TCSI CORP, 10-K, 2000-03-30

TCSI CORP
10-K, 2000-03-30
COMPUTER INTEGRATED SYSTEMS DESIGN

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999

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

For the fiscal year ended 0-19377
December 31, 1999 (Commission File Number)

TCSI Corporation
(Exact name of Registrant as specified in its charter)

Nevada 68-0140975
(State of Incorporation) (IRS Employer Identification No.)

1080 Marina Village Parkway, Alameda, California 94501
(Address of Principal Executive Offices) (Zip Code)

Registrant's telephone number, including area code: (510) 749-8500

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 par value

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

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

The aggregate market value of voting stock held by nonaffiliates of the
Registrant as of March 10, 2000 was approximately $144.1 million.

The number of shares outstanding of the Registrant's common stock, $0.10
par value, as of March 10, 2000 was 23,051,457

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 2000 Annual Meeting of
Shareholders to be held on May 11, 2000, are incorporated by reference into Part
III of this Report.

<PAGE>

TCSI CORPORATION

Table of Contents

Page

PART I

Item 1. Business 1

Item 2. Properties 8

Item 3. Legal Proceedings 8

Item 4. Submission of Matters to a Vote of Security Holders 9

PART II

Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters 10

Item 6. Selected Consolidated Financial Data 11

Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12

Item 7A. Qualitative and Quantitative Disclosures About Market
Risk 25

Item 8. Financial Statements and Supplementary Data 25

Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 25

PART III

Item 10. Directors and Executive Officers of the Registrant 26

Item 11. Executive Compensation 26

Item 12. Security Ownership of Certain Beneficial Owners
and Management 26

Item 13. Certain Relationships and Related Transactions 26

PART IV

Item 14. Exhibits, Consolidated Financial Statement Schedules,
and Reports on Form 8-K 27

<PAGE>

PART I

Item 1. Business

In addition to historical information contained herein, this Business
section and other parts of this Annual Report on Form 10-K contain certain
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements reflect current
expectations and there can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Such forward-looking
statements are subject to a number of risks and uncertainties that could cause
actual results to differ materially from those reflected in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in the "Certain Factors That May Affect Future
Results and Market Price of Stock" section in Item 7: "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

The Company

TCSI Corporation ("TCSI" or "the Company") is a leading provider of
software products and services for the global telecommunications ("telecom")
industry. TCSI's solutions enable telecom service providers, equipment
manufacturers, enterprise network users and systems integrators to rapidly
deploy and manage network infrastructure and services. The Company has recently
organized its operations into two Product Line Management Offices ("PLMO"). Each
PLMO has responsibility for marketing, sales, business development, product
delivery and customer service for the Company's two products: Catalant(R) and
WorldWin(R). The Catalant product line offers carrier-class network management
application and platform capabilities, targeting next generation voice, data and
wireless networks. The WorldWin product line provides integrated Operations
Support System ("OSS") solutions focused on data remediation, network management
and provisioning management needed for today's service providers.

TCSI was organized in 1983 as a Nevada corporation and is headquartered in
Alameda, California. The Company has offices throughout the United States and in
Europe and the Pacific Rim. TCSI's software provides solutions to many of the
world's leading telecom companies, including AT&T, Cable and Wireless, GTE,
Maxis in Malaysia, Nippon Telegraph & Telephone ("NTT") in Japan and Telkom
South Africa. The Company's software is also incorporated into telecom equipment
systems provided by equipment manufacturers, including 3Com, Lucent
Technologies, NEC and Motorola.

Industry Background

The worldwide telecom industry continues to undergo significant
transformation. Global deregulation and international privatization have
resulted in intense intra-industry, cross-industry and geographic competition in
providing telecommunications services. Long distance and local telecom service
providers compete in each other's markets. Wireless service providers, cable
television operators and utilities are leveraging their existing infrastructures
to provide voice, video and data transmission services. In addition, independent
service providers are leasing transmission facilities from long distance
carriers, local telephone companies, wholesale carriers and emerging network
providers to provide competing voice, video and data services. At the same time,
the complexity and size of public networks have increased. The emergence of the
Internet, intranets, extranets and telecommuting, as well as numerous new
telecom services such as high-speed data services, video teleconferencing and
unified messaging have increased demand for bandwidth, reliability, data
integrity and security.

In this dynamic environment, service providers are being forced to operate
with external public and private networks and need to differentiate themselves
on the basis of price, responsiveness, services offered, reliability and
security. To meet increased demands and remain competitive in this dynamic
environment, traditional telecom service providers must upgrade existing
circuit-based public networks. In addition, these providers along with new
competitors are deploying new packet-based networks that provide increased
functionality, reliability and secure services. Upgrading and deploying new
telecom networks and services requires the integration of diverse transmission
media and protocols, network

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equipment, network operations platforms and network management systems.
Moreover, the competitive environment requires more effective network
management, such as detection of and automatic response to fault indications,
remote configuration of networks and equipment, automation of accounting and
billing functions, optimization of network performance and improvement of
security. Network management systems must interoperate seamlessly among service
providers and interface with customer network management systems.

Until recently, most telecom service providers managed their voice networks
exclusively with mainframe-based proprietary systems written in early generation
programming languages. While these systems are tightly integrated and can
provide operating efficiencies within a single network, they are expensive to
develop, operate and maintain, and often require a large, specialized and
expensive technical organization. In addition, because these legacy systems are
not based on a common standard, the provisioning and management of end-to-end
services across telecom service providers is more difficult, and the equipment
choices of service providers are limited to vendors who conform to the
provider's standard. Furthermore, because these systems are proprietary and are
based on earlier-generation programming languages, they generally do not easily
scale, usually require substantial development effort for new functionality and
services, and are often incompatible with the additional software and hardware
service providers require to upgrade networks.

The need to provide services more rapidly, operate networks at peak
efficiency and do both with fewer people is forcing new approaches in the
software systems used by service providers. New services and network
infrastructure remain the chief vehicles that telecom service providers have to
differentiate themselves from their competition. The impact of new services,
particularly those that use the Internet, has strained the current
communications infrastructure and created a demand for greater capacity. In
response, service providers have begun implementing new technologies to augment
or replace their traditional copper wireline infrastructure with networks that
use fiber optics, hybrid fiber-coax cable, radio frequency signals, or satellite
transmission. They have also begun to implement a variety of new technologies so
they can offer greater bandwidth and higher-quality services. In conjunction
with these changes, providers are increasingly turning to new, state-of-the-art
OSS's to replace their legacy OSS's or to develop the means to rapidly integrate
the transmission of data between the network and support OSS's between OSS's
themselves, or a derivative of the above in order to expedite service
fulfillment to their customer base.

Service providers use OSS's to develop, deploy and manage their networks
and the services that depend on those networks. Through their ability to
control, monitor and measure network functions and equipment, OSS's can improve
the quality of service provisioning, assurance and billing. Service provisioning
is the process of enabling or modifying a service for a specific customer with
capacity from the managed network. Service assurance involves monitoring and
managing existing services to ensure their quality and that they meet
service-level obligations to customers. Billing involves the collection of usage
information, bill preparation and presentation and invoicing and collections.

New System Management Requirements

Competition among existing and new telecom service providers, the
proliferation of new communications services, and pressure to provide new
services quickly and cost-effectively has placed increased demands on telecom
service providers and equipment manufacturers. These demands have resulted in
the following system management requirements:

o Need to link technology and customers. Historically, a telecom
company's discrete network components and the broader network have been
managed separately from service activation and assurance of specific
services to the handling of billing, customer service and other
administrative tasks. The introduction of a new service affects all
components of an operator's infrastructure. For example, a customer
desiring a temporary 800-number for a special event requires a network
operator to process the order and activate the service by providing
special instructions to the appropriate network components (service
provisioning), monitor the network and respond to traffic bottlenecks
and unexpected service interruptions or failures (service assurance) and
update billing, accounting, and marketing databases (customer care). In
response to increased competition, there is a greater need to rapidly
introduce new services and respond to customer service requests. There
is also an increased need to tighten the link between a telecom
network's technology components and service management (and ultimately
the customer). As a result, new network software implementation will
increasingly address specific business processes and customer service

2
<PAGE>

requirements rather than network technology requirements. The
implication to software and hardware vendors is the need to offer
systems with proven technical and business viability. Further,
technology decisions by telecom service providers are increasingly being
led by marketing personnel, and include input from various business
functional areas throughout such companies. As service providers focus
more on customer care, there will be a need for network systems designed
to provide management more meaningful information with automated links
from the customer support processes to the network and equipment
management processes.

o Standardization of telecom management systems. Competition, innovation
and profitability are becoming the main drivers shaping the investment
decisions of telecom service providers and equipment manufacturers in
many parts of the world. Service providers are looking for solutions
that will not require them to lock into complex proprietary technologies
or to be limited to a small number of equipment suppliers. Further, as
deregulation enables companies to compete on a more global scale,
telecom companies are increasingly seeking to standardize network
architecture and infrastructure (including hardware and software
components) as well as business practices. As open, distributed
computing and industry standards continue to evolve, hardware and
software vendors will need to supply communications equipment and
software solutions that permit such standardization.

o New software requirements. The rapid proliferation of communication
services and networks requires highly flexible and customizable
management and control systems that can rapidly respond to changing
market and infrastructure conditions. OSS's must also integrate the
increasing number of network elements involved in any given connection.
New technology must enable and automate the rapid provisioning of new
and enhanced services. Increased competition requires OSS solutions that
enable cost-effective change management and offer highly reusable
technology in order to reduce the time-to-market for new or enhanced
services by taking advantage of past development work. Scalability is
increasingly important since the rates of growth of new services and
number of subscribers are highly variable and often unpredictable.
Solutions that are not highly scalable may not be adequate for
mission-critical, long-lived networks. The mission-critical nature of
public networks also demands solutions that are highly reliable.
Software products that meet all of these requirements are very complex,
and suppliers of these products must increasingly provide highly
specialized implementation, integration, and customization services in
order to provide complete software solutions.

Products and Services

TCSI's products and services enable its customers to meet the demand for
the new system management requirements described above.

Catalant(R) Product Line

Catalant is the Company's product line for element and network management
applications. It is based on advanced component and object-oriented software
technologies, and provides carrier-class performance, scalability and
reliability. Catalant products are marketed and sold to the following classes of
customers: (1) equipment manufacturers to develop management solutions bundled
with their hardware products, (2) service providers as configured network
management solutions and (3) systems integrators as a platform to develop custom
OSS solutions. The Catalant product line contains the following products that
can be sold separately or in combination with each other:

o Catalant applications. Catalant applications are configurable software
products that automate specific management functions, such as fault
management, performance management and service activation. All Catalant
applications are built on the same component infrastructure, so they can
easily integrate with each other to form a comprehensive OSS suite.

o SolutionCore(R). SolutionCore is TCSI's telecom application platform.
SolutionCore allows software developers to create new components that
will "plug and play" with the Catalant applications or to develop new
custom applications. SolutionCore allows developers to program in C++
for high-performance applications, in Enterprise Java Beans for
portability or in a scripting language for rapid development.

3
<PAGE>

o ServicePaks. ServicePaks are packaged combinations of software tools,
templates and professional services that can extend and customize the
Catalant applications for specific customer needs. ServicePaks are
available for OSS integration, system management and custom component
development.

The Catalant product line provides customers the ability to rapidly
configure and deploy sophisticated management solutions, rapidly customize
application functionality, easily customize software using programming languages
or scripting, as well as pre-built functionality tuned to managing next
generation networks and carrier-class scalability and performance.

WorldWin(R) Product Line

TCSI's WorldWin product line was acquired by TCSI as part of the
acquisition of GTE's Network Management Organization in December 1998. WorldWin
consists of several offerings focused on different segments of the service
provider market.

o WorldWin Suite. The WorldWin Suite is an integrated OSS solution that
provides service provisioning and service assurance functionality in a
pre-integrated package. WorldWin's target market is emerging service
providers which are creating or expanding their network infrastructure
and need a comprehensive OSS suite to manage their services and
infrastructure. The WorldWin Suite has a number of components that
satisfy most basic operational needs for an emerging service provider:

o InForm provides service order entry and basic customer relationship
management functionality;

o InService provides complete service provisioning functionality,
including service modeling, network capacity management and
flow-through network provisioning;

o InView provides service assurance functionality, including network
monitoring, fault and performance management and trouble ticketing;

o InExchange provides high performance, universal mediation services
between OSS and network devices or between multiple OSS's and
supports a wide variety of network devices and communication
protocols;

o Application programming interfaces allow a service provider to
integrate the WorldWin modules with other applications, such as
customer databases or billing systems.

o IncomeConnect. IncomeConnect is a billing data mediation product, based
on the InExchange platform module. IncomeConnect, either centrally, or
in a distributed deployment architecture, collects billing data
traversing multiple protocols, network device types and polling
requirements. Once collected from the network, IncomeConnect employs
user-defined rules to filter, format and augment the data received,
which is then sent downstream for distribution to billing systems, data
warehouses and other OSSs concerned with usage data.

Services

TCSI also provides customized implementation services to its customers to
enable them to deploy the Catalant and WorldWin suites of products. These
services may involve the integration of Catalant or WorldWin with legacy systems
and with the software products of other companies. The Company works with its
customers to specify, design, develop and deploy the software necessary to meet
its customers' business and operational requirements. TCSI has extensive
experience in developing and implementing solutions for the telecom industry, in
general, and network and element management solutions, in particular. The
Company engages in careful planning of the development and deployment phases, a
formal development process and rules or conventions that govern every phase of
framework and application development. The Company's methods combine techniques
from object-oriented design and development, quality management and distributed
systems deployment; and the Company's solutions rely heavily on its products.
Due to the complex requirements of its customers' network systems,
implementation services are often a key factor in customer purchasing decisions.

4
<PAGE>

The Company is committed to responsive user support and believes that such
support is critical in continuing successful long-term relationships with its
customers. The Company offers technical customer support from 8:00 a.m. to 5:00
p.m. (Pacific Standard Time), five days per week, which can be extended at the
customer's option to 24 hours per day, seven days per week for an additional
fee. Support is provided by telephone, via e-mail, via remote login and on-site,
as necessary. The Company has established an Internet site that provides
technical information, as well as schedules of the Company's upcoming training
courses.

The Company conducts training courses for its customers, on a fee basis, at
the Company's training facilities in the States of California and Washington and
at customer sites. Training courses include instruction in the installation,
customization and use of the Company's products.

As part of its software licensing agreements, the Company offers software
maintenance contracts to its customers. The maintenance contract entitles
customers to telephone support, product maintenance and upgrades to minor
product releases. Substantially all licensees of the Company's software products
were covered by a software maintenance contract during the year ended December
31, 1999.

Marketing and Sales

TCSI has established separate marketing and sales organizations for the
Catalant and WorldWin product lines. Each PLMO is responsible for determining
the market needs for its respective product and providing direction to the
product development group, establishing targeted marketing and advertising
campaigns, positioning the products within the target markets with appropriate
messaging, collateral, pricing and packaging and generating sales leads through
tradeshows, telemarketing and other means.

The Company's products are typically intended for use in applications that
may be critical to a customer's business. Further, these applications are often
complex and require significant technical knowledge of the Company's products
and the customer's operations to be successfully deployed. To date, the Company
has relied primarily on its experienced worldwide direct sales force to sell its
products and related services. The sales team also significantly utilizes the
Company's engineering personnel to assist in product demonstrations, answer
customer questions and determine system specifications.

The Company also uses other sales channels to augment its product sales.
Such channels have included sales representatives, distributors, equipment
manufacturers and systems integrators. Management believes that new sales
channels are an important part of the Company's growth strategy, as they will
provide the Company with access to important new customers and geographic
markets. Management intends to continue to invest in channel development.
Further, as the Company continues to make enhancements to its products,
management believes that the Company's products will be more attractive to
third-party developers and resellers.

Customers

The Company licenses its products to customers around the world. The
following chart reflects a sample of the Company's 1999 customers:

Catalant WorldWin
-------- --------
3Com Access Point
Motorola Cable & Wireless
NEC CompleTel
NTT GTE
Telkom South Africa Maxis

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of revenues, respectively. In 1999, 1998 and 1997, one customer with multiple
contracts, NEC Corporation, represented approximately 30%, 43% and 27% of total
revenues, respectively. In 1998, Lucent Technologies represented approximately
11% of total revenues, and in 1997, two customers, Italtel and IDC, each
represented approximately 11% of total revenues. The Company anticipates that it
will continue to experience significant customer concentration.

The Company earns a significant portion of revenues from outside the United
States. Revenues from foreign customers accounted for approximately 70%, 70%,
and 78% of the Company's total revenues for the years ended December 31, 1999,
1998 and 1997, respectively. The Company expects that international revenues
will continue to account for a significant portion of its total revenues in
future periods.

Competition

The Company offers products and services in the evolving market for telecom
software. The telecom industry is intensely competitive, subject to extremely
rapid technological change and is characterized by evolving industry standards,
changing regulatory requirements, frequent product introductions and rapid
changes in customer requirements. These market factors represent both an
opportunity and a competitive threat to TCSI. The rapid pace of technological
change continually creates new opportunities for existing and new competitors.

The Catalant product line competes in the equipment manufacturer and
service provider markets, providing solutions for next generation telecom
applications and platforms, while the WorldWin product line competes in the
emerging service provider market, providing integrated OSS and billing data
mediation solutions. The Company competes with numerous vendors in each product
category. TCSI expects that the overall number of competitors providing next
generation network solutions will increase due to the market's attractive
growth. On the other hand, the Company expects the number of vendors supplying
OSS solutions for basic telephone services solutions will decrease, due to
maturity of this market and the rapid introduction of more cost-effective
technologies.

TCSI's competitors include Vertel, Dorado Systems, Objective Systems
Integrators, Hewlett Packard and MicroMuse for the Catalant product line and
Eftia OSS Solutions, Objective Systems Integrators, Telcordia, Hewlett Packard
and MetaSolv for the WorldWin product line. Some of the Company's competitors
compete across both TCSI's product lines, while others do not offer as wide a
breadth of solutions. Several of the Company's current and potential competitors
have greater financial, marketing and technical resources than the Company. The
principal competitive factors in the markets in which the Company presently
competes and may compete in the future are quality, price, performance, customer
support, corporate reputation and product features such as scalability,
interoperability, functionality, customizability and ease of use.

The Company also faces competition in each of the three functional areas
that the Company believes are necessary for the delivery of network management
software solutions: development environments, turnkey applications and custom
services. The Company's Catalant and WorldWin product lines enable the Company
to provide its customers with development environments and turnkey applications,
as well as custom services. Because certain of the Company's competitors focus
only on one functional area, such competitors may be in a position to develop
competitive products targeted solely at the segment they serve.

There can be no assurance that the Company's current or potential
competitors will not develop products comparable or superior to those developed
by the Company or adapt more quickly than the Company to new technologies,
evolving industry standards, new product introductions or changing customer
requirements.

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Other Company Information

Backlog

Orders for the Company's software products and services are typically in
the form of licensing and service contracts, which call for the delivery of
products and the performance of services over a three-to-nine-month period.
Backlog for the Company's products and services represents an estimate of
remaining unearned contract value for all signed contracts, including
unrecognized license fees, development service fees and maintenance and support
fees. Backlog generally does not include any potential sublicense fees or
royalties, which are recognized as earned. Backlog also does not include
expected future additions to contract value associated with existing customers'
master license agreements and service contracts. Because of variations in the
magnitude and duration of orders received by the Company, and because the
Company's contracts may be canceled or rescheduled by the customer without
significant penalty, the Company's backlog at any particular date may not be a
meaningful indicator of future financial results. There can be no assurance that
TCSI's customers will in the future continue to place orders with the Company
which equal or exceed the comparable levels for prior periods. At December 31,
1999, the Company's backlog amounted to approximately $9.5 million compared to
approximately $16 million at December 31, 1998. The decline in backlog from 1998
to 1999 is attributable to a decline in bookings, the lengthy sales and
implementation cycle associated with the Company's products, the completion of
several large projects and the lack of follow-on work primarily in Asia.

Employees

As of February 29, 2000, the Company had 179 employees, of which
approximately 68% were professional engineering staff. None of the Company's
employees are represented by a labor union, and the Company has not experienced
any work stoppages. Management believes that the Company's employee relations
are good.

The Company's future growth and success will depend to a significant extent
on its ability to continue to recruit and assimilate skilled engineers,
managers, and other personnel. The Company's future success will also depend on
its ability to attract and retain qualified managerial, sales, and software
engineering personnel. The Company has at times experienced and continues to
experience difficulty in attracting and retaining qualified personnel. The
Company's future success will also depend on the ability of its current and
future management personnel to operate effectively, both independently and as a
group. Competition for qualified personnel in the software industry is intense,
and there can be no assurance that the Company will be successful in attracting
and retaining such personnel. The complex nature of the networks of the
Company's customers requires that the Company recruit and hire personnel with
expertise in and a broad understanding of the industries in which the Company's
customers compete. Furthermore, competitors have in the past and may in the
future attempt to recruit the Company's employees. Failure to attract and retain
key personnel could have a material adverse effect on the Company's business,
operating results and financial condition.

Intellectual Property

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Executive Officers of the Company

The Company's executive officers currently are:

<TABLE>
<CAPTION>
Name Age Position

<S> <C> <C>
Norman E. Friedmann 71 Acting President and Chief Executive Officer
Arthur H. Wilder............. 58 Chief Financial Officer, Secretary, and Treasurer
</TABLE>

Norman E. Friedmann, became a member of the Board of Directors in February
1998. In December 1999, he was appointed acting President and Chief Executive
Officer of the Company. He served as a management consultant to the Company from
1996 to February 1998. Dr. Friedmann currently manages Friedmann Enterprises,
which he founded in 1990. Prior to that, he served as Executive Vice President
and Chief Operating Officer of Herbalife International, Inc. from 1992 until his
retirement in 1995. He served as President, Chief Executive Officer, and member
of the Board of Directors of Daisy Systems from 1987 to 1989. Prior to that, he
founded and served as President, Chief Executive Officer and Chairman of the
Board of Cordura Corporation from 1965 to 1987.

Mr. Wilder joined TCSI in November 1997. Prior to joining TCSI, Mr. Wilder
operated his own financial consulting practice in the San Francisco Bay Area.
Previously, he spent more than seven years with Flow Industries, Inc. and its
affiliated companies near Seattle, Washington. Initially, Mr. Wilder served as
Chief Financial Officer of the parent company and its pre-public subsidiary
companies. He later became Executive Vice President and then President of
FloWind Corporation, a subsidiary of Flow Industries, Inc. Mr. Wilder holds a
B.A. in Economics and an M.B.A. from San Jose State University.

Item 2. Properties

The Company's principal administrative, sales and marketing, customer
support and product development facilities are located in Alameda, California.
In addition, the Company leases sales offices in Newmarket, United Kingdom;
Tokyo, Japan; and Raleigh, North Carolina and a product development facility in
Bothell, Washington ("Bothell"). The Company's San Jose, California operations
were consolidated with the Alameda facility upon the expiration, in November
1999, of the lease for the San Jose office. In addition, the Company has
executed a lease agreement for a new facility in Bothell and will relocate its
current Bothell operations in early 2000. The Company currently has
approximately 125,000 square feet of leased facilities. The Company's leases
have various terms, expiring at different times through the year 2007. The
Company believes that its existing facilities are adequate to meet its current
needs and that suitable additional or alternative space will be available in the
future on commercially reasonable terms, as needed.

Item 3. Legal Proceedings

On November 4, 1996, a purported class action complaint was filed in the
Superior Court of the State of California, Alameda County, by Albert J.
Copperstone and Joseph Siciliano against the Company and certain of its officers
and directors. The complaint alleged that, between October 11, 1995 and
September 25, 1996, defendants made materially false and misleading statements
concerning the Company's business condition and prospects in violation of
California law. On September 24, 1997, a purported class action complaint was
filed in the United States District Court for the Northern District of
California by Copperstone and Siciliano against the Company and certain of its
officers and directors. The federal complaint contained virtually identical
factual allegations as the State action, and alleged violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. On
October 20, 1999, the United States District Court for the Northern District of
California approved a proposed settlement and dismissed the federal action with
prejudice. The settlement involved payment of an amount comprised of proceeds
from the Company's

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Director and Officer insurance policies. Neither the Company nor the individuals
involved contributed to the settlement of the actions. On December 8, 1999, the
Alameda County Superior Court dismissed the state action with prejudice.

On November 20, 1996, a purported derivative action complaint was filed in
the Superior Court of the State of California, Alameda County, by Mike Tinkler
against the Company's Board of Directors and the Company as a nominal defendant.
The complaint alleged that, as a result of the facts alleged in the Copperstone
State Action, defendants breached their fiduciary duties. The parties reached a
settlement, which involved payment of an amount comprised of proceeds from the
Company's Director and Officer insurance policies and a contribution by the
Company. The settlement did not have a material adverse effect on TCSI's
financial position or on its financial results of operations. On December 1,
1999, the Alameda County Superior Court dismissed the Tinkler Derivative Action
with prejudice.

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

None.

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PART II

Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters

The common stock of the Company ("Common Stock") commenced trading on The
Nasdaq National Market under the symbol "TCSI" in July 1991. The following table
sets forth the high and low closing sale prices of the Common Stock for the
periods indicated, as reported by The Nasdaq National Market:

High Low
----- ----

1998

First quarter.................................. $ 8.94 $ 6.13
Second quarter................................. 8.13 5.00
Third quarter.................................. 6.25 2.50
Fourth quarter................................. 3.25 2.00

1999
First quarter.................................. $ 2.50 $ 1.63
Second quarter................................. 2.94 1.69
Third quarter.................................. 2.69 1.47
Fourth quarter................................. 3.50 1.38

The market price of the shares of Common Stock has been, and is likely to
continue to be, highly volatile and may be significantly affected by factors
such as actual or anticipated fluctuations in the Company's business, operating
results, and financial condition, announcements of technological innovations,
new products, or new contracts of the Company or its competitors, developments
with respect to proprietary rights, adoption of new accounting standards
affecting the software industry, general market conditions, and other factors.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have particularly affected the market prices
for the common stocks of technology companies. These types of broad market
fluctuations may adversely affect the market price of the Company's Common
Stock.

As of March 10, 2000, the number of shareholders of record of the Company's
Common Stock was 148 and the number of beneficial shareholders was approximately
15,300. The Company has declared no cash dividends on its Common Stock since the
Company's initial public offering. The Company currently intends to retain any
earnings for use in its business and does not anticipate paying any cash
dividends in the foreseeable future.

10
<PAGE>

Item 6. Selected Consolidated Financial Data

The following selected financial data should be read in conjunction with the
Company's consolidated financial statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein.

<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1999 1998 1997 1996 1995
--------- ----- --------- --------- -------
(in thousands, except per share data)
Statements of Operations Data:
Revenues:

<S> <C> <C> <C> <C> <C>
Services................................................... $ 22,269 $31,560 $33,970 $42,733 $43,790
Software licensing fees.................................... 10,497 10,760 5,608 10,230 11,572
--------- -------- -------- -------- --------
Total services and licensing fees....................... 32,766 42,320 39,578 52,963 55,362
Equipment, non-telecom..................................... -- -- -- 7,270 --
--------- -------- -------- -------- --------
Total revenues.......................................... 32,766 42,320 39,578 60,233 55,362
Costs, expenses, and special items:
Services................................................... 20,154 20,297 21,071 28,773 24,945
Equipment, non-telecom..................................... -- -- -- 6,810 --
Product development........................................ 14,351 12,311 5,932 6,642 --
Selling, general, and administrative....................... 17,137 16,164 18,563 25,010 19,498
Write-off of in-process technology acquired................ -- 831 -- -- --
Nonrecurring special items, net............................ 1,528 (550) 1,088 (4,587) --
--------- -------- -------- -------- --------
Total costs, expenses, and special items..................... 53,170 49,053 46,654 62,648 44,443
--------- -------- -------- -------- --------
Income (loss) from operations................................ (20,404) (6,733) (7,076) (2,415) 10,919
Gain on sale of investment in common stock................... -- -- -- 585 --
Other income and expense, net................................ 1,974 3,266 3,104 2,276 982
--------- -------- -------- -------- --------
Income (loss) before income tax provision (benefit).......... (18,430) (3,467) ( 3,972) 446 11,901
Income tax provision (benefit)............................... 4,052 1,054 (1,350) 152 3,831
--------- -------- -------- -------- --------
Net income (loss)............................................ $(22,482) $(4,521) $ (2,622) $ 294 $ 8,070
========= ======== ======== ======== ========
Earnings (loss) per share (EPS) - Basic..................... $ (0.99) $ (0.20) $ (0.12) $ 0.01 $ 0.45
========= ======== ======== ======== ========
Shares used in calculation of EPS - Basic.................... 22,614 22,349 21,638 20,515 18,069
========= ======== ======== ======== ========
Earnings (loss) per share (EPS) - Diluted.................... $ (0.99) $ (0.20) $ (0.12) $ 0.01 $ 0.42
========= ======== ======== ======== ========
Shares used in calculation of EPS - Diluted.................. 22,614 22,349 21,638 21,542 19,224
========= ======== ======== ======== ========

<CAPTION>
December 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- --------
Balance Sheet Data: (in thousands)
Cash and equivalents and marketable securities............... $31,714 $48,983 $55,467 $52,607 $22,027
Working capital.............................................. 37,360 48,071 59,358 50,717 31,374
Total assets................................................. 58,163 80,829 84,231 88,133 50,630
Shareholders' equity......................................... 49,482 71,144 74,148 73,610 37,376
</TABLE>

<PAGE>

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

In addition to historical information contained herein, this Management's
Discussion and Analysis of Financial Condition and Results of Operations
contains forward-looking statements. The forward-looking statements contained
herein are subject to certain factors that could cause actual results to differ
materially from those reflected in the forward-looking statements. Such factors
include, but are not limited to, those discussed below under "Certain Factors
That May Affect Future Results" and in Item 1 of this Form 10-K.

Overview

TCSI currently operates in one segment, which is providing integrated
software products and services for the global telecom industry. The Company's
two product lines are: (1) Catalant(R), which offers carrier-class network
management application and platform capabilities, targeting next generation
voice, data and wireless networks and (2) WorldWin(R), which offers integrated
OSS solutions, including provisioning, service assurance, mediation and billing
functionality for emerging service providers worldwide.

The Company provides services to customers under time-and-material and
fixed price contracts. The Company recognizes revenues under
time-and-material-type contracts as the services are performed. For fixed price
contracts, the Company recognizes revenues using the percentage-of-completion
method, which is based on the percentage of contract costs incurred in relation
to total estimated contract costs. The scope and size of the Company's system
solutions can be large and complex, often requiring delivery over several
quarters. From time-to-time, customers have established payment milestones,
which can be achieved only after completion of the related services. In limited
cases, some customers have disputed fees charged for services provided. Although
the Company has been, and is, under no obligation to compromise its billed
amounts, the Company has periodically reduced its accounts receivable when such
disputes could not be amicably resolved and may do so in the future.
Additionally, a portion of the Company's revenues has been, and is expected to
continue to be, derived from software licensing fees from a limited number of
customers. The Company also licenses software to customers under contracts,
which do not require significant production, modification or customization of
software. The Company recognizes revenues under these contracts when a
non-cancelable license agreement has been signed, the product has been shipped,
the fees are fixed and determinable, collectibility is probable and
vendor-specific objective evidence of fair value exists to allocate the total
fee to elements of the arrangement.

The licensing and implementation of the Company's software products
generally involve a significant commitment of resources by prospective
customers. As a result, the Company's sales process is subject to delays
associated with lengthy approval processes typically accompanying such
significant capital expenditures. Accordingly, the Company is substantially
dependent on its customers' decisions as to the timing and level of expenditures
and resource commitments. The variability in the timing of such expenditures
could cause material fluctuations in the Company's business, operating results
and financial condition. In this regard, the consistency of the Company's 1999
and 1998 quarterly results have been adversely affected by delays in the
purchase of software licenses and related services.

A substantial portion of the Company's revenues is derived from the sale of
the Company's software products and services to major telecom service providers
and equipment manufacturers. Due to the complex nature of the advanced element,
network, and service management systems being developed, successful deployment
of these systems can contain significant technological risks. The Company has in
the past relied, and will in the future rely, on its development and
implementation expertise. Additionally, development and implementation of these
systems often occurs over several quarters. There exists the risk that a change
in a customer's technology or business strategy during such lengthy development
and implementation periods may cause early termination of a project or
discontinuance of future phases. In this regard, the Company, in limited cases,
has experienced, and may continue to experience, fluctuations in revenues and
operating results on a quarterly basis due to termination, cancellation, or
non-renewal of agreements.

12
<PAGE>

Management believes that revenue growth is highly dependent upon the
development and enhancement of software products that meet market needs.
Although management intends to target Company-funded product development
spending at levels consistent with other software companies, from time to time,
spending may be greater or less than these amounts, as circumstances dictate.
Furthermore, management expects that, from time to time, it may periodically
acquire businesses, products, or technologies to enhance the Company's current
product offerings.

Results of Operations

The following table sets forth selected statement of operations data as a
percentage of revenues for each of the following years ended December 31:

<TABLE>
<CAPTION>
1999 1998 1997
------ ------- -------

Revenues:
<S> <C> <C> <C>
Services....................................................................... 68% 74% 86%
Software licensing fees........................................................ 32 26 14
----- ----- -----
Total revenues.............................................................. 100 100 100

Costs, expenses, and special items:

Services (1)................................................................... 62 48 53
Product development............................................................ 44 29 15
Selling, general, and administrative (1)....................................... 52 38 47
Write-off of in-process technology acquired.................................... -- 2 --
Nonrecurring special items, net (1)............................................ 5 (1) 3
----- ----- -----
Loss from operations............................................................. (62) (16) (18)
Other income and expense, net.................................................... 6 8 8
----- ----- -----
Loss before income tax provision................................................. (56) (8) (10)
Income tax provision (1)......................................................... 12 3 3
----- ----- -----
Net loss......................................................................... (68)% (11)% (7)%
===== ===== =====
</TABLE>

(1) Includes charges recorded in the fourth quarter of 1999 related to (i) the
write-off of prepaid license fees, (ii) an employee incentive plan, (iii)
reorganization/consolidation costs and (iv) a valuation allowance against
deferred tax assets, respectively. Such charges totaled $7.3 million.

Revenues

The Company generates revenues from the sale of its software products and
related services to the telecom industry. In 1999, services represented 68 % and
software licensing fees represented 32 % of total revenues. In 1998, services
represented 74 % and software licensing fees represented 26 % of total revenues.
In 1997, services represented 86 % and software licensing fees represented 14 %
of total revenues.

For the following years ended December 31, the revenue breakdown is as
follows:

<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
(in thousands)
Total revenues:
<S> <C> <C> <C>
Services....................................................... $22,269 $31,560 $33,970
Software licensing fees........................................ 10,497 10,760 5,608
------ ------ ------
Totals $32,766 $42,320 $39,578
======= ======= =======
</TABLE>

Total revenues decreased 23% in 1999 to $32.8 million from $42.3 million in
1998. Total revenues increased 7% in 1998 from $39.6 million in 1997. The
decrease in total revenues in 1999 compared to 1998 was the result of a decline
in

13
<PAGE>

service revenues and the increase in revenues in 1998 compared to 1997 was
primarily the result of an increase in software licensing fees. Both are
discussed in greater detail in the following two paragraphs.

Total revenues from services for 1999 decreased 29% to $22.3 million from
$31.6 million. The decrease in service revenues was primarily the result of the
completion of several major projects during 1999 and a decline in follow-on work
from existing customers. Total revenues from services for 1998 decreased 7% to
$31.6 million from $34.0 million in 1997.

Total software licensing revenues for 1999 of $10.5 million approximated
licensing revenues of $10.8 million in 1998. Total software licensing revenues
increased 92% in 1998 from $5.6 million in 1997. The increase was primarily due
to the completion of several major projects in the United States that were
delayed in 1997 and the Company's focus on transitioning from being a custom
software services provider to becoming a software product developer. The Company
expects software licensing revenues to continue to vary on a quarterly and
annual basis.

For the following years ended December 31, revenues by geographic location
are summarized below:

1999 1998 1997
--------- --------- -------
(in thousands)

Revenues:
The Americas....................... $ 9.9 $ 12.6 $ 8.6
Asia-Pacific....................... 12.0 22.4 21.5
Europe............................. 10.9 7.3 9.5
---- ---- ----
$ 32.8 $42.3 $ 39.6
====== ===== =======

Revenues from the Americas decreased 22% to $9.9 million in 1999 from $12.6
million in 1998. The decrease was due to the completion of several major
projects and a lack of follow-on work. Revenues from the Americas increased 47%
to $12.6 million in 1998 from $8.6 million in 1997. The increase in 1998 was the
result of continued relationships with existing customers, particularly Lucent
Technologies, and the result of completing several major projects with TCSI's
telecom service providers. In 1999, revenue from the Asia-Pacific region
decreased 46% to $12.0 million from $22.4 million in 1998. The decrease was due
to the completion of several large projects and a lack of follow-on business. In
1998, revenue from the Asia-Pacific region approximated the 1997 level due to
continued relationships with existing customers resulting in revenues from
follow-on contracts signed in 1997. In 1999, revenue from Europe increased 49%
to $10.9 million from $7.3 million in 1998. This increase relates primarily to
sales through a new channel partner in Europe in 1999. In 1998, revenue from
Europe decreased 17% to $7.3 million of total revenue from $9.5 million in 1997.
The decline was attributed largely to slow channel development. The Company
generally realizes services revenues involving design, development, testing, and
deployment over a twelve-to-eighteen month period. The Company expects that
international revenues will continue to account for a significant portion of its
total revenue in future periods.

To date, a significant portion of revenues has been concentrated among a
limited number of customers. In 1999, 1998 and 1997, revenues from the Company's
five largest customers represented 60%, 74%, and 64% of revenues, respectively.
In 1999, 1998 and 1997 one customer with multiple contracts, NEC Corporation,
represented approximately 30%, 43% and 27% of total revenues, respectively. In
1998, Lucent Technologies represented approximately 11% of total revenues, and
in 1997, two customers, Italtel and IDC, each represented approximately 11% of
total revenues. The Company anticipates that it will continue to experience
significant customer concentration. There can be no assurance that such
customers or any other customers will continue to place orders with the Company
which will equal or exceed the comparable levels for prior periods.

Costs of Services

The Company incurs direct costs for the development and deployment of its
customers' software solutions. The major components of direct costs are employee
compensation, subcontractor fees, training costs and other billable direct
costs, including travel expenses. Direct costs also include an allocation for
benefits, facilities, telephone expenses, information systems support and
depreciation and amortization of intangibles. Costs of services declined 1% to $
20.2 million in 1999

14
<PAGE>

from $20.3 million in 1998. Costs of services decreased 4% in 1998 from $21.1
million in 1997. As a percentage of service revenues, cost of services were 91%,
64%, and 62% for 1999, 1998, and 1997, respectively. The cost of service
percentage for 1999 increased compared to 1998 due to service revenues declining
29% from 1998 levels without a corresponding decrease in direct costs and a $1
million write-off, in 1999 of license fees prepaid to a third-party. The cost of
service percentage for 1998 remained relatively consistent compared to 1997's
percentage The cost of service percentage may remain at or go below 1999 levels
until existing and future customers ramp up their development efforts.

Product Development

Product development expenses include employee compensation, subcontractor
fees, training costs and other product development costs for existing and
potential new products, in addition to an allocation for benefits, facilities,
telephone expenses, information systems support, and depreciation.

The Company invested $14.4 million, or 44% of revenues, in internally
funded product development in 1999 compared to $12.3 million, or 29% of
revenues, in internally funded product development in 1998. In 1997, the Company
invested $5.9 million, or 15% of revenues, in internally funded product
development. During 1999, product development spending increased 17% compared to
1998 as the Company intensified its efforts to secure the earliest possible
completion of its next generation software releases. During 1998, product
development spending increased 108% compared to 1997, reflecting the Company's
focus on becoming a software product supplier. In December 1998, TCSI acquired
GTE's Network Management Organization ("GTE-NMO") which provided the Company
with an established customer base (particularly in the emerging carrier segment)
and a new product development center in the Pacific Northwest.

The Company expects to continue to invest in its new component-based
applications. There can be no assurance, however, that the Company's product
development spending will result in the successful introduction of new products.

Selling, General and Administrative Expenses

Selling expenses include sales and marketing, employee compensation,
promotional material, trade shows, travel and facilities expenses. General and
administrative expenses include compensation costs related to executive
management, finance and administrative personnel along with the other
administrative costs including recruiting, legal and accounting fees, insurance
and bad debt expense.

Selling, general, and administrative expenses increased 6% to $17.1 million
in 1999 from $16.2 million in 1998. Selling, general, and administrative
expenses decreased 13% in 1998 from $18.6 million in 1997. The increase in 1999
in selling, general and administrative expenses was due primarily to expenses
related to settlement of shareholder and derivative lawsuits and costs
associated with an employee incentive program. The decline in 1998 was primarily
due to cost reduction efforts and an allocation of telephone and information
systems support expenses to internal users offset by one-time payments in
connection with the GTE-NMO acquisition. Selling, general and administrative
expenses as a percentage of revenue were 52 %, 38 %, and 47 % in 1999, 1998, and
1997, respectively. The increase in selling, general, and administrative
expenses as a percentage of revenues in 1999 is primarily attributable to the
decline in total revenues for the year compared to 1998 total revenues in
addition to the costs noted above, related to shareholder lawsuits and the
employee incentive program.

Write-off of In-process Technology Acquired

In connection with the acquisition of GTE-NMO, the Company wrote off, in
1998, approximately $831,000 of in-process technology acquired since the
technology had not yet reached technological feasibility and had no alternative
future use.

The value assigned to in-process technology was determined by identifying
the product development projects in areas for which technological feasibility
had not been achieved and assessing the date of completion of the product
development

15
<PAGE>

effort. The state of completion was determined by estimating the costs and time
incurred to date relative to those costs and time to be incurred to develop the
purchased in-process technology into commercially viable products, estimating
the resulting net cash flows only from the percentage of product development
efforts complete at the date of acquisition, and discounting the net cash flows
back to their present value. The discount rate included a factor that took into
account the uncertainty surrounding the successful development of the purchased
in-process technology. Research and development costs to bring the products from
the acquired company to technological feasibility are not expected to have a
material impact on the Company's future results of operations or cash flows.

Nonrecurring Special Items

In 1999, the Company recorded charges of approximately $1.5 million related
to reorganizing and consolidating its operations. Such charges included (i) the
write-down of certain fixed assets and leasehold improvements, (ii) costs
associated with excess leased space and (iii) costs resulting from the
resignation of the Company's President and Chief Executive Officer.

In 1998, the Company recorded a nonrecurring gain of $550,000 following the
settlement of litigation related to the sale of a non-telecom business unit. The
gain resulted from a claim, made by Atmel, in 1997, under the 1996 TCSI/Atmel
Corporation Purchase Agreement. In 1998, TCSI obtained an equitable settlement
of this matter with the escrow agent releasing $550,000 (of a $1.0 million
escrow fund) plus interest to TCSI, and the remaining $450,000 less fees to
Atmel.

In 1997, the Company recorded a non-recurring loss of $1.1 million
resulting from adjustments to the market-value of equipment held for resale
related to the termination of a transportation contract in 1996. The Company
concluded the sale of the equipment in 1997.

Income Tax Provision (Benefit)

TCSI recorded an income tax provision (benefit) of $4.1 million, $1.1
million, and $(1.4) million for 1999, 1998, and 1997, respectively. The tax
provision for 1999 relates primarily to the payment of taxes in foreign
jurisdictions and the establishment of a valuation allowance against the
remaining balance of the Company's deferred tax assets. The tax provision for
1998 differed from the Federal statutory rate primarily due to a valuation
allowance recorded in that year of $2.4 million. The Company has recorded a full
valuation allowance against its deferred tax assets due to uncertainties
regarding the amount and timing of future taxable income.

Liquidity and Capital Resources

Operating Activities

Net cash provided by/(used in) operating activities was $(15.3) million,
$2.3 million, and $6.4 million for the years 1999, 1998, and 1997, respectively.
Cash flows from operating activities for 1999 primarily reflected a net loss of
$22.5 million, a decrease of $3.7 million in deferred income taxes, a decrease
of $1.0 million in accounts payable, and an increase of $.6 million in
receivables. Cash flows from operating activities for 1998 primarily reflected a
net loss of $4.5 million, a decrease of $2.3 million in the receivables balance,
a decrease of $2.3 million in deferred revenue, and an increase of $2.0 million
in accounts payable. Cash flows from operating activities for 1997 primarily
reflected a net loss of $2.6 million, an increase of $3.4 million in income
taxes payable, an increase of $2.7 million in deferred revenue, a decrease of
$2.3 million in accounts payable, and a decrease of $2.2 million in other
assets.

Investing Activities

Net cash provided by/(used in) investing activities was $0.8 million,
$(15.0) million, and $(6.7) million for the years 1999, 1998, and 1997,
respectively. The Company purchased $17.6 million, $40.3 million, and $21.6
million of marketable securities in 1999, 1998, and 1997, respectively, while
$21.3 million, $35.6 million, and $21.5 million of marketable securities matured
in each respective year. The net increase in cash flows from investing
activities in 1999 also

<PAGE>

included $2.8 million of cash used for capital and leasehold improvement
expenditures. In 1998, the Company acquired GTE-NMO; this contributed to
decreases in cash flows from investing activities of $6.5 million. The net
decrease in cash flows from investing activities also included $3.8 million of
cash used for capital expenditures in 1998 compared to $7.2 million of cash used
for capital expenditures and leasehold improvements during 1997. The capital
expenditures during 1997 are primarily related to the consolidation of the
Company's facilities in Northern California and to the establishment of the
Company's office in the United Kingdom. Management expects cash used in
investing activities will continue to vary on a quarterly and annual basis and
from time to time, it may acquire businesses, products, or technologies to
enhance the Company's current product offerings.

Financing Activities

Net cash provided by financing activities was $0.6 million, $1.6 million,
and $3.3 million for the years 1999, 1998, and 1997, respectively. The decreases
from 1998 to 1999 and 1997 to 1998 were primarily the result of decreases in
stock options exercised and stock purchased pursuant to the Employee Stock
Purchase Plan, which is a function of market conditions and investment decisions
made by employees.

Additional Information on Liquidity and Capital Resources

As of December 31, 1999, the Company had cash and equivalents and
short-term marketable securities of $ 31.7 million. The Company believes that
existing cash balances (including cash equivalents and marketable securities),
together with existing sources of liquidity, including cash flows from operating
activities, will provide adequate cash to fund its operations for at least the
next twelve months. Over the past three years, the Company has satisfied its
liquidity needs principally through its existing cash balances and cash flows
from operating activities. However, fluctuating receivable balances may affect
the Company's operating cash flows in the future. The Company's receivables are
primarily from large, credit-worthy customers and, as a result, the Company does
not anticipate any significant default from a customer's inability to make a
payment for products and/or services received.

During 1999, working capital decreased to $37.4 million from $48.1 million
in 1998. The decrease is primarily attributable to the decrease in cash and cash
equivalents, which were used to fund operating activities of the company. During
1998, working capital decreased to $48.1 million from $59.4 million in 1997. The
decrease was primarily attributable to the purchase of GTE-NMO. During 1997,
working capital increased to $59.4 million from $50.8 million in 1996. The
increase was primarily due to the maturity of approximately $5.8 million of
long-term marketable securities that were reinvested in short-term instruments
and the receipt of approximately $3.6 million in income tax refunds.

As of December 31, 1999, the Company had no outstanding debt.

Certain Factors That May Affect Future Results and Market Price of Stock

Statements in this report which are prefaced with words such as "expects,"
"anticipates," "believes" and similar words and other statements of similar
sense, are forward-looking statements. These statements are based on the
Company's current expectations and estimates as to prospective events and
circumstances which may or may not be within the Company's control and as to
which there can be no firm assurances given. These forward-looking statements,
like any other forward-looking statements, involve risks and uncertainties that
could cause actual results to differ materially from those projected or
anticipated. The following discussion highlights some of the risks the Company
faces.

Potential Fluctuations in Future Operating Results

The Company has experienced and expects to continue to experience
significant fluctuations in revenues and operating results on a quarterly or an
annual basis as a result of a number of factors, many of which are beyond the
control of the Company. These factors include the cancellation, modification, or
non-renewal of service, license, or maintenance agreements; the size and timing
of significant customer engagements and license fees; the relative proportion of
services and software licensing fees; personnel changes; capital spending
patterns of the Company's customers; concentration of

17
<PAGE>

the Company's customers; the lengthy sales cycles of the Company's products and
services; industry acceptance of the Company's products and services; changes in
operating expenses; new product introductions and product enhancements by the
Company or its competitors; the ability of the Company to develop, introduce,
and market new products and product enhancements on a timely basis; changes in
pricing policies by the Company or its competitors; regulatory changes, currency
fluctuations, and general economic factors. These factors are difficult to
forecast, and these or other factors could have a material adverse effect on the
Company's business, operating results, and financial condition.

Historically, a portion of the Company's revenue has been derived from
software licensing fees from a limited number of customers. Variability in the
timing of such license fees has caused, and may continue to cause, material
fluctuations in the Company's business, operating results, and financial
condition. The Company's products and services generally require significant
capital expenditures by customers as well as the commitment of resources to
implement, monitor, and test the Company's enhancements to such systems.
Accordingly, the Company is substantially dependent on its customers' decisions
as to the timing and level of such expenditures and resource commitments.

In addition, the Company typically realizes a significant portion of
license revenues in the last weeks or even days of a quarter. As a result, the
magnitude of quarterly fluctuations may not become evident until late in, or
after the close of, a particular quarter. The Company's expenses are based in
part on the Company's expectations as to future revenue levels and to a large
extent are fixed in the short-term. If revenues do not meet expectations, the
Company's business, operating results, and financial condition are likely to be
materially adversely affected. In particular, because only a small portion of
the Company's expenses varies with revenues, results of operations may be
disproportionately affected by a reduction in revenues. As a result, the Company
believes that period-to-period comparisons of its operating results are not
necessarily meaningful and should not be relied upon as indications of future
performance.

Lengthy Sales and Implementation Cycles

The Company's products are typically intended for use in applications that
may be critical to a customer's business. The licensing and implementation of
the Company's software products generally involves a significant commitment of
resources by prospective customers. Historically, the Company's sales process
has been subject to delays associated with lengthy approval processes that
typically accompany significant capital expenditures. However, the Company's
latest products are intended to reduce the time and resources required for
delivery to customers, and, therefore reduce the sales cycle. Still, the time
required to implement the Company's products can vary significantly with the
needs of its customers and is generally a process that extends for several
months. Because of their complexity, larger implementations may take multiple
quarters to complete. From time to time, the Company has provided services to
implement certain large projects, and, although no contractual basis exists for
the customer to do so, certain customers have delayed payment of a portion of
service fees and in some cases have disputed the fees charged. There can be no
assurance the Company will not experience additional delays or disputes
regarding payment in the future, particularly if the Company receives orders for
large, complex installations. Therefore, the Company believes that its quarterly
and annual operating results and financial condition are likely to vary
significantly in the future.

Acceptance of the Company's Products; Product Development Risks

A substantial portion of the Company's revenues are derived from the sale
of the Company's products and services which provide software solutions to major
corporations in the worldwide telecom services and equipment industries.
Although many telecom companies currently seek to integrate their business
operation systems and network operation systems, there can be no assurance that
these or other service providers will continue to seek the integration of such
systems or that such companies will use the Company's products. Due to the
complex nature of the OSS software developed by the Company, the Company has in
the past relied, and will in the future continue to rely, on its development and
implementation expertise. The Company continues to develop software products
that reduce the customization necessary to fully integrate customers' systems.
There can be no assurance, however, that the Company will continue to
successfully develop and market such products or, even if successful, that the
revenue from such products will compensate for any concurrent loss of
development and implementation service revenues. The failure by the Company to

18
<PAGE>

successfully develop and market such products and technologies would have a
material adverse effect on its business, operating results, and financial
condition.

The Company's future business, operating results, and financial condition
are significantly dependent upon the continued market acceptance of its
portfolio of products and services. There can be no assurance that the Company's
technology will continue to achieve market acceptance or that the Company will
be successful in developing, introducing, or marketing improvements to its
products. Moreover, the life cycle of component-based products is difficult to
estimate due in large part to the recent changes in the telecom market, the
effect of future product enhancements, and competition. A decline in the demand
for the Company's software as a result of new or existing competing technologies
or other factors would have a material adverse effect on the Company's business,
operating results, and financial condition.

Customer Concentration

To date, a significant portion of the Company's revenues has been
concentrated among a limited number of customers. In 1999, 1998 and 1997 a large
portion of revenues was derived from contracts negotiated with a large equipment
manufacturer in Asia. Revenue for 1999 from that customer decreased by 46%
compared to 1998 due primarily to the completion of several large projects. The
Company anticipates that it will continue to experience significant customer
concentration. There can be no assurance that such customers or any other
customers will in the future continue to place orders with the Company which
equal or exceed the comparable levels for prior periods. In addition, the
Company's customers typically designate one individual to procure network
management software. If any of such individuals were terminated, transferred, or
replaced, the Company would be vulnerable to cancellation of an order if, for
example, the Company's competitors had existing relationships with the
individual's replacement. As a result of these factors, the Company's business,
operating results, and financial condition could be materially adversely
affected.

Product Defects

The Company provides complex software products for major telecom equipment
manufacturers, systems integrators, and service providers. The development and
enhancement of such complex software entails substantial risks of product
defects. The Company has in the past identified software defects in certain of
its products. There can be no assurance that errors will not be found in
existing or new products or releases after commencement of commercial licensing,
which may result in delay or loss of revenues, loss of market share, failure to
achieve market acceptance, or may otherwise adversely impact the Company's
business, operating results, and financial condition.

Implementation Risks

As is characteristic of companies providing software solutions to the
telecom industry, the complexities involved in implementing the Company's
software solutions entail risks of performance shortfalls. In some cases, the
Company has agreed to accept some financial responsibility, in the form of
negotiated penalty amounts, if the Company's products did not meet
specifications or caused customer system downtime. There can be no assurance
that the Company will not encounter delays or other difficulties due to such
implementation complexities. Because the Company's customer base consists of a
relatively limited number of customers, the product defects or implementation
errors could be potentially damaging to the Company's reputation. Any such
occurrence could have a material adverse effect upon the Company's business,
operating results, and financial condition.

International Sales

Revenues outside of the Americas accounted for 70% of the Company's total
revenues for the year ended December 31, 1999. The Company expects that
international revenues will continue to account for a significant portion of its
total revenues in future periods. The Company intends to penetrate additional
international markets and to further expand its existing international
operations. The Company's international business involves a number of inherent
risks, including greater difficulty in accounts receivable collection and,
therefore, longer accounts receivable collection periods; difficulty in staffing
and managing foreign operations; a longer sales cycle than with domestic
customers; potentially unstable

19
<PAGE>

political and economic conditions; language barriers; cultural differences in
the conduct of business; seasonality; unexpected changes in regulatory
requirements, including a slowdown in the rate of privatization of telecom
service providers; reduced protection for intellectual property rights in some
countries; potentially adverse tax consequences; tariffs and other trade
barriers. Access to foreign markets is often difficult due to the established
relationships between government owned or controlled communications companies
and local suppliers of communications products. There can be no assurance the
Company will be able to successfully penetrate such foreign markets. In
addition, there can be no assurance that the Company will be able to sustain or
increase revenues derived from international licensing and services or that the
foregoing factors will not have a material adverse effect on the Company's
future international business, and consequently, on the Company's business,
operating results, and financial condition.

International sales also entail risks associated with currency
fluctuations. The Company has attempted to reduce the risk of fluctuations in
currency exchange rates associated with international revenues by pricing its
products and services in United States dollars whenever possible. The Company,
however, generally pays the expenses of its international operations in local
currencies and generally does not engage in hedging transactions with respect to
such obligations. Upward fluctuations in currency exchange rates could cause the
Company's products to become relatively more expensive to foreign customers,
leading to a reduction in sales or profitability. Furthermore, future
international activity may result in foreign currency denominated sales, and, in
such event, gains and losses on the conversion to U.S. dollars of accounts
receivable and accounts payable arising from international operations may
contribute to fluctuations in the Company's operating results. In order to
reduce the risk of exchange rate losses from foreign currency denominated sales,
which historically have not been material, the Company has engaged in a limited
quantity of hedging transactions. There can be no assurance that such hedging
transactions will not have a material adverse effect on the Company's business,
operating results, and financial condition.

Dependence on Telecommunications Carriers; Government Regulation

Many of the Company's principal customers are major telecom carriers. Such
companies operate within the telecom industry, which has recently been
characterized by intense competition in the development of new technology,
equipment, and customer services. The Company believes that large telecom
carriers have become increasingly cautious in making significant capital
expenditures, due in part to increased competition from smaller, rapidly
developing alternative carriers, decreasing prices for telecom services and
equipment, and regulatory rate structures that have become less dependent on the
level of carriers' capital expenditures. These and other factors have in the
past and may in the future cause such customers to experience significant
fluctuations in capital expenditures for network management software solutions.

The telecom industry is subject to extensive regulation in the United
States and other countries, and the Company's customers generally must receive
regulatory approvals in conducting their businesses. Although the telecom
industry has been characterized by government deregulation, there can be no
assurance that deregulatory trends will continue or that reregulation will not
occur. Government regulatory policies are likely to continue to have a major
impact on the Company's ability to attract and retain customers. For example,
regulatory authorities may continue to oversee the pricing of new and existing
telecom services, which, in turn impact carriers' ability to make significant
capital expenditures. The enactment by federal, state, or foreign governments of
new laws or regulations or change in the interpretation of existing regulations
could adversely affect the Company's customers, and thereby affect the Company's
business, operating results, and financial condition.

Competition

<PAGE>

The Catalant product line competes in the equipment manufacturer and
service provider markets, offering solutions for next generation telecom
applications and platforms, while the WorldWin product line competes in the
emerging service provider market, by offering integrated OSS and billing data
mediation solutions. The Company competes with numerous vendors in each product
category. TCSI expects that the overall number of competitors providing next
generation network solutions will increase due to the market's attractive
growth. On the other hand, the Company expects the number of vendors supplying
OSS solutions for basic telephone services solutions will decrease, due to
maturity of this market and the rapid introduction of more cost-effective
technologies.

TCSI's competitors include Vertel, Dorado Systems, Objective Systems
Integrators, Hewlett Packard and MicroMuse for the Catalant product line, and
Eftia OSS Solutions, Objective Systems Integrators, Telcordia, Hewlett Packard
and MetaSolv for the WorldWin product line. Some of the Company's competitors
compete across both TCSI's product lines, while others do not offer as wide a
breadth of solutions. Several of the Company's current and potential competitors
have greater financial, marketing and technical resources than the Company. The
principal competitive factors in the markets in which the Company presently
competes and may compete in the future are quality, price, performance, customer
support, corporate reputation, and product features such as scalability,
interoperability, functionality, customizability and ease of use.

The Company also faces competition in each of the three functional areas
that the Company believes are necessary for the delivery of network management
software solutions: development environments, turnkey applications, and custom
services. The Company's Catalant and WorldWin product lines enable the Company
to provide its customers with development environments and turnkey applications.
Because certain of the Company's competitors focus only on one functional area,
such competitors may be in a position to develop competitive products targeted
solely at the segment they serve.

Rapid Technological Change; Need to Manage Product Transitions

The market for the Company's products is characterized by rapidly changing
technologies, evolving industry standards, changing regulatory environments,
frequent new product introductions, and rapid changes in customer requirements.
The introduction of products embodying new technologies and the emergence of new
industry standards and practices can render existing products obsolete and
unmarketable. As a result, the life cycles of the Company's products are
difficult to estimate. This poses substantial risks for the Company because the
Company's products and software solutions typically have lengthy development and
sales cycles. The Company's future success will depend on its ability to enhance
its existing products and to develop and introduce, on a timely and
cost-effective basis, new products and product features that keep pace with
technological developments and emerging industry standards and address the
evolving needs of its customers. There can be no assurance that the Company will
be successful in developing and marketing new products or product features that
respond to technological change or evolving industry standards, that the Company
will not experience difficulties that could delay or prevent the successful
development, introduction, and marketing of these new products and features, or
that its new products or product features will adequately meet the requirements
of the marketplace and achieve market acceptance. If the Company is unable, for
technological or other reasons, to develop and introduce enhancements of
existing products or new products in a timely manner, the Company's business,
operating results, and financial condition will be materially adversely
affected.

The Company's products are designed to operate on a variety of hardware and
software platforms and with a variety of databases employed by its customers in
their networks. The Company must continually modify and enhance its products to
keep pace with changes in hardware and software platforms and database
technology. As a result, uncertainties related to the timing and nature of new
product announcements and introductions or modifications by systems vendors and
by vendors of relational database software could materially adversely impact the
Company's business, operating results, and financial condition. In addition, the
failure of the Company's products to operate across the

21
<PAGE>

various existing and evolving versions of hardware and software platforms and
database environments employed by consumers would have a material adverse effect
on the Company's business, operating results, and financial condition.

The introduction or announcement of products by the Company or one or more
of its competitors embodying new technologies, or changes in industry standards
or customer requirements, could render the Company's software products and
solutions obsolete or unmarketable. The introduction of new or enhanced versions
of its products requires the Company to manage the transition from older
products in order to minimize disruption in customer ordering. There can be no
assurance that the introduction or announcement of new product offerings by the
Company or one or more of its competitors will not cause customers to defer
licensing of existing Company products or engaging the Company's services. Any
deferral of license or service revenues could have a material adverse effect on
the Company's business, operating results, and financial condition.

Protection of Intellectual Property

The Company's success and ability to compete is dependent in part upon its
proprietary software technology. The Company relies on a combination of patent,
trade secret, copyright and trademark laws, nondisclosure and other contractual
agreements, and technical measures to protect its proprietary rights. To date,
the Company has patents and patents pending related to its telecom products. The
Company expects to continue to file patent applications where it believes it is
appropriate to protect its proprietary technologies. Despite the Company's
efforts to protect its proprietary rights, unauthorized parties may attempt to
copy aspects of the Company's products or to obtain and use information that the
Company regards as proprietary. There can be no assurance that the steps taken
by the Company to protect its proprietary technology will prevent
misappropriation of such technology, and such steps may not preclude competitors
from developing products with functionality or features similar to the Company's
products. In addition, effective patent, copyright, trademark, and trade secret
protection may be unavailable or limited in certain foreign countries. The
failure of the Company to protect its proprietary information could have a
material adverse effect on the Company's business, operating results, and
financial condition.

While the Company believes that its products and trademarks and their use
by customers does not infringe upon the proprietary rights of third parties,
there can be no assurance that the Company will not receive future
communications from third parties asserting that the Company's products or their
use by customers infringe, or may infringe, the proprietary rights of such third
parties. The Company expects that software product developers will be
increasingly subject to infringement claims as the numbers of products and
competitors in the Company's industry segment grows and the functionality of
products in different industry segments overlaps. Any such claims, including
meritless claims, could result in costly, time-consuming litigation, and
diversion of technical and management personnel. In the event any third party
was to make a valid claim and a license was not made available on commercially
reasonable terms, or if the Company was unable to develop non-infringing
alternative technology, the Company's business, operating results, and financial
condition could be materially adversely affected.

In addition, certain of the Company's customers regard the solutions
provided by the Company to be proprietary to such customers and may attempt to
prohibit the Company from using or otherwise benefiting from certain of the
advances made in developing such solutions. Although the Company intends to
increasingly standardize its integration solutions through the use of
component-based software products, there can be no assurance that the
prohibition or restrictions imposed by certain customers on the use of certain
intellectual property will not adversely affect the Company's business,
operating results, and financial condition.

The Company relies on certain software that it licenses from third parties,
including software that is integrated with internally developed software and
used in the Company's products to perform key functions. There can be no
assurance that these third party software licenses will continue to be available
to the Company on commercially reasonable terms or that such licenses will not
be terminated. Although the Company believes that alternative software is
available from other third-party suppliers, the loss of or inability to maintain
any of these software licenses or the inability of the third parties to enhance
their products in a timely and cost-effective manner could result in delays or
reductions in product shipments

22
<PAGE>

by the Company until equivalent software could be developed internally or
identified, licensed, and integrated, which would have a material adverse effect
on the Company's business, operating results and financial condition.

Dependence on Key Personnel

The Company's future growth and success depends to a significant extent on
its ability to attract and retain qualified managerial, sales, and software
engineering personnel. The Company has at times experienced and continues to
experience difficulty in attracting and retaining qualified personnel. The
Company's future success will also depend on the ability of its current and
future management personnel to operate effectively, both independently and as a
group. The Company has experienced changes in its executive management. For
example, as a result of the resignation, in December 1999, of the President and
Chief Executive Officer, the Company is currently recruiting to fill that
vacancy. Competition for the hiring of such personnel in the software industry
is intense, and there can be no assurance that the Company will be successful in
locating candidates with appropriate qualifications. Failure to attract and
retain key personnel could have a material adverse effect on the Company's
business, operating results, and financial condition.

Risks Associated with Acquisitions

The Company periodically evaluates potential acquisitions of complementary
businesses, products and technologies. To support its growth plans, the Company
may acquire companies that have a significant installed base of products not yet
offered by the Company, have strategic distribution channels or customer
relationships or otherwise present opportunities which management believes
enhance the Company's competitive position.

Such acquisitions could subject the Company to numerous risks, including
risks associated with the integration into the Company of new employees and
technology. Moreover, the negotiation and acquisition of such transactions
involve the diversion of substantial management resources and the evaluation of
such opportunities requires substantial diversion of engineering and
technological resources. In addition, transactions involving the issuance by the
Company of common stock or other securities could result in immediate and
substantial dilution to the Company's existing shareholders, large one-time
write-offs, or the creation of goodwill or other intangible assets that could
result in amortization expenses. The failure to successfully evaluate, negotiate
and effect acquisition transactions could have a material adverse effect on the
Company's business, operating results and financial condition. In December 1998,
the Company acquired GTE-NMO. This provided the Company with an established
customer base, particularly in the emerging carrier segment and a new product
development center in the Pacific Northwest.

Volatility of Stock Price

The market price of the shares of the Company's Common Stock has been and
is likely to continue to be highly volatile and may be significantly affected by
factors such as actual or anticipated fluctuations in the Company's business,
operating results and financial condition, announcements of technological
innovations, new products or new contracts by the Company or its competitors,
developments with respect to proprietary rights, adoption of new accounting
standards affecting the software industry, general market conditions and other
factors. Due to the foregoing factors, it is likely that the Company's revenues
or operating results will be below the expectations of public market analysts
and investors in some future period. In such event, the price of the Company's
Common Stock could be materially adversely affected. In addition, the stock
market from time to time has experienced significant price and volume
fluctuations that have particularly affected the market prices of technology
company stocks. These types of broad market fluctuations may adversely affect
the market price of the Company's Common Stock. In the past, following periods
of volatility in the market price of a company's securities, securities class
action litigation has often been initiated against such company. Such litigation
could result in substantial costs and a diversion of management's attention and
resources, which could have a material adverse effect upon the Company's
business, operating results, and financial condition.

23
<PAGE>

Year 2000 Compliance

In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready. During 1999, the Company completed its Year 2000
remediation and testing efforts. As a result of those efforts, the Company
incurred less than $100,000 in total costs related to the Year 2000 issue and
experienced no disruptions in its information systems or products, and believes
those systems and products successfully responded to the Year 2000 date change.
The Company is not aware of any material problems resulting from Year 2000
issues, either with its products, its internal systems or the products and
services of third parties. The Company will continue to monitor its
mission-critical computer applications and those of its suppliers, vendors and
customers throughout the year 2000 to ensure that any latent Year 2000 matters
that may arise are addressed promptly.

24
<PAGE>

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk. As of December 31, 1999, the Company's cash and
investment portfolio includes only fixed-income securities. These securities are
subject to interest rate risk and will decline in value if interest rates
increase. Due to the short duration of the Company's investment portfolio, an
immediate 100 basis points increase or decrease in interest rates would not have
a material effect on the fair market value of the Company's portfolio. The
Company has the ability to hold its fixed income investments until maturity, and
therefore the Company would not expect its operating results or cash flows to be
affected to any significant degree by the effect of a sudden change in market
interest rates in its investment portfolio.

Foreign Currency Exchange Risk. The majority of the Company's revenues are
denominated in U.S. dollars and, as a result, the Company has relatively little
exposure to foreign currency exchange risk. The Company does not use derivative
financial instruments for trading or speculative purposes.

Item 8. Financial Statements and Supplementary Data

The information required by Item 8 is incorporated by reference herein from
Part IV, Item 14(a)(1) and (2).

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

None.

25
<PAGE>

PART III

Certain information required by Part III is omitted from this Report in
that the registrant will file a definitive Proxy Statement pursuant to
Regulation 14A ("Proxy Statement") not later than 120 days after the end of the
fiscal year covered by this Report, and certain information included therein is
incorporated herein by reference.

Item 10. Directors and Executive Officers of the Registrant

The information required by Item 10 is set forth under the captions
"Proposal 1: Election of Directors," "Board Meetings, Committees, and Director
Compensation," and "Section 16(a) Beneficial Ownership Reporting Compliance" in
the Company's Proxy Statement and under the caption "Executive Officers of the
Registrant" in Part I hereof, which information is incorporated herein by
reference.

Item 11. Executive Compensation

The information required by Item 11 is set forth under the caption
"Executive Compensation" in the Company's Proxy Statement, which information is
incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information required by Item 12 is set forth under the caption
"Security Ownership of Directors, Officers, and Principal Shareholders" in the
Company's Proxy Statement, which information is incorporated herein by
reference.

Item 13. Certain Relationships and Related Transactions

The information required by Item 13 is set forth under the caption
"Compensation Committee Interlocks and Insider Participation" in the Company's
Proxy Statement, which information is incorporated herein by reference.

26
<PAGE>

PART IV

Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on
Form 8-K

(a) The following documents are filed as part of this Report:

1. Consolidated Financial Statements

The following consolidated financial statements of TCSI are filed as part of
this Report:

<TABLE>
<CAPTION>
Page

<S> <C>
Report of Independent Auditors................................................................................. 32
Consolidated Balance Sheets as of December 31, 1999 and 1998................................................... 33
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998, and 1997........................................................................... 34
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999, 1998, and 1997........................................................................... 35
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998, and 1997........................................................................... 36
Notes to Consolidated Financial Statements..................................................................... 37
</TABLE>

2. Consolidated Financial Statement Schedule

The following consolidated financial statement schedule of TCSI Corporation
is filed as part of this report and should be read in conjunction with the
consolidated financial statements of TCSI Corporation:

<TABLE>
<CAPTION>
Schedule Page
- -------- ----
<S> <C>
II Valuation and Qualifying Accounts................................................................... 53
</TABLE>

All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted.

3. Exhibits

The index of exhibits is at page 28.

(b) Reports on Form 8-K in the fourth quarter of 1999:

During the quarter ended December 31, 1999, the Company filed a current
report on Form 8-K, dated December 20, 1999, reporting both the resignation of
Dr. Ram A. Banin, the Company's President and Chief Executive Officer and the
naming by the Board of Dr. Norman E. Friedmann, a member of the Company's Board
of Directors, as interim President and Chief Executive Officer.

27
<PAGE>

3. Exhibits

Exhibit
Number Document Description
- -------- ----------------------------------------------------------------------
3.1 Restated Articles of Incorporation of the Company incorporated herein
by reference to Exhibit 3.1 of the Company's Registration Statement
No. 33-40872 on Form S-1 filed on May 29, 1991.

3.2 Certificate of Amendment of the Restated Articles of Incorporation of
the Company, dated December 12, 1994, incorporated herein by reference
to Exhibit 3.2 of Form 10-K filed March 9, 1995.

3.3 Amended Bylaws of the Company incorporated herein by reference to
Exhibit 3.2 of the Company's Registration Statement No. 33-40872 on
Form S-1 filed on May 29, 1991.

3.4 Amended and Restated Bylaws of the Company incorporated herein by
reference to Exhibit 3.4 of the Company's Quarterly Report on Form
10-Q filed on October 16, 1998.

3.5* Amended and Restated Bylaws of the Company dated March 14, 2000.

4.1 Preferred Shares Rights Agreement dated as of February 16, 1999,
between the Company and BankBoston, N.A., incorporated herein by
reference to Exhibit 4 of Form 8-A filed on February 25, 1999.

10.1# Teknekron Communications Systems, Inc. 1991 Stock Incentive Plan as
amended February 28, 1992, incorporated herein by reference to Exhibit
4 of the Company's Registration Statement No. 33-57540 on Form S-8
filed on January 28, 1993.

10.2# Amendment to Teknekron Communications Systems, Inc. 1991 Stock
Incentive Plan, dated March 3, 1995, changing the name of the plan to
TCSI Corporation 1991 Stock Incentive Plan, incorporated herein by
reference to Exhibit 10.2 of Form 10-K filed March 9, 1995.

10.3# Amendments to TCSI Corporation 1991 Stock Incentive Plan, dated
December 8, 1995 and March 1, 1996, incorporated herein by reference
to Exhibit 10.3 of Form 10-K filed March 25, 1996.

10.4 Teknekron Communications Systems, Inc. Equity Sharing Plan restated as
of May 17, 1991, incorporated herein by reference to Exhibit 4 of the
Company's Registration Statement No. 33-41808 on Form S-8 filed on
July 19, 1991.

10.5 Amendment One to Teknekron Communications Systems, Inc. Equity Sharing
Plan dated January 4, 1993, incorporated herein by reference to
Exhibit 10.4 of Form 10-K filed March 26, 1993.

10.6 Amendment to Teknekron Communications Systems, Inc. Equity Sharing
Plan, dated March 3, 1995, changing the name of the plan to TCSI
Corporation Equity Sharing Plan, incorporated herein by reference to
Exhibit 10.5 of Form 10-K filed March 9, 1995.

10.7 Form of Indemnity Agreement between the Company and each of its
directors and officers incorporated herein by reference to Exhibit
10.8 of the Company's Registration Statement No. 33-40872 on Form S-1
filed on May 29, 1991.

10.8 Form of specimen, TCSI Corporation Equity Sharing Plan Non-Qualified
Notice of Grant of Stock Options and Grant Agreement and Annex I
(attached thereto), dated March 3, 1995, incorporated herein by
reference to Exhibit 10.10 of Form 10-K filed March 9, 1995.

10.9 Form of specimen, Teknekron Communications Systems, Inc. Equity
Sharing Plan Amended Option Agreement, dated as of January 4, 1993,
incorporated herein by reference to Exhibit 10.14 of Form 10-K filed
March 26, 1993.

____________________
# Plans in which executive officers participate

28
<PAGE>

Exhibit
Number Document Description
- -------- ----------------------------------------------------------------------
10.10# Form of specimen, TCSI Corporation 1991 Stock Incentive Plan Notice of
Grant of Stock Options and Grant Agreement and Annex I (attached
thereto), dated March 3, 1995, incorporated herein by reference to
Exhibit 10.12 of Form 10-K filed March 9, 1995.

10.11# Form of specimen, amendment to TCSI Corporation 1991 Stock Incentive
Plan, dated December 6, 1996, changing eligible participants,
repricing and transferability of options, and approval of material
amendments, incorporated herein by reference to Exhibit 10.13 of Form
10-K filed March 27, 1997.

10.12# Form of specimen, amendment to TCSI Corporation 1991 Stock Incentive
Plan, dated May 30, 1997, increasing the maximum number of options
which may be awarded in a fiscal year incorporated herein by reference
to Exhibit 10.30 of Form 10-Q filed November 13, 1997.

10.13 Lease between Mitsubishi Estate Housing Co. and the Company dated
December 27, 1993, concerning lease of the Company's facilities at
15-1, Jinnan 1-Chome, Shibuya-ku, Tokyo, Japan, incorporated by
reference to Exhibit 10.12 of Form 10-K filed March 28, 1994.

10.14 Description of ongoing Incentive Bonus Program and form of standard
letter of agreement entered into between the Company and Ram A. Banin,
Ph.D., incorporated herein by reference to Exhibit 10.2 of Form 10-K
filed March 9, 1995.

10.15 Lease between Browning-Ferris Industries of California, Inc. and the
Company, dated December 16, 1994, concerning the lease of the
Company's facilities located at 150 Almaden Blvd., Suite 850, San
Jose, California, incorporated herein by reference to Exhibit 10.15 of
Form 10-K filed March 9, 1995.

10.16 Lease between Browning-Ferris Industries of California, Inc. and the
Company, dated December 16, 1994, concerning the lease of the
Company's facilities located at 150 Almaden Blvd., Suite 800 and 900,
San Jose, California, incorporated herein by reference to Exhibit
10.16 of Form 10-K filed March 9, 1995.

10.17 Lease between JMB/San Jose Associates and the Company, dated January
31, 1996, concerning lease of the Company's facilities located at 150
Almaden Blvd., Fifth Floor, San Jose, California, incorporated herein
by reference to Exhibit 10.21 of Form 10-K filed March 25, 1996. 10.18
TCSI 1994 Board of Directors Option Plan, dated as of December 2,
1994, incorporated herein by reference to Exhibit 4 of the Company's
Registration Statement No. 33-98842 on Form S-8 filed on October 27,
1995.

10.19 Amendment to TCSI 1994 Board of Directors Option Agreement, dated
December 6, 1996, changing eligibility of outside directors to receive
equity securities under an employee benefit plan, transferability of
options, and approval of material amendments, incorporated herein by
reference to Exhibit 10.20 of Form 10-K filed March 27, 1997.

10.20 Form of specimen, TCSI 1994 Board of Directors Option Agreement, dated
as of December 2, 1994, incorporated herein by reference to Exhibit
10.18 of Form 10-K filed March 9, 1995.

______________________
# Plans in which executive officers participate.

29
<PAGE>

Exhibit
Number Document Description
- -------- ----------------------------------------------------------------------
10.21 Lease between Cow Holdings Limited and the Company, dated July 25,
1996, concerning lease of Company's facilities located at 8605
Westwood Center Dr., Vienna, Virginia, incorporated herein by
reference to Exhibit 10.23 of Form 10-K filed March 27, 1997. 10.22
Amendment to lease between White Pearl Investment Company (former
landlord: Cow Holdings Limited) and the Company, dated December 19,
1997, changing the landlord and terminating the lease effective
December 19, 1997.

10.23 Sublease between Computer Associates International, Inc. and the
Company, dated July 12, 1996, concerning the lease of Company's
facilities located at 1080 Marina Village Parkway, Alameda,
California, incorporated herein by reference to Exhibit 10.24 of Form
10-K filed March 27, 1997.

10.24 Lease between Tricoho, Ltd. And the Company, dated July 22, 1996,
concerning lease of Company's facilitieslocated at 15851 Dallas
Parkway, Suite 367, Dallas, Texas, incorporated herein by reference to
Exhibit 10.25 of Form 10-K filed March 27, 1997.

10.25 Sublease between Innovative Managed Care Systems, Inc. and the
Company, dated March 7, 1997, concerning the sublease of the Company's
facilities located at 15851 Dallas Parkway, Suite 367, Dallas, Texas.

10.26# Form of specimen, TCSI Employee Stock Purchase Plan, dated January 19,
1997, incorporated herein by reference to Exhibit 10.26 of Form 10-K
filed March 27, 1997.

10.27# Amendment to TCSI Employee Stock Purchase Plan, dated December 5,
1997, amending the maximum number of shares an employee may purchase
in an offering.

10.28 Arrangements with Executive Officer, dated May 1, 1992 and Amendment
to Employment Agreement, dated June 11, 1997, incorporated herein by
reference to Exhibit 10.27 of Form 10-Q filed August 14, 1997.

10.29 Arrangements with Executive Officer, Employment Agreement, dated
December 20, 1993, incorporated herein by reference to Exhibit 10.28
of Form 10-Q filed August 14, 1997.

10.30 Arrangements with Executive Officer, Termination Agreement, dated July
31, 1997, incorporated herein by reference to Exhibit 10.29 of Form
10-Q filed August 14, 1997.

10.31 Lease between Kenburgh Land and Properties Limited and the Company,
dated February 14, 1997, concerning the lease of the Company's
facilities located at First Floor Suffolk House, Fordham Road,
Newmarket, United Kingdom.

10.32 Amendment to TCSI 1994 Outside Directors Stock Option Plan, dated May
5, 1998, changing the number of options granted to each New Outside
Director from 31,500 to 20,000 and reducing the annual grant from
6,000 shares to 5,000 shares.

10.33* Arrangements with Executive Officer, Settlement Agreement and Release,
dated December 17, 1999.

10.34* Arrangement for Consulting Services for Interim President and Chief
Executive Officer

21.0 Subsidiaries of the Registrant.

23.1* Consent of Ernst & Young LLP, Independent Auditors.

27.1* Financial Data Schedule

- ------------
* Filed herewith.
# Plans in which executive officers participate

30
<PAGE>

SIGNATURES

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

TCSI Corporation
(Registrant)

March 24, 2000 /s/ NORMAN E. FRIEDMANN
------------------------
Norman E. Friedmann, Ph.D., Acting President and Chief
Executive Officer (Principal Executive Officer)

March 24, 2000 /s/ ARTHUR H. WILDER
---------------------
Arthur H. Wilder, Chief Financial Officer, Secretary, and
Treasurer (Principal Financial Officer and Principal
Accounting Officer)

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

March 24, 2000 /s/ JOHN C. BOLGER
-------------------
John C. Bolger, Chairman of the Board of Directors

March 24, 2000 /s/ NORMAN E. FRIEDMANN
------------------------
Norman E. Friedmann, Ph.D., Director

March 24, 2000 /s/ DONALD GREEN
-----------------
Donald Green, Director

March 24, 2000 /s/ WILLIAM A. HASLER
----------------------
William A. Hasler, Director

March 24, 2000 /s/ DAVID G. MESSERSCHMITT
---------------------------
David G. Messerschmitt, Ph.D., Director

March 24, 2000 /s/ HARVEY E. WAGNER
---------------------
Harvey E. Wagner, Director

31
<PAGE>

REPORT OF INDEPENDENT AUDITORS

Board of Directors and Shareholders
TCSI Corporation

We have audited the accompanying consolidated balance sheets of TCSI
Corporation as of December 31, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1999. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of TCSI
Corporation at December 31, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States. Also, in our opinion, the financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.

/s/ ERNST & YOUNG LLP

Walnut Creek, California
February 1, 2000

<PAGE>

TCSI CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

<TABLE>
<CAPTION>
December 31,
1999 1998
---------- ---------
Assets
Current assets:

<S> <C> <C>
Cash and equivalents.................................................................. $ 8,788 $22,308
Marketable securities................................................................. 22,926 19,371
Receivables, net...................................................................... 12,134 11,570
Other receivables..................................................................... 879 922
Deferred tax assets................................................................... -- 2,941
Other current assets.................................................................. 1,314 644
--------- ----------
Total current assets.......................................................... 46,041 57,756
Furniture, equipment, and leasehold improvements, net................................... 8,457 10,599
Noncurrent marketable securities........................................................ -- 7,304
Noncurrent deferred tax assets.......................................................... -- 749
Intangibles and other noncurrent assets, net............................................ 3,665 4,421
--------- ----------
Total assets.................................................................. $ 58,163 $ 80,829
========= ==========

Liabilities and Shareholders' Equity
Current liabilities:

Accounts payable...................................................................... $ 3,449 $ 4,446
Accrued liabilities................................................................... 3,157 3,198
Deferred revenues..................................................................... 1,029 1,379
Income taxes payable.................................................................. 1,046 662
--------- ----------
Total current liabilities..................................................... 8,681 9,685
Commitments and Contingencies (Notes 10 and 11)

Shareholders' equity:
Preferred shares, par value $0.01 per share; 5,000,000 shares authorized; none
issued and outstanding............................................................. -- --
Common shares, par value $0.10 per share; 75,000,000 shares authorized;
22,686,724 and 22,452,606 shares issued and outstanding at December 31,
1999 and 1998, respectively....................................................... 2,268 2,245
Additional paid-in capital............................................................ 51,265 50,737
Accumulated other comprehensive income (loss)......................................... 25 (244)
Retained earnings (deficit)........................................................... (4,076) 18,406
--------- ---------
Total shareholders' equity.................................................... 49,482 71,144
--------- ---------
Total liabilities and shareholders' equity.................................. $58,163 $80,829
========= =========
</TABLE>

See accompanying notes to consolidated financial statements.

33
<PAGE>

TCSI CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1999 1998 1997
---------- ---------- -------
Revenues:
<S> <C> <C> <C>
Services..................................................................... $ 22,269 $31,560 $33,970
Software licensing fees...................................................... 10,497 10,760 5,608
--------- --------- --------
Total revenues....................................................... 32,766 42,320 39,578
Costs, expenses, and special items:
Services..................................................................... 20,154 20,297 21,071
Product development.......................................................... 14,351 12,311 5,932
Selling, general, and administrative......................................... 17,137 16,164 18,563
Write-off of in-process technology acquired.................................. -- 831 --
Nonrecurring special items, net.............................................. 1,528 (550) 1,088
--------- --------- --------
Total costs, expenses, and special items............................. 53,170 49,053 46,654
--------- --------- --------
Loss from operations........................................................... (20,404) (6,733) (7,076)
Other income and expense, net.................................................. 1,974 3,266 3,104
--------- --------- --------
Loss before income tax provision (benefit)..................................... (18,430) (3,467) (3,972)
Income tax provision (benefit)................................................. 4,052 1,054 (1,350)
--------- --------- --------
Net loss....................................................................... $(22,482) $(4,521) $ (2,622)
========= ========= ========
Net loss per share (EPS) - Basic and diluted................................... $ (0.99) $ (0.20) $ (0.12)
========= ========= ========
Shares used in calculation of EPS - Basic and diluted.......................... 22,614 22,349 21,638
========= ========= ========
</TABLE>

See accompanying notes to consolidated financial statements.

34
<PAGE>

TCSI CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1999, 1998, and 1997
(in thousands)

<TABLE>
<CAPTION>
Accumulated
Additional Retained Other Total
Common Shares Paid-in Earnings/ Comprehensive Shareholders'
Number Amount Capital (Deficit) Loss Equity
------ ------ ---------- ---------- ------------- -------------

<S> <C> <C> <C> <C> <C> <C>
Balances as of December 31, 1996.................. 21,219 $2,122 $45,939 $25,549 $ -- $73,610
Proceeds from exercise of options............... 829 83 2,692 -- -- 2,775
Proceeds from employee stock purchase plan...... 88 9 502 -- -- 511
Unrealized gains on marketable securities....... -- -- -- -- 108 108
Net loss........................................ -- -- -- (2,622) -- (2,622)
Foreign currency translation adjustments -- -- -- -- (234) (234)
----- ------ -------- -------- ----------- -----------

Balances as of December 31, 1997.................. 22,136 2,214 49,133 22,927 (126) 74,148
Proceeds from exercise of options............... 172 16 911 -- -- 927
Proceeds from employee stock purchase plan...... 145 15 693 -- -- 708
Unrealized gains on marketable securities....... -- -- -- -- 19 19
Net loss........................................ -- -- -- (4,521) -- (4,521)
Foreign currency translation adjustments........ -- -- -- -- (137) (137)
------ -------- -------- ---------- ----------- ----------
Balances as of December 31, 1998.................. 22,453 2,245 50,737 18,406 (244) 71,144
Proceeds from exercise of options............... 4 -- 140 -- -- 140
Proceeds from employee stock purchase plan...... 230 23 388 -- -- 411
Unrealized losses on marketable securities...... -- -- -- -- (102) (102)
Net loss........................................ -- -- -- (22,482) -- (22,482)
Foreign currency translation adjustments........ -- -- -- -- 371 371
---- ------ -------- ---------- ---------- ----------
Balances as of December 31, 1999................... 22,687 $ 2,268 $ 51,265 $ (4,076) $ 25 $ 49,482
====== ======== ========== =========== ========== ==========
</TABLE>

See accompanying notes to consolidated financial statements

35
<PAGE>

TCSI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1999 1998 1997
----------- ----------- --------

Cash flows from operating activities:

<S> <C> <C> <C>
Net loss................................................................................ $ (22,482) $(4,521) $(2,622)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization...................................................... 4,231 4,236 4,244
Loss on disposal or write-down of fixed assets 716 -- --
Write-off of in-process technology acquired........................................ -- 831 --
Deferred income taxes.............................................................. 3,690 771 (1,110)
Net changes in operating assets and liabilities, net of effect of acquisition
in 1998:
Receivables, net................................................................. (564) 2,271 1,677
Other assets..................................................................... 129 189 2,205
Accounts payable................................................................. (997) 2,036 (2,282)
Accrued liabilities.............................................................. (41) (772) (1,825)
Deferred revenues................................................................ (350) (2,261) 2,682
Income taxes payable............................................................. 384 (491) 3,383
---------- ----------- -----
Net cash provided by (used in) operating activities........................... (15,284) 2,289 6,352

Cash flows from investing activities:

Capital and leasehold equipment expenditures............................................ (2,805) (3,777) (7,208)
Purchases of marketable securities...................................................... (17,608) (40,338) (21,566)
Redemptions of marketable securities.................................................... 21,255 35,583 21,500
Cash paid for acquisition of GTE-NMO.................................................... -- (6,513) --
Decrease in other noncurrent assets..................................................... -- -- 556
---------- -------- - -------
Net cash provided by (used in) investing activities........................... 842 (15,045) (6,718)

Cash flow from financing activities:

Proceeds from issuance of common stock.................................................. 551 1,635 3,286

Effect of exchange rate changes on cash and equivalents................................. 371 (137) (234)
-------- ------- ---------
Net increase / (decrease) in cash and equivalents....................................... (13,520) (11,258) 2,686
Cash and equivalents at the beginning of year........................................... 22,308 33,566 30,880
------ ---- -------
Cash and equivalents at the end of year................................................. $ 8,788 $ 22,308 $ 33,566
======= ======= =========

Supplemental disclosure of non-cash investing and financing activities:

Cash paid (refunds received) for income taxes, net.................................... $ 460 $ 800 $ (3,624)
======= ======= =========
</TABLE>

See accompanying notes to consolidated financial statements.

36
<PAGE>

TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999

NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company

TCSI Corporation ("TCSI" or the "Company") currently operates in one
industry segment, which is providing integrated software products and services
for the global telecommunications industry.

Basis of Presentation

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ materially from those estimates.

Cash and Equivalents

The Company considers all cash and highly liquid investments purchased with
an original maturity of less than three months at the date of purchase to be
cash equivalents. Cash and equivalents are recorded at cost, which approximates
fair value. Substantially all of the Company's cash and equivalents are
custodied with four major domestic financial institutions.

Major Customers

To date, a significant portion of the Company's revenues has been
concentrated among a limited number of customers. In 1999, 1998 and 1997,
revenues from the Company's five largest customers represented 60%, 74%, and 64%
of revenues, respectively. In 1999, 1998 and 1997 one customer with multiple
contracts represented approximately 30%, 43% and 27% of total revenues,
respectively. In 1998, one customer represented approximately 11% of total
revenues, and in 1997, two customers each represented approximately 11% of total
revenues. The Company anticipates that it will continue to experience
significant customer concentration.

Concentrations of Credit Risk and Credit Risk Evaluations

Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash and equivalents and
receivables. Cash and equivalents consist principally of demand deposit and
money market accounts and commercial paper. Marketable securities consist
primarily of commercial paper and debt securities of domestic municipalities and
U.S. and foreign companies and U.S. treasuries and agencies with strong credit
ratings. Cash and equivalents and marketable securities are held with various
domestic and foreign financial institutions with high credit standing. The
Company has not experienced any significant losses on its cash and equivalents
or marketable securities. Receivable balances are primarily from large, credit
worthy customers in the telecommunications industry. The Company performs
ongoing credit evaluations of its customers and generally does not require
collateral. Allowances are maintained for potential credit issues, and such
losses to date have been within management's expectations.

37
<PAGE>

Revenue Recognition

The Company licenses its software to customers under contracts which
generally include both software licensing fees and systems solutions services.
Revenues for integration and consulting services and related software licensing
fees are recognized either as the services are performed (for time and
material-type contracts) or under the percentage-of-completion method (for
fixed-price contracts). Percentage of completion is determined using the number
of dollars incurred (as measured by labor hours) as compared to the total
estimated dollars to complete the contract. Actual remaining effort under
fixed-price contracts could vary significantly from the estimates, and such
differences could be material to the financial statements. Differences between
invoiced amounts and revenue recognized are reflected as unbilled receivables or
deferred revenues. Additionally, the Company licenses software to customers
under contracts which do not require significant production, modification, or
customization of software, in accordance with the terms of the American
Institute of Certified Public Accountants ("AICPA") Statement of Position 97-2,
Software Revenue Recognition ("SOP 97-2") and SOP 98-9. The Company recognizes
revenue from software licensing fees under these contracts when a noncancelable
license agreement has been signed, the product has been shipped, the fees are
fixed and determinable, collectibility is probable and vendor-specific objective
evidence of fair value exists to allocate the total fee to elements of the
arrangement.

Stock-Based Compensation

The Company generally grants stock options for a fixed number of shares to
employees with an exercise price equal to the fair value of the shares at the
date of grant. The Company accounts for stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and, accordingly, recognizes no compensation expense for the stock
option grants.

38
<PAGE>

Software Development Costs

Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed", provides
for the capitalization of certain software development costs incurred after
technological feasibility of the software is attained. Software development
costs subject to potential capitalization were not material in 1999, 1998 and
1997, and, as such, were expensed as incurred.

Computer Software

Development costs related to software incorporated in the Company's
products incurred subsequent to the establishment of technological feasibility
are capitalized and amortized over the estimated lives of the related products.
Technological feasibility is established upon completion of a working model. To
date, costs incurred subsequent to the establishment of technological
feasibility have not been significant, and all software development costs have
been charged to product development expense in the accompanying statements of
operations.

Income Taxes

Deferred income taxes are recorded for temporary differences between the
basis of assets and liabilities as recognized by tax laws and their carrying
values as reported in the accompanying consolidated financial statements.

Comprehensive Loss

Components of comprehensive loss for the years ended December 31 were as
follows:

<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- --------

<S> <C> <C> <C>
Net loss............................................... $(22,482) $(4,521) $ (2,622)
Translation gains (losses)............................. 371 (137) (234)
Unrealized gains (losses) on marketable securities..... (102) 19 108
-------- ------- -------
Comprehensive loss..................................... $(22,213) $(4,639) $(2,748)
======== ======= =======
</TABLE>

39
<PAGE>

TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Per Share Information

Basic net loss per share is computed using the weighted average number of
common shares outstanding. Diluted net loss per share is computed using the
weighted average number of common shares outstanding and dilutive common stock
equivalents from the Company's stock option plans, calculated using the treasury
stock method.

The following table sets forth the computation of basic and diluted net loss
per share:

<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ---------
(in thousands)
Numerator:
Numerator for basic net loss
<S> <C> <C> <C>
per share $ (22,482) $ (4,521) $ (2,622)
========= ========= ========

Denominator:

Denominator for basic net loss per
share -- weighted-average shares outstanding 22,614 22,349 21,638

Effect of dilutive securities-employee stock options* -- -- --
-------- -------- ---------

Denominator for diluted net loss per share 22,614 22,349 21,638
======== ======== =========

Net loss per share-basic and diluted $ (0.99) $ (0.20) $ (0.12)

======== ======== =========
</TABLE>

*Since the Company had losses from operations in 1999, 1998 and 1997,
weighted-average common shares (with an exercise price less than the average
market price of the Company's common shares) were not included in the
computations for those years because their effects would be antidilutive were as
follows:

<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ---------
(in thousands)

<S> <C> <C> <C>
Weighted-average common shares ...................... 59 97 305
=========== =========== ===========
</TABLE>

Out-of-the money securities:

The following securities consist of options not included in the computation
of diluted loss per share because the exercise price of each of these options
was greater than the average market price of the Company's common shares during
the period.
<TABLE>
<CAPTION>

1999 1998 1997
---------- ---------- --------
(in thousands)
<S> <C> <C> <C>
Absolute options outstanding at end of period 2,700 2,686 1,413
========== ========== ==========
</TABLE>

Reclassifications

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

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities"("SFAS 133"). SFAS 133 establishes standards for
reporting information about derivative instruments and hedging activities,
requires that an entity recognize all derivative instruments as either assets or
liabilities in the statement of financial position, and requires that those
instruments be measured at fair value. The Company will be required to adopt
SFAS 133 effective January 1, 2001. The Company does

40
<PAGE>

TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

not currently have any derivative instruments but has previously engaged in a
limited quantity of hedging transactions in order to reduce the risk of exchange
rate losses from foreign currency denominated sales, which historically have not
been material to the Company. Management of the Company does not currently
anticipate hedging transactions in the future and thus, the adoption of SFAS 133
will not have a material effect on the Company's consolidated financial
position, results of operations or cash flows.

NOTE 2 - MARKETABLE SECURITIES

Management determines the appropriate classification of marketable
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. Marketable securities are classified as held-to-maturity
when the Company has the intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost. The Company had no
held-to-maturity securities at December 31, 1999 or 1998. Marketable securities
not classified as such are classified as available-for-sale. Available-for-sale
securities are stated at fair value, determined by quoted market prices, with
the unrealized gains and losses, net of tax, included in accumulated other
comprehensive loss within shareholders' equity. Realized and unrealized gains
and losses from investments have been insignificant to the consolidated results
of operations and financial position of the Company.

Marketable securities as of December 31 consist of the following:

<TABLE>
<CAPTION>
1999 1998
--------- -------
(in thousands)

Available-for-sale securities:
<S> <C> <C>
Debt securities of U.S. companies.................................................... $ 7,960 $ 20,323
Debt securities of foreign companies................................................. 2,703 2,625
U.S. Treasury securities and obligations of U.S. government Agencies................. 12,238 3,600
Unrealized gains / (losses).......................................................... 25 127
--------- ---------
$ 22,926 $ 26,675
========= =========
</TABLE>

All of the Company's securities have stated maturities of two years or
less. The Company's cash flows relating to the purchases and maturities of its
marketable securities for the years ended December 31 are as follows:

<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- -------
(in thousands)
Purchases of marketable securities:
<S> <C> <C> <C>
Investments held-to-maturity................................................ $ -- $ -- $14,129
Investments available-for-sale.............................................. 17,608 40,338 7,437
-------- -------- --------
$17,608 $40,338 $21,566
======== ======= ========
Maturities and sales of marketable securities:

Investments held-to-maturity................................................ $ -- $10,853 $17,600
Investments available-for-sale................................................ 21,255 24,730 3,900
-------- ------- --------
$21,255 $35,583 $21,500
======== ======= ========
</TABLE>

41
<PAGE>

TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 3 - RECEIVABLES

Receivables as of December 31 consist of the following:

<TABLE>
<CAPTION>
1999 1998
------------ ----------
(in thousands)

<S> <C> <C>
Billed receivables........................................... $ 11,763 $ 9,092
Unbilled receivables......................................... 1,579 3,617
Allowance for doubtful accounts.............................. (1,208) (1,139)
----------- ----------
$ 12,134 $ 11,570
=========== ==========
</TABLE>

NOTE 4 - OPERATING SEGMENTS

The Company has adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information" ("FAS
131") which establishes standards for reporting information about operating
segments in annual financial statements. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. For management purposes, in 1999 and prior years, the Company was
divided into and presented its financial information by geographic area. Each of
these geographic locations had a vice president who reported directly to the
Chief Executive Officer ("CEO"), who is the Chief Operating Decision Maker as
defined by FAS 131. The Company's management relied on an internal management
accounting system. Results of operations for these geographic locations, which
were provided to the CEO, included Revenues, Cost of Revenues and Gross Profit,
as provided below in accordance with FAS 131. The Company's management made
financial decisions and allocated resources based on the information it received
from this internal system. Summarized financial information by geographic area
for 1999, 1998 and 1997, as taken from the internal management information
system, is as follows:

1999 1998 1997
--------- --------- ------
(in thousands)
The Americas:
<S> <C> <C> <C>
Total Revenues......................................................... $ 9,889 $ 12,559 $ 8,555
Cost of Revenues....................................................... 6,621 9,137 4,636
--------- --------- ---------
Gross Profit........................................................... 3,268 3,422 3,919

Asia-Pacific:
Total Revenues......................................................... 12,015 22,414 21,474
Cost of Revenues....................................................... 8,287 8,050 11,378
--------- --------- ---------
Gross Profit........................................................... 3,728 14,364 10,096

Europe:
Total Revenues......................................................... 10,862 7,347 9,549
Cost of Revenues....................................................... 5,246 3,110 5,057
--------- --------- ---------
Gross Profit........................................................... 5,616 4,237 4,492
</TABLE>

Commencing on January 1, 2000, due to a reorganization, the Company has
been presenting its financial data and results of operations by, and has been
organized into, two Product Line Management Offices ("PLMO"): Catalant and
WorldWin. Going forward, segmental disclosure will be presented along those two
products.

42
<PAGE>

TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 5 - FURNITURE, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS, NET

Furniture, equipment and leasehold improvements are stated at cost.
Depreciation is provided for furniture and equipment in amounts sufficient to
relate the cost of depreciable assets to operations over their estimated service
lives of the assets (three to five years) utilizing the straight-line method.
Amortization is provided for leasehold improvements in amounts sufficient to
relate the cost over the shorter of the term of the related office lease or the
estimated service lives of the assets (ten years) utilizing the straight-line
method.

Equipment, furniture and leasehold improvements as of December 31 consisted of
the following:

<TABLE>
<CAPTION>
1999 1998
---- ----
(in thousands

<S> <C> <C>
Computer equipment..................................................... $ 19,672 $ 18,464
Furniture and fixtures................................................. 4,206 4,325
Leasehold improvements................................................. 6,995 6,663
--------- ---------

30,873 29,452

Accumulated depreciation and amortization.............................. (22,416) (18,853)
--------- ----------
$ 8,457 $ 10,599
========= ==========
</TABLE>

NOTE 6 - 401(k) PLAN AND STOCK OPTION PLANS

401(k)

Eligible employees can contribute amounts to the Company's 401(k) Plan (the
"Plan") via payroll withholding subject to certain limitations. The Company
matches contributions by plan participants based upon a percentage of the
participant's contribution determined by the Board of Directors for each plan
year. Total charges to operations under the Plan in 1999, 1998 and 1997 were
approximately $482,000, $795,000 and $725,000, respectively.

Equity Sharing Plan

The Equity Sharing Plan (the "Equity Plan") provides for the issuance of up
to 2.6 million common shares for the granting of options to employees and
consultants. The Equity Plan provides for issuance of incentive options at an
exercise price of not less than 100% of fair value at the date of grant. As
provided by the Equity Plan, all ungranted options expired March 1, 1996;
accordingly, no shares are available for grant as of December 31, 1999.

Information regarding the Equity Plan is as follows:

<TABLE>
<CAPTION>
Weighted
Option Average
Shares Exercise Price
------ --------------
(in thousands)
<S> <C> <C>
Outstanding as of December 31, 1996................................................ 528 $ 5.05
Exercised...................................................................... (354) 2.41
Options canceled............................................................... (137) 12.49
--------
Outstanding as of December 31, 1997................................................ 37 2.97
Exercised...................................................................... (34) 2.89
----
Outstanding as of December 31, 1998 ............................................. 3 3.86
Canceled...................................................................... (3) 3.86
--
Outstanding as of December 31, 1999............................................... -- $ --
========= ==========
Exercisable as of December 31, 1999............................................... -- $ --
========= ==========
</TABLE>

43
<PAGE>

TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

1991 Stock Incentive Plan

The 1991 Stock Incentive Plan (the "Stock Plan") provides for the issuance
of up to 3.0 million common shares for the granting of options or restricted
shares to employees, directors, and consultants. The Stock Plan provides for
issuance of incentive options at an exercise price per share of not less than
100% of fair value at the date of the grant. The Stock Plan also provides for
issuance of nonstatutory options and restricted stock awards at an exercise
price per share equal to the fair value of the shares at the date of grant.
Options granted under the Stock Plan generally have a term of up to six years
from the date of the grant and are exercisable to the extent vested. The option
term and vesting schedule is established by the 1991 Stock Incentive Plan
Committee at the date of grant. No grants of restricted stock have been issued
under the Stock Plan.

In 1996, the Company's shareholders approved an amendment to the Stock Plan
that increased the number of common shares reserved for option grants to 7.5
million. Beginning January 1, 1997, the number of options eligible to be granted
under the Stock Plan automatically increases by 0.75 million each year.

<TABLE>
<CAPTION>
Information regarding the Stock Plan is as follows: Weighted
Average

Option Shares Exercise Price
------------------ --------------
(in thousands)
<S> <C> <C>
Outstanding as of December 31, 1996............................................ 2,444 $ 9.61
Granted...................................................................... 3,330 6.04
Exercised.................................................................... (475) 4.15
Canceled.................................................................... (1,807) 11.55
------ ------------
Outstanding as of December 31, 1997............................................ 3,492 5.99
Granted...................................................................... 833 3.14
Exercised.................................................................... (138) 4.42
Canceled ................................................................... (919) 6.10
---- ------------
Outstanding as of December 31, 1998............................................ 3,268 5.29
Granted...................................................................... 1,543 1.98
Exercised.................................................................... (4) 1.99
Canceled ................................................................... (1,186) 4.61
----------- ------------
Outstanding as of December 31, 1999........................................... 3,621 $ 4.11
=========== ============

Exercisable as of December 31, 1999............................................ 1,137 $ 5.66
=========== ============
</TABLE>

The weighted average grant date fair value of options granted during 1999,
1998, and 1997 was $1.81, $4.13, and $3.70 per share, respectively.

1994 Outside Directors Stock Option Plan

In 1995, the Company's shareholders approved the 1994 Outside Directors
Stock Option Plan (the "Directors' Plan") which provides for the issuance of up
to 300,000 common shares for options to non-employee directors. Grants under the
Director's Plan are priced at fair value at the date of grant. In May 1998, the
board approved an amendment to the plan whereby each eligible director is to be
granted options to purchase 20,000 shares upon appointment or election to the
Board of Directors (the "Board"); before the amendment, the amount was 31,500
shares. In addition, the amendment provides that current directors will be
granted options to purchase an additional 5,000 shares per year; before the
amendment, the amount was 6,000 shares. Options vest monthly over a three-year
period. At December 31, 1999, the weighted average contractual life of options
outstanding is 3.3 years and the range of exercise prices is $1.76 to $10.75 per
share.

44
<PAGE>

TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Information regarding the Director's Plan is as follows:

<TABLE>
<CAPTION>
Weighted
Average
Option Shares Exercise Price
------------------ --------------
(in thousands)

<S> <C> <C>
Outstanding as of December 31, 1996.............................................. 116 $ 8.14
Granted...................................................................... 24 6.26
Canceled..................................................................... (44) 7.32
---
Outstanding as of December 31, 1997.............................................. 96 8.04
Granted...................................................................... 72 5.34
---
Exercisable as of December 31, 1998.............................................. 168 6.89
Granted....................................................................... 30 1.88
Canceled ..................................................................... (24) 6.40
---
Outstanding as of December 31, 1999........................................... 174 $ 6.09
=== ============
Exercisable as of December 31, 1999.............................................. 100 $ 7.74
=== ============
</TABLE>

The weighted average grant date fair value of options granted during 1999,
1998, and 1997 was $1.64, $5.05, and $3.78, per share, respectively.

Shares Reserved for Future Issuance

As of December 31, 1999, the Company has reserved shares of capital stock
for future issuance as follows:

<TABLE>
<CAPTION>
(In thousands)
<S> <C> <C>

Stock options outstanding:
1991 Stock Incentive Plan 3,621
1994 Outside Directors' Stock Option Plan 174 3,795
--------
Stock options available for grant:
1991 Stock Incentive Plan 3,934
1994 Outside Directors' Stock Option Plan 127
-------- 4,061
Employee stock purchase plan 37
--------
7,893
========
</TABLE>

Outstanding and Exercisable by Price Range

As of December 31, 1999, the options outstanding and exercisable by price
for all plans are detailed below:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------- -------------------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Price Shares Life (years) Exercise Price Shares Exercise Price
- ------------------ --------- ------------ -------------- ------ --------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C>
$ 1.36 - 1.92 1,092 5.26 $ 1.87 65 $ 1.91
1.93 - 5.05 815 4.86 2.61 113 3.03
5.10 - 5.99 1,015 3.50 5.71 520 5.71
6.01 - 19.55 873 3.10 6.84 539 7.02
------- ----------
3,795 1,237
======= ==========
</TABLE>

<PAGE>

TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Stock-Based Compensation and Pro forma Information

Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") requires disclosure of the fair value, as
defined, of options granted to employees and related compensation expense. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model. A weighted-average expected life of the
option of four years and no dividend yield were assumed.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

The Company is also required to present pro-forma information as if the
provisions of SFAS 123 had been implemented as of January 1, 1995. For purposes
of pro forma disclosures, the estimated fair value of the options is amortized
to expense over the options' vesting period. The effect of adjustments made to
obtain pro-forma income (loss) and earnings (loss) per share is not expected to
be indicative of the effect on future periods' pro forma results, as future
years will include the effects of additional years of stock options granted. The
Company's pro forma information for the years ended December 31 is as follows:

<TABLE>
<CAPTION>
1999 1998 1997
-------- --------- -------

<S> <C> <C> <C>
Pro forma net loss $(24,605) $(7,212) $(6,508)
======== ======= =======
Pro forma net loss per share - Basic and diluted.........................$ (1.09) $ (0.32) $ (0.30)
======== ======= =======

Expected volatility...................................................... 1.412 0.920 0.957
======== ======= =======
Risk-free interest rate.................................................. 5.49% 5.15% 6.38%
======== ======= =======
Expected life............................................................ 4 Years 4 Years 4 Years
======== ======== =======
Dividend rate............................................................ 0% 0% 0%
======== ======== =======
</TABLE>

Employee Stock Purchase Plan

In December 1996, the Company adopted the Employee Stock Purchase Plan (the
"Purchase Plan") under Section 423 of the Internal Revenue Code and reserved
500,000 shares of Company common stock for issuance under this plan. The number
of shares available under the Purchase Plan will increase annually by the lesser
of 100,000 shares, 1% of the Company's outstanding shares, or an amount
determined by the Board. All employees, as defined by the Purchase Plan, may
contribute up to 15% of their compensation to purchase shares of the Company's
common stock at the lesser of 85% of the fair market value at the beginning or
end of each six-month offering period. The offering periods commence each
February and August. During the years ended December 31, 1999 and 1998, 230,426
and 145,153 shares, respectively, of common stock were issued under the Purchase
Plan.

Option Repricing

In January 1997, the Company's Board approved the repricing of 1.1 million
options granted under the 1991 Stock Incentive Plan. All employees were given
the opportunity to exchange their current options for new options with an
exercise price of $6.63 per share (fair value of the related common shares as of
the repricing date) and also to indicate, if applicable, which options they did
not want to reprice. Of the repriced options, 50% vested in January 1998, 25% in

<PAGE>

TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

January 1999, and 25% will vest in January 2000. These options are included in
the respective option schedules as cancellations and subsequent grants.

NOTE 7 - INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets as of December 31 using the liability method
were as follows:

<TABLE>
<CAPTION>
1999 1998
--------- -------
(in thousands)

Current deferred tax assets:

<S> <C> <C>
Revenue differences related to timing...................................................... $ 1,195 $ 850
Other accrued items........................................................................ 1,456 1,028
--------- --------
Total current deferred tax assets............................................................ 2,651 1,878
--------- --------
Noncurrent deferred tax assets:
Net operating loss carry-forward............................................................. 7,334 2,604
Benefit of credit carry-forward.............................................................. 2,052 854
Capitalized research and development 1,573 0
In-process technology acquired............................................................... 650 334
Depreciation................................................................................. 478 415
--------- --------
Total noncurrent deferred tax assets......................................................... 12,087 4,207
--------- --------

Total deferred tax assets.................................................................... 14,738 6,085
Less: valuation allowance................................................................... (14,738) (2,395)
--------- --------
Net deferred tax assets...................................................................... $ 0 $ 3,690
========= ========
</TABLE>

Realization of TCSI's deferred tax assets is dependent upon the Company
generating sufficient taxable income in future years in appropriate
jurisdictions to obtain benefit from the reversal of temporary differences and
from net operating loss and tax credit carryforwards. However, due to
uncertainties regarding the timing and amount of future taxable income, the net
deferred tax assets have been fully offset by a valuation allowance as of
December 31, 1999. During the year ended December 31, 1999, the valuation
allowance increased by $12,343,000.

The current and deferred portions of the income tax provision (benefit) for
the years ended December 31 are as follows:

<TABLE>
<CAPTION>
1999 1998 1997
---------- --------- --------
(in thousands)

Current:
<S> <C> <C> <C>
Federal..................................................................... $ -- $ (506) $ (656)
State....................................................................... -- -- --
Foreign..................................................................... 362 789 416
--------- --------- ---------
362 283 (240)
--------- --------- ----------
Deferred:
Federal..................................................................... 3,136 734 (994)
State....................................................................... 554 37 (116)
--------- --------- ---------
3,690 771 (1,110)
--------- --------- ---------
$ 4,052 $ 1,054 $ (1,350)
========= ========= =========
</TABLE>

The provision (benefit) for income taxes differed from the amount computed
by applying the Federal statutory income tax rate for the years ended December
31 as follows:

47
<PAGE>

TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ------

<S> <C> <C> <C>
Federal statutory rate....................................................... (34)% (34)% (34)%
State taxes, net of federal.................................................. (9) (3) (3)
Tax exempt interest.......................................................... -- (6) (5)
Foreign taxes................................................................ 2 7 7
Valuation allowance.......................................................... 67 69 --
Other items.................................................................. 4 3 1
------- ------- ------
Income tax provision (benefit)............................................... *% *% (34)%
======= ======= ======
</TABLE>

*Not Meaningful

As of December 31, 1999, the Company had a net operating loss carry-forward
for Federal income tax purposes of approximately $20.7 million and research
credit carry-forwards of $0.6 million which will expire in varying amounts from
2012 through 2019, and a foreign tax credit carry-forward of approximately $1.2
million which will expire from 2001 through 2004. The Company also has state net
operating loss carry-forwards of $5.2 million which expire from 2001 through
2004.

NOTE 8 - FOREIGN CURRENCY TRANSLATION

The Company has determined that the functional currency of each foreign
operation is primarily the U.S. Dollar. Through 1999, foreign currency
transaction gains and losses (which are recorded in the accompanying
Consolidated Statements of Operations) have not been significant.

NOTE 9-ACQUISITION OF GTE-NMO

In December 1998, the Company completed the acquisition of the net assets
of GTE Network Management Organization ("GTE-NMO"), a former division of GTE
Government Systems Corporation ("GTE"). GTE-NMO is a Bothell, Washington-based
organization that develops and implements network management solutions. It
licenses WorldWin communications software ("WorldWin"). WorldWin is a family of
Operations Support System ("OSS") products offering telephony, cable, and
wireless providers a flexible platform for launching new services, while
protecting existing network. The acquisition price was approximately $7,958,000
and consisted of cash of $6,513,000, forgiveness of an existing receivable of
$355,000, the assumption of a liability of $333,000, and acquisition costs of
$757,000. The acquisition was accounted for as a purchase. The excess of the
purchase price over the net assets acquired was recorded as the intangible
assets detailed below, totaling $3.6 million, and will be amortized on a
straight-line basis over seven years.

<TABLE>
<CAPTION>
Unamortized
Amortization Balance
As of as of
Amortization December 31, 1999 December 31, 1999
Period Cost
------------------ ------------ ------------------------ ----------------------
(in years) (in thousands)
<S> <C> <C> <C> <C>
Developed Technology 2 $ 772 $ 418 $ 354
Core Technology 5 1,788 387 1,401
Assembled Workforce 3 699 253 446
Goodwill 7 385 60 325
------------ ------------------------ ----------------------
Total $ 3,644 $ 1,118 $ 2,526
============ ======================== ======================
</TABLE>

The operating results of this acquisition are included in the Company's
accompanying consolidated results of operations from the date of acquisition.
The unaudited pro forma information set forth below presents the consolidated
results of operations (as if the acquisition had occurred as the beginning of
the periods presented) for the period from the

48
<PAGE>

TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

date of acquisition, after giving effect to certain adjustments such as the
write-off of in-process technology acquired of $831,000 and one-time payments of
$1.2 million for acquisition costs and for fees to GTE for managing GTE-NMO's
operations during the first month of TCSI's ownership. These unaudited pro forma
consolidated results have been prepared for comparative purposes only and do not
purport to be indicative of what would have occurred had the acquisition taken
place at the beginning of the period presented or the results which may occur in
the future. Unaudited pro forma results for the years ended December 31 were as
follows:

<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1998 1997
----------- ---------
(unaudited)

<S> <C> <C>
Pro forma total revenues...................................................$ 51,742 $ 52,578
========= =========
Pro forma net loss.........................................................$ (5,010) $ (3,122)
========= =========
Pro forma net loss per share - Basic and diluted...........................$ (0.22) $ (0.14)
========= =========
Shares used in computation of pro forma net loss per share................. 22,349 21,638
========= =========
</TABLE>

Purchased In-Process Technology

Management estimates that approximately $831,000 of the purchase price
represents purchased in-process technology that has not yet reached
technological feasibility and has no alternative future use. Accordingly, this
amount was expensed in 1998. The value assigned to in-process technology was
determined by identifying the product development projects in areas for which
technological feasibility had not been achieved and assessing the date of
completion of the product development effort. The state of completion was
determined by estimating the costs and time incurred to date relative to those
costs and time to be incurred to develop the purchased in-process technology
into commercially viable products, estimating the resulting net cash flows only
from the percentage of product development efforts complete at the date of
acquisition, and discounting the net cash flows back to their present value. The
discount rate included a factor that took into account the uncertainty
surrounding the successful development of the purchased in-process technology.
Research and development costs to bring the products from the acquired company
to technological feasibility are not expected to have a material impact on the
Company's future results of operations or cash flows.

NOTE 10-COMMITMENTS

The Company is obligated under operating lease agreements for its facilities
with noncancelable lease terms in excess of one year. Certain of these leases
contain renewal options and require that the Company pay for taxes, insurance,
and maintenance expenses. Rent expense under these leases during the years ended
December 31, 1999, 1998 and 1997 was $3.2 million, $2.2 million, and $2.2
million, respectively. Future minimum lease payments by year on noncancelable
operating leases as of December 31, 1999 are as follows (in thousands):

2000.............................................................. $ 2,077
2001.............................................................. 1,798
2002.............................................................. 1,907
2003.............................................................. 1,837
Thereafter........................................................ 1,729
---------
$ 9,348
=========

49
<PAGE>

TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 11-LEGAL PROCEEDINGS

On November 4, 1996, a purported class action complaint was filed in the
Superior Court of the State of California, Alameda County, by Albert J.
Copperstone and Joseph Siciliano against the Company and certain of its officers
and directors. The complaint alleged that, between October 11, 1995 to September
25, 1996, defendants made materially false and misleading statements concerning
the Company's business condition and prospects in violation of California law.
On September 24, 1997, a purported class action complaint was filed in the
United States District Court for the Northern District of California by
Copperstone and Siciliano against the Company and certain of its officers and
directors. The federal complaint contained virtually identical factual
allegations as the state action, and alleged violations of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. On October 20,
1999, the United States District Court for the Northern District of California
approved a proposed settlement and dismissed the federal action with prejudice.
The settlement involved payment of an amount comprised of proceeds from the
Company's Director and Officer insurance policies. Neither the Company nor the
individuals involved contributed to the settlement of the actions. On December
8, 1999, the Alameda County Superior Court dismissed the state action with
prejudice.

On November 20, 1996, a purported derivative action complaint was filed in
the Superior Court of the State of California, Alameda County, by Mike Tinkler
against the Company's Board of Directors and the Company as a nominal defendant.
The complaint alleged that as a result of the facts alleged in the Copperstone
State Action, defendants breached their fiduciary duties. The parties reached a
settlement, which involved payment of an amount comprised of proceeds from the
Company's Director and Officer insurance policies and a contribution by the
Company. The settlement did not have a material adverse effect on TCSI's
financial position or on its financial results of operations. On December 1,
1999, the Alameda County Superior Court dismissed the Tinkler Derivative Action
with prejudice.

NOTE 12-NONRECURRING SPECIAL ITEMS

50
<PAGE>

TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 13 - SELECTED UNAUDITED QUARTERLY FINANCIAL DATA

Selected unaudited quarterly financial data for 1999 is as follows:

<TABLE>
<CAPTION>
1999 Quarter Ended
----------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
----------------------------------------------------------
(unaudited)
(in thousands, except per share amounts)
Revenues:
<S> <C> <C> <C> <C>
Services..................................................... $ 6,457 $ 8,176 $ 4,010 $ 3,626
Software licensing fees...................................... 3,612 1,979 3,276 1,630
-------- -------- -------- -------
Total revenues....................................... 10,069 10,155 7,286 5,256
Costs, expenses, and special items:
Services..................................................... 4,932 5,019 4,762 5,441
Product development.......................................... 3,963 3,898 3,070 3,420
Selling, general, and administrative......................... 3,668 3,940 4,795 4,734
Nonrecurring special items, net.............................. -- -- -- 1,528
-------- -------- -------- --------
Total costs, expenses, and special items............. 12,563 12,857 12,627 15,123
-------- -------- -------- --------
Loss from operations.......................................... (2,494) (2,702) (5,341) (9,867)
Other income and expense, net.................................. 682 477 576 239
-------- -------- -------- --------
Loss before income tax provision............................... (1,812) (2,225) (4,765) (9,628)
Income tax provision .......................................... --- 387 58 3,607
-------- -------- -------- --------
Net loss...................................................... $ (1,812) $ (2,612) $ (4,823) $(13,235)
========== ======== ======== ========
Net loss per share (EPS) - Basic and Diluted.................. $ (0.08) $ (0.12) $ (0.21) (0.58)
========== ======== ======== ========
Shares used in calculation of EPS - Basic and Diluted.......... 22,538 22,578 22,652 22,686
========== ======== ======== ========
</TABLE>
51

<PAGE>

TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Selected unaudited quarterly financial data for 1998 is as follows:

<TABLE>
<CAPTION>
1998 Quarter Ended
----------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
--------- -------- --------- ---------
(unaudited)
(in thousands, except per share amounts)
Revenues:
<S> <C> <C> <C> <C>
Services..................................................... $ 8,131 $ 8,640 $ 7,383 $ 7,406
Software licensing fees...................................... 2,874 2,499 2,333 3,054
-------- -------- -------- --------
Total revenues................................................. 11,005 11,139 9,716 10,460
Costs, expenses, and special items:
Services..................................................... 4,558 5,056 5,378 5,305
Product development.......................................... 2,543 2,902 3,264 3,602
Selling, general, and administrative......................... 3,810 3,698 3,425 5,231
Write-off of in-process technology acquired.................. -- -- -- 831
Nonrecurring special items, net.............................. -- (550) -- --
-------- --------- -------- --------
Total costs, expenses, and special items............. 10,911 11,106 12,067 14,969
-------- --------- -------- --------
Income (loss) from operations................................. 94 33 (2,351) (4,509)
Other income and expense, net.................................. 766 782 803 915
-------- --------- -------- --------
Income (loss) before income tax provision (benefit)........... 860 815 (1,548) (3,594)
Income tax provision (benefit)................................. 344 326 (150) 534
-------- --------- -------- --------
Net income (loss)............................................ $ 516 $ 489 $ (1,398) $ (4,128)
======== ========= ======== ========
Net income (loss) per share (EPS) - Basic................... $ 0.02 $ 0.02 $ (0.06) $ (0.18)
======== ========= ======== ========
Shares used in calculation of EPS - Basic.................... 22,219 22,312 22,410 22,452
======== ========= ======== ========
Net income (loss) per share (EPS) - Diluted................. $ 0.02 $ 0.02 $ (0.06) $ (0.18)
======== ========= ======== ========
Shares used in calculation of EPS - Diluted.................. 22,991 22,516 22,410 22,452
======== ========= ======== ========
</TABLE>

<PAGE>

TCSI Corporation
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)

<TABLE>
<CAPTION>
Balances at Charge to Balances at
Beginning Costs and End of
Description of Period Expenses Deductions Period
- ------------------------------------------------------ ------------- ----------- ---------- ----------------
Year ended December 31, 1999:
<S> <C> <C> <C> <C>
Allowance for doubtful accounts..................... $1,139 $ 69 $ - $1,208
====== ==== ====== ======

Year ended December 31, 1998:
Allowance for doubtful accounts....................... $ 400 $ 739(1) $ - $1,139
======= ===== ====== ======

Year ended December 31, 1997:
Allowance for doubtful accounts....................... $ 400 $ 263 $(263) $ 400
======= ===== ===== ======
</TABLE>

- -------------------
1 Reserves established relative to GTE-NMO acquisition which were reflected in
the net assets recorded by the Company for acquisition.

Exhibit 3.5

(SEAL)

BYLAWS

TEKNEKRON COMMUNICATIONS SYSTEMS, INC.

INDEX

Page

ARTICLE I Offices 1

Section 1. Principal Office in Nevada 1
Section 2. Principal Office in California 1
Section 3. Other Offices 1

ARTICLE II Shareholders 1

Section 1. Place of Meetings 1
Section 2. Annual Meetings 1
Section 3. Special Meetings 1
Section 4. Notice of Shareholders' Meetings 1
Section 5. Manner of Giving Notice; Affidavit of Notice 2
Section 6. Quorum 2
Section 7. Voting 2
Section 8. Record Date 3
Section 9. Actions at Meetings Not Regularly Called:
Ratification and Approval 3
Section 10. Shareholder Action by Written
Consent Without A Meeting 4
Section 11. Proxies 4
Section 12. Inspectors of Election 4

ARTICLE III Directors 4

Section 1. Powers 4
Section 2. Number and Qualification of Directors 5
Section 3. Election and Term of Office 5
Section 4. Removal 5
Section 5. Vacancies 5
Section 6. Place of Meeting 6
Section 7. Regular Meetings 6
Section 8. Special Meetings 6

<PAGE>

Exhibit 3.5

Page

Section 9. Quorum 6
Section 10. Participation in Meetings by
Conference Telephone 6
Section 11. Waiver of Notice 7
Section 12. Adjournment 7

Section 13. Fees and Compensation 7
Section 14. Action At Meetings Not
Regularly Called:
Ratification and Approval 7
Section 15. Rights of Inspection 7
Section 16. Committees 7

ARTICLE IV Officers 7
Section 1. Officers 7
Section 2. Election 8
Section 3. Subordinate Officers 8
Section 4. Removal and Resignation 8
Section 5. Vacancies 8
Section 6. Chairman of the Board 8
Section 7. Chief Executive Officer 8
Section 8. President 8
Section 9. Vice Presidents 8
Section 10. Secretary 8
Section 11. Chief Financial Officer 9

ARTICLE V Other Provisions 9
Section 1. Inspection of Documents 9
Section 2. Endorsement of Documents;
Contracts 9
Section 3. Certificates of Stock 9
Section 4. Representation of Shares of
Other Corporations 10
Section 5. Stock Purchase Plans 10
Section 6. Construction and Definitions 10
Section 7. Reports to Shareholders 10
Section 8. Option Repricing 10

ARTICLE VI Indemnification 10
Section 1. Definitions 10
Section 2. Indemnification of Corporate Agents 11
Section 3. Advancement of Expenses 11
Section 4. Indemnification Contracts 11
Section 5. Insurance 11

ARTICLE VII Emergency Provisions 11

Section 1. General 11
Section 2. Unavailable Directors 11
Section 3. Authorized Number of Directors 11
Section 4. Quorum 12

-ii-

<PAGE>

Exhibit 3.5

Page

Section 5. Creation of Emergency Committee 12
Section 6. Constitution of Emergency
Committee 12
Section 7. Powers of Emergency Committee 12
Section 8. Directors Becoming Available 12
Section 9. Election of Board of Director 12
Section 10. Termination of Emergency
Committee 12

ARTICLE VIII Amendments 13

Section 1. Amendment by Shareholders 13
Section 2. Amendment by Directors 13

-iii-

<PAGE>

Exhibit 3.5

BYLAWS

Bylaws For The Regulation, Except
As Otherwise Provided By Statute Or
Its Articles of Incorporation Of

TEKNEKRON COMMUNICATIONS SYSTEMS, INC.
a Nevada corporation

ARTICLE I

OFFICES

Section 1. PRINCIPAL OFFICE IN NEVADA. The principal office of the
corporation within the State of Nevada shall be at the 894 Incline Way, Incline
Village, Nevada 89450.

Section 2. PRINCIPAL OFFICE IN CALIFORNIA. The principal office of the
corporation within the State of California shall be at 2121 Allston Way,
Berkeley, California 94704.

The Board of Directors (herein called the "Board") is hereby granted full
power and authority to change said principal office from one location to
another. Any such change shall be noted on the Bylaws opposite this Section, or
this Section may be amended to state the new location.

Section 3. OTHER OFFICES. Branch or subordinate offices may at any time be
established by the Board at any place or places.

ARTICLE II

SHAREHOLDERS

Section 1. PLACE OF MEETINGS. Meetings of shareholders shall be held at the
principal office of the corporation, or at any other place within or without the
State of Nevada which may be designated either by the Board or by the written
consent of all persons entitled to vote thereat, given either before or after
the meeting and filed with the Secretary.

Section 2. ANNUAL MEETINGS. The annual meetings of shareholders shall be
held on such date and such time as may be fixed by the Board; provided, however,
that should said day fall upon a Saturday, Sunday, or legal holiday observed by
the corporation at its principal office, then any such annual meeting of
shareholders shall be held at the same time and place on the next day thereafter
ensuing which is a full business day. If the annual meeting shall not be held on
the date above specified, the Board of Directors shall cause a meeting in lieu
thereof to be held as soon thereafter as convenient, and, in any case, not later
than sixty (60) days after the date designated above, and any business
transacted or election held at such meeting shall be valid as if transacted or
held at the annual meeting. At such meetings directors shall be elected and any
other proper business may be transacted.

Section 3. SPECIAL MEETINGS. Special meetings of the shareholders may be
called at any time by the Board, the Chairman of the Board, the President, or by
the holder's of shares entitled to cast not less than ten percent (10%) of the
votes at such meeting. Upon request in writing to the Chairman of the Board, the
President, any Vice President or the Secretary by any person (other than the
Board) entitled to call a special meeting of shareholders, the officer forthwith
shall cause notice to be given to the shareholders entitled to vote that a
meeting will be held at a time requested by the person or persons calling the
meeting, not less than ten (10) nor more than sixty (60) days after the receipt
of the request. If the notice is not given within twenty (20) days after receipt
of the request, the persons entitled to call the meeting may give the notice.

1
<PAGE>
Exhibit 3.5

Section 4. NOTICE OF SHAREHOLDERS' MEETINGS. All notices of meetings of
shareholders shall be given in accordance with Section 5 of this Article II not
less than ten (10) nor more than sixty (60) days before the date of the meeting.
The notice shall specify the place, date and hour of the meeting and (i) in the
case of a special meeting, the purpose or purposes for which the meeting is
called, or (ii) in the case of the annual meeting, those matters which the
Board, at the time of giving the notice, intends to present for action by the
shareholders. The notice of any meeting at which directors are to be elected
shall include the name of any nominee or nominees intended at the time of the
notice to be presented by the Board for election.

Section 5. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Notice of any
meeting of shareholders shall be given either personally or by first-class mail,
postage prepaid, addressed to a shareholder entitled to vote at the meeting at
the address of that shareholder appearing on the books of the corporation or
given by the shareholder to the corporation for the purpose of notice. Upon such
mailing of any such notice the service thereof shall be complete, and the time
of the notice shall begin to run from the date upon which such notice is
deposited in the mail for transmission to such shareholder. Personal delivery of
any such notice to any officer of a corporation or association or to any member
of a partnership, shall constitute delivery of such notice to such corporation,
association, or partnership.

Notice duly delivered or mailed to a shareholder in accordance with the
provisions of this section, shall be deemed sufficient, and in the event of the
transfer of his stock after such delivery or mailing and prior to the holding of
the meeting, it shall not be necessary to deliver or mail notice of the meeting
to the transferee. Any shareholder may waive notice of any meeting by a writing
signed by him, or his only authorized attorney, either before or after the
meeting.

An affidavit of the mailing or other means of giving any notice of any
shareholders' meeting shall be executed by the Secretary, Assistant Secretary,
or any transfer agent of the corporation giving the notice, and shall be filed
and maintained in the minute book of the corporation.

Section 6. QUORUM. A majority of the shares entitled to vote, represented
in person or by proxy, shall constitute a quorum at any meeting of shareholders.
The affirmative vote of a majority of the shares represented and voting at a
duly called meeting at which a quorum is present (which shares voting
affirmatively also constitute at least a majority of the required quorum) shall
be the act of the shareholders, unless the vote of a greater number or voting by
classes is required herein. The shareholders present at a duly called or held
meeting at which a quorum is present may continue to do business until
adjournment, notwithstanding the withdrawal of enough shareholders to leave less
than a quorum, if any action taken (other than adjournment) is approved by at
least a majority of the shares required to constitute a quorum.

Section 7. VOTING. The shareholders entitled to notice of any meeting or to
vote at any such meeting shall be only persons in whose name shares stand on the
stock records of the corporation on the record date determined in accordance
with Section 8 of this Article.

Voting shall in all cases be subject to the following provisions:

(a) Shares held by an administrator, executor, guardian, conservator or
custodian may be voted by such holder either in person or by proxy, without a
transfer of such shares into the holder's name; and shares standing in the name
of a trustee may be voted by the trustee, either in person or by proxy, but no
trustee shall be entitled to vote shares held by such trustee without a transfer
of such shares into the trustee's name.

2
<PAGE>

Exhibit 3.5

(b) Shares standing in the name of a receiver may be voted by such
receiver; and shares held by or under the control of a receiver may be voted by
such receiver without the transfer thereof into the receiver's name if authority
to do so is contained in the order of the court by which such receiver was
appointed.

(c) Except where otherwise agreed in writing between the parties, a
shareholder whose shares are pledged shall be entitled to vote such shares until
the shares have been transferred into the name of the pledgee, and thereafter
the pledgee shall be entitled to vote the shares so transferred.

(d) Shares standing in the name of a minor may be voted and the
corporation may treat all rights incident thereto as exercisable by the minor,
in person or by proxy, whether or not the corporation has notice, actual or
constructive, of the nonage, unless a guardian of the minor 5 property has been
appointed and written notice of such appointment given to the corporation.

(e) Shares standing in the name of another corporation, domestic or
foreign, may be voted by such officer, agent or proxy-holder as the bylaws of
such other corporation may prescribe or, in the absence of such provision, as

the Board of Directors of such other corporation may determine or, in the
absence of such determination, by the chairman of the board, president or any
vice president of such other corporation, or by any other person authorized to
do so by the board, president or any vice president of such other corporation.

(f) If shares stand of record in the names of two or more persons,
whether fiduciaries, members of a partnership, joint tenants, tenants in common,
husband and wife as community property, tenants by the entirety, voting
trustees, persons entitled to vote under a shareholder voting agreement or
otherwise, or if two or more persons (including proxy-holders) have the same
fiduciary relationship respecting the same shares, unless the Secretary of the
corporation is given written notice to the contrary and is furnished with a copy
of the instrument or order appointing them or creating the relationship wherein
it is so provided, their acts with respect to voting shall have the following
effect:

(i) If only one votes, such act binds all;

(ii) If more than one vote, the act of the majority so
voting binds all;

(iii)If more than one votes, but the votes are evenly split on any
particular matter, each faction may vote the securities in question
proportionately.

If the instrument so filed or the registration of the shares shows that any
such tenancy is held in unequal interests, a majority or even split for the
purpose of this section shall be a majority or even split in interest.

Elections need not be by ballot. In any election of directors, the
candidates receiving the highest number of affirmative votes of the shares
entitled to be voted for then up to the number of directors to be elected by
such shares are elected; votes against the director and votes withheld shall
have no legal effect.

Section 8. RECORD DATE. The Board may fix, in advance, a record date for
the determination of the shareholders entitled to notice of any meeting or to
vote or entitled to receive payment of any dividend or other distribution, or
any allotment of rights, or to exercise rights in respect of any other lawful
action. The record date so fixed shall be not more than sixty (60) days prior to
the date of the meeting nor more than sixty (60) days prior to any other action.

When a record date is so fixed, only shareholders of record at the close of
business on that date are entitled to notice of and to vote at the meeting or to
receive the dividend, distribution, or allotment of rights, or to exercise of
the rights, as the case may be, notwithstanding any transfer of shares on the
books of the corporation after the record date. A determination of shareholders
of record entitled to notice of or to vote at a meeting of shareholders shall
apply to any adjournment of the meeting unless the Board fixes a new record date
for the adjourned meeting. The Board shall fix a new record date if the meeting
is adjourned for more than forty-five (45) days from the date set for the
original meeting.

If no record date is fixed by the Board, the record date for determining
shareholders entitled to notice of or to vote at a meeting of shareholders shall
be at the close of business on the business day next preceding the day on which
notice is given or, if notice is waived, at the close of business on the
business day next preceding the day on which the meeting is held.

3
<PAGE>
Exhibit 3.5

Section 9. ACTIONS AT MEETINGS NOT REGULARLY CALLED: RATIFICATION AND
APPROVAL. Whenever all shareholders entitled to vote at any meeting consent,
either by: (a) a writing on the records of the meeting or filed with the
secretary; or (b) presence at such meeting and oral consent entered on the
minutes; or (c) taking part in the deliberation at such meeting without
objection; the doings of such meeting shall be as valid as if had at a meeting
regularly called and noticed. At such meeting any business may be transacted
which is not excepted from the written consent or to the consideration of which
no objections for want of notice is made at the time. If any meeting be
irregular for want of notice or of such consent, provided a quorum was present
at such meeting, the proceeding: of the meeting may be ratified and approved and
rendered likewise valid and the irregularity or defect therein waived by writing
signed by all parties having the right to vote at such meeting. Such consent or
approval of stockholders may be by proxy or attorney, but all such proxies and
powers of attorney must be in writing.

Section 10. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any
action which may be taken at any annual or special meeting of shareholders may
be taken without a meeting and without prior notice, if a consent in writing,
setting forth the action so taken, is signed by shareholders holding at least a
majority of the voting power, except that, if any greater proportion of voting
power is required for such action at a meeting, then the greater proportion of
written consents is required, and this provision for action by written consent
does not supersede any specific provision for action by written consent
contained in the Nevada General Corporation Law.

Section 11. PROXIES. Every person entitled to vote shares has the right to
do so either in person or by one or more persons authorized by a written proxy
executed by such shareholder and filed with the Secretary. Any proxy duly
executed is not revoked and continues in full force and effect until revoked by
the person executing it prior to the vote pursuant thereto by a writing
delivered to the secretary of the corporation stating that the proxy is revoked
or by a subsequent proxy executed by the person executing the prior proxy and
presented to the meeting, or, as to any meeting, by attendance at such meeting
and voting in person by the person executing the proxy; provided, however, that
no proxy shall be valid after the expiration of 6 months from the date of its
execution unless otherwise provided in the proxy or unless coupled with an
interest.

Section 12. INSPECTORS OF ELECTION. In advance of any meeting of
shareholders, the Board may appoint any persons other than nominees for office
as inspectors of election to act at such meeting or any adjournment thereof. If
inspectors of election be not so appointed, or if any persons so appointed fail
to appear or refuse to act, the chairman of any such meeting may, and on the
request of any shareholder or shareholder's proxy shall, make such appointment
at the meeting. The number of inspectors shall be either one or three. If
appointed at a meeting on the request of one or more shareholders or proxies,
the majority of shares represented in person or by proxy shall determine whether
one or three inspectors shall be appointed.

The duties of such inspectors shall include: determining the number of
shares outstanding and the voting power of each; determining the number of
shares represented at the meeting and the existence of a quorum; determining the
authenticity, validity, and effect of proxies; receiving votes, ballots, or
consents; hearing and determining all challenges and questions in any way
arising in connection with the right to vote; counting and tabulating all votes
or consents; determining when the polls shall close; determining the result of
any vote; and doing such acts as may be proper to conduct the election or vote
with fairness to all shareholders. If there are three inspectors of election,
the decision, act, or certification of a majority is effective in all respects
as decision, act, or certificate of all.

ARTICLE III
DIRECTORS

Section 1. POWERS. Subject to limitations of the Articles of Incorporation,
of these Bylaws, and of the Nevada General Corporation Law relating to action
required to be approved by the shareholders or by the outstanding shares, the
business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the Board. The Board may
delegate the management of the day-to-day operation of the business of the
corporation to a management company or other person provided that the business
and affairs of the corporation shall be managed and all corporate powers shall
be exercised under the ultimate direction of the Board. Without prejudice to
such general powers, but subject to the same limitations, it is hereby expressly
declared that the Board shall have the following powers in addition to the other
powers enumerated in these Bylaws:

4
<PAGE>

Exhibit 3.5

(a) To select and remove all the other officers, agents, and employees of
the corporation, prescribe the powers and duties for them as may not be
inconsistent with law, or with the Articles of Incorporation or these Bylaws,
fix their compensation, and require from them security for faithful service.

(b) To conduct, manage, and control the affairs and business of the
corporation and to make such rules and regulations therefor not inconsistent
with law, or with the Articles of Incorporation or these Bylaws, as they may
deem best.

(c) To adopt, make, and use a corporate seal, and to prescribe the forms
of certificates of stock, and to alter the form of such seal and of such
certificates from time to time as in their judgment they may deem best.

(d) To authorize the issuance of shares of stock of the corporation from
time to time, upon such terms and for such consideration as may be lawful.

(e) To borrow money and incur indebtedness for the purposes of the
corporation, and to cause to be executed and delivered therefor or, in the
corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages,
pledges, hypothecation's, or other evidences of debt and securities therefor.

(f) To make, adopt or amend these Bylaws.

Section 2. NUMBER AND QUALIFICATION OF DIRECTORS. The authorized number of
directors of the corporation shall be not less than three (3) nor more than
seven (7). The exact number of directors shall be three (3) until changed,
within the limits specified above, by a resolution duly adopted by the Board of
Directors or Bylaw amending this Section 2, duly adopted by the Board or by the
shareholders.

Section 3. ELECTION AND TERM OF OFFICE. Unless elected pursuant to the
written consent of shareholders, the directors shall be elected at each annual
meeting of shareholders but if any such annual meeting is not held or the
directors are not elected thereat, or if the directors are not elected pursuant
to the written consent of shareholders, the directors may be elected at any
special meeting of shareholders held for that purpose. Each director shall hold
office until the next annual meeting and until a successor has been elected and
qualified.

Section 4. REMOVAL. The Board may declare vacant the office of a director
who has been declared of unsound mind by an order of court or who has been
convicted of a felony.

Any or all of the directors may be removed without cause if such removal is
approved by not less than two-thirds of the issued and outstanding shares
entitled to vote, provided, however, that (a) if the Articles of Incorporation
or an amendment thereto, provide for the election of directors by cumulative
voting, no director shall be removed from office except upon the vote or written
consent of shareholders owning sufficient shares to have prevented his election
to office in the first instance, (b) the Articles of Incorporation may require
the concurrence of a larger percentage of the stock entitled to voting power in
order to remove a director, and (c) when by the provisions of the Articles of
Incorporation the holders of the shares of any class or series, voting as a
class or series, are entitled to elect one or more directors, any director so
selected may be removed only by the applicable vote of the holders of the shares
of that class or series. Any reduction of the authorized number of directors
does not, by itself, remove any director prior to the expiration of such
director's term of office.

Section 5. VACANCIES. Any director may resign effective upon giving written
notice to the Chairman of the Board, the President, Secretary, or the Board,
unless the notice specifies a later time for the effectiveness of such
resignation. If the resignation is effective at a future time, a successor may
b~ elected to take office when the resignation becomes effective.

5
<PAGE>

Exhibit 3.5

All vacancies on the Board, including those existing as a result of a
removal of a director or those caused by an increase in the number of directors,
may be filled by a majority of the remaining directors, though less than a
quorum, or by a sole remaining director, and each director so elected shall hold
office until the next annual meeting and until such director's successor has
been elected and qualified.

A vacancy or vacancies on the Board shall be deemed to exist in case of the
death, resignation, or removal of any director, or if the authorized number of
directors be increased, or if the shareholders fail, at any annual or special
meeting of shareholders at which any director or directors are to be elected, to
elect the total authorized number of directors to be voted for at that meeting.
If the directors shall not be elected on the day designated for that purpose,
the corporation shall not be dissolved but every director shall continue to hold
his office and discharge his duties until his successor has been elected.

The Board may declare vacant the office of a director who has been declared
of unsound mind by an order of court or convicted of a felony.

The shareholders may elect a director or directors at any time to fill any
vacancy or vacancies not filled by the directors. Any such election by written
consent, other than to fill a vacancy created by removal, requires the consent
of a majority of the outstanding shares entitled to vote. If the Board accepts
the resignation of a director tendered to take effect at a future time, the
Board or the shareholders shall have power to elect a successor to take office
when the resignation is to become effective.

No reduction of the authorized number of directors shall have the effect of
removing any director prior to the expiration of the director's term of office.

Section 6. PLACE OF MEETING. Regular or special meetings of the Board may
be held at any place within or without - the State of Nevada which has been
designated from time to time by the Board. In the absence of such designation,
regular meetings shall be held at the principal office of the corporation.

Section 7. REGULAR MEETINGS. Immediately following each annual meeting of
shareholders the Board shall hold a regular meeting for the purpose of
organization, election of officers, and the transaction of other business.

Other regular meetings of the Board shall be held without call at such time
as shall from time to time be fixed by the Board. This Bylaw hereby expressly
dispenses with call and notice of all regular meetings of the Board.

Section 8. SPECIAL MEETINGS. Special meetings of the Board for any purpose
or purposes may be called at any time by the Chairman of the Board, the
President, or the Secretary, or by any two directors.

Special meetings of the Board shall be held upon three (3) days written
notice by mail or twenty-four (24) hours' notice given personally or by
telephone, telegraph, telex or other similar means of communication. Any such
notice shall be addressed or delivered to each director at such director's
address as it is shown upon the records of the corporation or as may have been
given to the corporation by the director for purposes of notice.

Notice by mail shall be deemed to have been given at the time a written
notice is deposited in the United States mail, postage prepaid. Any other
written notice shall be deemed to have been given at the time it is personally
delivered to the recipient or is delivered to a common carrier for transmission,
or actually transmitted by the person giving the notice by electronic means, to
the recipient. Oral notice shall be deemed to have been given at the time it is
communicated, in person or by telephone or wireless, to the recipient or to a
person at the office of the recipient who the person giving the notice has
reason to believe will promptly communicate it to the recipient.

Section 9. QUORUM. A majority of the authorized number of directors
constitutes a quorum of the Board for the transaction of business, except to
adjourn as hereinafter provided. Every act or decision done or made by a
majority of the directors present at a meeting duly held at which a quorum is
present shall be regarded as the act of the Board, unless a greater number be
required by law or by the Articles of Incorporation. A meeting at which a quorum
is initially present may continue to transact business notwithstanding the
withdrawal of directors, if any action taken is approved by at least a majority
of the required quorum for such meeting.

6
<PAGE>

Exhibit 3.5

Section 10. PARTICIPATION IN MEETINGS BY CONFERENCE TELEPHONE. Members of
the Board may participate in a meeting through use of a conference telephone
network or a similar communications method, so long as all members participating
in such meeting can hear one another. Each person participating in the meeting
shall sign the minutes thereof. The minutes may be signed in counterparts.

Section 11. WAIVER OF NOTICE. The transactions of any meeting of the Board,
however called and noticed or wherever held, are as valid as though had at a
meeting duly held after regular call and notice if a quorum be present and if,
either before or after the meeting, each of the directors not present signs a
written waiver of notice, a consent to holding such meeting or an approval of
the minutes thereof. All such waivers, consents, or approvals shall be filed
with the corporate records or made a part of the minutes of the meeting.

Section 12. ADJOURNMENT. A majority of the directors present, whether or
not a quorum is present, may adjourn any directors' meeting to another time and
place. Notice of the time and place of holding an adjourned meeting need not be
given to absent directors if the time and place be fixed at the meeting
adjourned. If the meeting is adjourned for more than twenty-four (24) hours,
notice of any adjournment to another time or place shall be given prior to the
time of the adjourned meeting to the directors who were not present at the time
of the adjournment.

Section 13. FEES AND COMPENSATION. Directors and members of committees may
receive such compensation, if any, for their services, and such reimbursement
for expenses, as may be fixed or determined by the Board.

Section 14. ACTION AT MEETINGS NOT REGULARLY CALLED: RATIFICATION AND
APPROVAL. Whenever all directors entitled to vote at any meeting, consent,
either by: (a) a writing on the records of the meeting or filed with the
secretary; or (b) presence at such meeting and oral consent entered on the
minutes; or (c) taking part in the deliberations at such meeting without
objection; the doings of such meeting shall be as valid as if had at a meeting
regularly called and noticed. At such meeting any business may be transacted
which is not excepted from the written consent or to the consideration of which
no objections for want of notice is made at the time. If any meeting be
irregular for want of notice or of such consent, provided a quorum was present
at such meeting, the proceedings of the meeting may be ratified and approved and
rendered likewise valid and the irregularity or defect therein waived by writing
signed by all parties having the right to vote at such meeting.

Section 15. RIGHTS OF INSPECTION. Every director shall have the absolute
right at any reasonable time to inspect and copy all books, records, and
documents of every kind and to inspect the physical properties of the
corporation and also of its subsidiary corporations, domestic or foreign. Such
inspection by a director may be made in person or by agent or attorney and
includes the right to copy and obtain extracts.

Section 16. COMMITTEES. The Board may, by resolution or resolutions passed
by a majority of the whole board, designate one or more committees, each
committee to consist of one or more directors of the corporation, which, to the
extent provided in the resolution or resolutions, shall have and may exercise
the powers of the Board in the management of the business and affairs of the
corporation, and the power to authorize the seal of the corporation to be
affixed to all papers on which the corporation desires to place a seal.

Members and alternate members of a committee must be appointed by
resolution adopted by a majority of the authorized number of directors and such
committee may be designated an Executive Committee or such other name as the
Board shall specify. The Board shall have the power to prescribe the manner in
which proceedings of any such committee shall be conducted. In the absence of
any such prescription, such committee shall have the power to prescribe the
manner in which its proceedings shall be conducted. Unless the Board or such
committee shall otherwise provide, the regular and special meetings and other
actions of any such committee shall be governed by the provisions of this
Article applicable to meetings and actions of the Board. Minutes shall be kept
of each meeting of each committee.

7
<PAGE>
Exhibit 3.5

ARTICLE IV

OFFICERS

Section 1. OFFICERS. The officers of the corporation shall be a chief
executive officer, a president, a secretary, a chief financial officer and a
resident agent. The corporation may also have, at the discretion of the Board, a
chairman of the board, one or more vice-presidents, one or more assistant
secretaries, one or more assistant treasurers, and such other officers as may be
elected or appointed in accordance with the provisions of Section 3 of this
Article. Any person may hold two or more offices.

Section 2. ELECTION. The officers of the corporation, except such officers
as may be elected or appointed in accordance with the provisions of Section 3 or
Section 5 of this Article, shall be chosen annually by, and shall serve at the
pleasure of, the Board, and shall hold their respective offices until their
resignation, removal, or other disqualification from service, or until their
respective successors shall be elected.

Section 3. SUBORDINATE OFFICERS. The Board may elect, and may empower the
Chief Executive Officer or President to appoint, such other officers as the
business of the corporation may require, each of whom shall hold office for such
period, have such authority, and perform such duties as are provided in these
Bylaws or as the Board may from time to time determine.

Section 4. REMOVAL AND RESIGNATION. Any officer may be removed, either with
or without cause, by the Board of Directors at any time, or, except in the case
of an officer chosen by the Board, by any officer upon whom such power of
removal may be conferred by the Board. Any such removal shall be without
prejudice to the rights, if any, of the officer under any contract of employment
of the officer.

Any officer may resign at any time by giving written notice to the
corporation, but without prejudice to the rights, if any, of the corporation
under any contract to which the officer is a party. Any such resignation shall
take effect at the date of the receipt of such notice or at any later time
specified therein; and, unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.

Section 5. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification, or any other cause shall be filled in
the manner prescribed in these Bylaws for regular election or appointment to
such office.

Section 6. CHAIRMAN OF THE BOARD. The Chairman of the Board, if there shall
be such an officer, shall, if present, preside at all meetings of the Board and
exercise and perform such other powers and duties as may be from time to time
assigned by the Board.

Section 7. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall
preside over all of the operations of the corporation, shall preside at all
shareholders meetings, and all officers and employees shall be reportable to the
Chief Executive Officer. The Chief Executive Officer shall make such reports and
perform such other duties as may be established from time to time by the Board
of Directors.

Section 8. PRESIDENT. Subject to such powers, if any, as may be given by
the Board to the Chief Executive Officer and the Chairman of the Board, if there
be such an officer, the President is the general manager of the corporation and
has, subject to the control of the Board, general supervision, direction, and
control of the business and officers of the corporation. The President shall
preside at all meetings of the shareholders in the absence of the Chief
Executive Officer and, in the absence of the Chairman of the Board, or if there
be none, at all meetings of the Board. The President has the general powers and
duties of management usually vested in the office of president and general
manager of a corporation and such other powers and duties as may be prescribed
by the Board or the Chief Executive Officer.

Section 9. VICE PRESIDENTS. In the absence or disability of the Chief
Executive Officer, the President, the Vice Presidents in order of their rank as
fixed by the Board or, if not ranked, the Vice President designated by the
Board, shall perform all the duties of the President, and when so acting shall
have all the powers of, and be subject to all the restrictions upon, the
President. The Vice Presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
Board.

8
<PAGE>

Exhibit 3.5

Section 10. SECRETARY. The Secretary shall keep, or cause to be kept, at
the principal office and such other place as the Board may order, a book of
minutes of all meetings of shareholders, the Board, and its committees, with the
time and place of holding, whether regular or special, and, if special, how
authorized, the notice thereof given, the names of those present at Board and
committee meetings, the number of shares present or represented at shareholders'
meetings, and the proceedings thereof. The Secretary shall keep, or cause to be
kept, a copy of the Bylaws of the corporation at the principal office or
business office in accordance with Section 78.105 of the Nevada Revised
Statutes.

The Secretary shall keep, or cause to be kept, at the principal office or
at the office of the corporation's transfer agent or registrar, if one be
appointed, a share register, or a duplicate share register, showing the names of
the shareholders and their addresses, the number and classes of shares held by
each, the number and date of certificates issued for the same, and the number
and date of cancellation of every certificate surrendered for cancellation.

The Secretary shall give, or cause to be given, notice of all the meetings
of the shareholders and of the Board and of any committees thereof required by
these Bylaws or by law to be given, shall keep the seal of the corporation in
safe custody, and shall have such other powers and perform such other duties as
may be prescribed by the Board.

Section 11. CHIEF FINANCIAL OFFICER. The Chief Financial Officer of the
corporation shall keep and maintain, or cause to be kept and maintained,
adequate and correct accounts of the properties and business transactions of the
corporation, and shall send or cause to be sent to the shareholders of the
corporation such financial statements and reports as are by law or these Bylaws
required to be sent to them. The books of account shall at all times be open to
inspection by any director.

ARTICLE V
OTHER PROVISIONS

Section 1. INSPECTION OF DOCUMENTS. The corporation shall keep in its
principal office a certified copy of its Articles of Incorporation and all
amendments thereto, certified copy of these Bylaws and all amendments thereto, a
stock ledger or duplicate stock ledger, revised annually, containing the names,
alphabetically arranged, of all persons who are stockholders of the corporation,
showing their places of residence, if known, and the number of shares held by
them respectively or in lieu of the stock ledger or duplicate stock ledger, a
statement setting out the name of the custodian of the stock ledger or duplicate
stock ledger, and the present and complete post office address, including street
and number, if any, where such stock ledger or duplicate stock ledger is kept.
The original or a copy of these Bylaws as amended to date which shall be open to
inspection by shareholders at all reasonable times during office hours. If the
principal office of the corporation is outside the State of Nevada and the
corporation has no principal business office in such state, it shall upon the
written notice of any shareholder furnish to such shareholder a copy of these
Bylaws as amended to date.

Section 2. ENDORSEMENT OF DOCUMENTS; CONTRACTS. Subject to the provisions
of applicable law, any note, mortgage, evidence of indebtedness, contract, share
certificate, conveyance, or other instrument in writing and any assignment or
endorsement thereof executed or entered into between this corporation and any
other person, when signed by the Chairman of the Board, the President or any
Vice President, and the Secretary or any Assistant Secretary, the Chief
Financial Officer or any Assistant Treasurer of this corporation shall be valid
and binding on this corporation in the absence of actual knowledge on the part
of the other person that the signing officers had not authority to execute the
same. Any such instruments may be signed by any other person or persons and in
such manner as from time to time shall be determined by the Board and, unless so
authorized by the Board, no officer, agent, or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or amount.

9
<PAGE>

Exhibit 3.5

Section 3. CERTIFICATES OF STOCK. Every holder of shares of the
corporationshall be entitled to have a certificate signed in the name of the
corporation by the Chairman of the Board, the President or a Vice President and
by the Chief Financial Officer or an Assistant Treasurer or the Secretary or an
Assistant Secretary, certifying the number of shares and the class or series of
shares owned by the shareholder. Any or all of the signatures on the certificate
may be facsimile. If any officer, transfer agent, or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent, or registrar before such certificate is
issued, it may be issued by the corporation with the same effect as if such
person were an officer, transfer agent, or registrar at the date of issue.

Certificates for shares may be issued prior to full payment under such
restrictions and for such purposes as the Board may provide; provided, however,
that on any certificate issued to represent any partly paid shares, the total
amount of the consideration to be paid therefor and the amount paid thereon
shall be stated.

Except as provided in this Section no new certificate for shares shall be
issued in lieu of an old one unless the latter is surrendered and cancelled at
the same time. The Board may, however, in case any certificate for shares is
alleged to have been lost, stolen, or destroyed, authorize the issuance of a new
certificate in lieu thereof, and the corporation may require that the
corporation be given a bond or other adequate security sufficient to indemnify
it against any claim that may be made against it (including expense or
liability) on account of the alleged loss, theft, or destruction of such
certificate or the issuance of such new certificate.

Section 4. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The President or
any other officer or officers authorized by the Board or the President are each
authorized to vote, represent, and exercise on behalf of the corporation all
rights incident to any and all shares of any other corporation or corporations
standing in the name of the corporation. The authority herein granted may be
exercised either by any such officer in person or by any other person authorized
so to do by proxy or power of attorney duly executed by said officer.

Section 5. STOCK PURCHASE PLANS. The corporation may adopt and carry out a
stock purchase plan or agreement or stock option plan or agreement providing for
the issue and sale for such consideration as may be fixed of its unissued
shares, or of issued shares acquired or to be acquired, to one or more of the
employees or directors of the corporation or of a subsidiary or to a trustee on
their behalf and for the payment for such shares in installments or at one time,
and may provide for aiding any such persons in paying for such shares by
compensation for services rendered, promissory notes, or otherwise.

Any such stock purchase plan or agreement or stock option plan or agreement
may include, among other features, the fixing of eligibility for participation
therein, the class and price of shares to be issued or sold under the plan or
agreement, the number of shares which may be subscribed for, the method of
payment therefor, the reservation of title until full payment therefor, the
effect of the termination of employment and option or obligation on the part of
the corporation to repurchase the shares upon termination of employment,
restrictions upon transfer of the shares, the time limits of and termination of
the plan, and any other matters, not in violation of applicable law, as may be
included in the plan as approved or authorized by the Board or any committee of
the Board.

Section 6. CONSTRUCTION AND DEFINITIONS. Unless the context otherwise
requires, the general provisions, rules of construction, and definitions
contained in the General Provisions of the Nevada Revised Statutes shall govern
the construction of these Bylaws.

Section7. REPORTS TO SHAREHOLDERS. The corporation hereby expressly waives,
to the maximum extent permitted by law, the requirement set forth in Section
1501 of the California Corporations Code, to the extent the same may be
applicable to the corporation, and any and all other similar requirements under
any other applicable state statutes, to deliver annual reports to shareholders;
provided, however, that nothing herein shall be interpreted as prohibiting the
Board from issuing annual or other periodic reports to shareholders as the Board
may determine from time to time.

Section 8. OPTION REPRICING. The company shall not reprice any stock
options already issued and outstanding to a lower strike price at any time
during the term of such option, without the prior approval of shareholders. To
the extent permissible by law, any amendment or repeal of this provision shall
require the affirmative vote of the holders of a majority in interest of the
common stock of the Company entitled to vote.

10
<PAGE>
Exhibit 3.5
ARTICLE VI
INDEMNIFICATION

Section 1. DEFINITIONS. For the purposes of this Article, "agent" means any
person who is or was a director, officer, employee, or other agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust, or other enterprise, or was a
director, officer, employee, or agent of a foreign or domestic corporation which
was a predecessor corporation of the corporation or of another enterprise at the
request of such predecessor corporation.

Section 2. INDEMNIFICATION OF CORPORATE AGENTS. The corporation shall
indemnify any person who was or is a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, to the fullest extent
permitted by Nevada law and the Articles of Incorporation. The rights conferred
on any person above shall not be exclusive of any other right such person may
have or hereafter acquire under any statute, provision of the Articles of
Incorporation, bylaw, agreement, vote of shareholders or disinterested directors
or otherwise.

Section 3. ADVANCEMENT OF EXPENSES. The expenses of officers and directors
incurred in defending a civil or criminal action, suit or proceeding must be
paid by the corporation as they are incurred and in advance of the final
disposition of the action, suit or proceeding upon receipt of an undertaking by
or on behalf of the director or officer to repay the amount if it is ultimately
determined by a court of competent jurisdiction that he is not entitled to be
indemnified by the corporation. The provisions of this subsection do not affect
any rights to advancement of expenses to which corporate personnel other than
directors or officers may be entitled under any contract or otherwise by law.

Section 4. INDEMNIFICATION CONTRACTS. The Board of Directors is authorized
to enter into a contract with any director, officer, employee or agent of the
corporation, or any person serving at the request of the corporation as a
director, office, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, including employee benefit plans, providing
for indemnification rights equivalent to or, if the Board of Directors so
determines, greater than, those provided for in Section 2 of this Article VI.

Section 5. INSURANCE. The corporation shall have power to purchase and
maintain insurance or make other financial arrangements on behalf of any agent
of the corporation for any liability asserted against or incurred by the agent
in such capacity or arising out of the agent's status as such whether or not the
corporation would have the power to indemnify the agent against such liability
under the provisions of this Article. The other financial arrangements made by
the corporation may include, but shall not be limited to, any of the
arrangements set forth in the Nevada General Corporation Law, as the same may be
amended from time to time.

ARTICLE VII
EMERGENCY PROVISIONS

Section 1. GENERAL. The provisions of this Article shall be operative only
during a national emergency declared by the President of the United States or
the person performing the President's functions, or in the event of a nuclear,
atomic, or other attack on the United States or a disaster making it impossible
or impracticable for the corporation to conduct its business without recourse to
the provisions of this Article. Said provisions in such event shall override all
other Bylaws of this corporation in conflict with any provisions of this
article, and shall remain operative so long as it remains impossible or
impracticable to continue the business of the corporation otherwise, but
thereafter shall be inoperative; provided that all actions taken in good faith
pursuant to such provisions shall thereafter remain in full force and effect
unless and until revoked by action taken pursuant to the provisions of the
Bylaws other than those contained in this Article.

11
<PAGE>

Exhibit 3.5

Section 2. UNAVAILABLE DIRECTORS. All directors of the corporation who are
not available to perform their duties as directors by reason of physical or
mental incapacity or for any other reason or who are unwilling to perform their
duties or whose whereabouts are unknown shall automatically cease to be
directors, with like effect as if such persons had resigned as directors, so
long as such unavailability continues.

Section 3. AUTHORIZED NUMBER OF DIRECTORS. The authorized number of
directors shall be the number of directors remaining after eliminating those who
have ceased to be directors pursuant to Section 2, or the minimum number
required by law, whichever number is greater.

Section 4. QUORUM. The number of directors necessary to constitute a quorum
shall be one-third of the authorized number of directors as specified in the
foregoing Section, or such other minimum number as, pursuant to the law or
lawful decree then in force, it is possible for the Bylaws of a corporation to
specify.

Section 5. CREATION OF EMERGENCY COMMITTEE. In the event the number of
directors remaining after eliminating those who have ceased to be directors
pursuant to Section 2 is less than the minimum number of authorized directors
required by law, then until the appointment of additional directors to make up
such required minimum, all the powers and authorities which the Board could by
law delegate, including all powers and authorities which the Board could
delegate to a committee, shall be automatically vested in an emergency
committee, and the emergency committee shall thereafter manage the affairs of
the corporation pursuant to such powers and authorities and shall have all such
other powers and authorities as may by law or lawful decree be conferred on any
person or body of persons during a period of emergency.

Section 6. CONSTITUTION OF EMERGENCY COMMITTEE. The emergency committee
shall consist of all the directors remaining after eliminating those who have
ceased to be directors, pursuant to Section 2, provided that such remaining
directors are not less than three in number. In the event such remaining
directors are less than three in number, the emergency committee shall consist
of three persons, who shall be the remaining director or directors and either
one or two officers or employees of the corporation, as the remaining director
or directors may in writing designate. If there is no remaining director, the
emergency committee shall consist of the three most senior officers of the
corporation who are available to serve, and if and to the extent that officers
are not available to serve, and if and to the extent that officers are not
available, the most senior employees of the corporation. Seniority shall be
determined in accordance with any designation of seniority in the minutes of the
proceedings of the Board, and in the absence of such designation, shall be
determined by rate of remuneration. In the event that there are no remaining
directors and no officers or employees of the corporation available, the
emergency committee shall consist of three persons designated in writing by the
shareholder owning the largest number of shares of record as of the last record
date.

Section 7. POWERS OF EMERGENCY COMMITTEE. The emergency committee, once
appointed, shall govern its own procedures and shall have power to increase the
number of members thereof beyond the original number, and in the event of a
vacancy or vacancies therein, arising at any time, the remaining member or
members of the emergency committee shall have the power to fill such vacancy or
vacancies. In the event at any time after its appointment, all members of the
emergency committee shall die or resign or become unavailable to act for any
reason whatsoever, a new emergency committee shall be appointed in accordance
with the foregoing provisions of this Article.

Section 8. DIRECTORS BECOMING AVAILABLE. Any person who has ceased to be a
director pursuant to the provisions of Section 2 and who thereafter becomes
available to serve as a director shall automatically become a member of the
emergency committee.

Section 9. ELECTION OF BOARD OF DIRECTORS. The emergency committee shall,
as soon after its appointment as is practicable, take all requisite action to
secure the election of a board of directors, and upon such election all the
powers and authorities of the emergency committee shall cease.

12
<PAGE>
Exhibit 3.5

Section 10. TERMINATION OF EMERGENCY COMMITTEE. In the event, after the
appointment of an emergency committee, a sufficient number of persons who ceased
to be directors pursuant to Section 2 become available to serve as directors, so
that if they had not ceased to be directors as aforesaid, there would be enough
directors to constitute the minimum number of directors required by law, then
all such persons shall automatically be deemed to be reappointed as directors
and the powers and authorities of the emergency committee shall be at an end.

13
<PAGE>

Exhibit 3.5
ARTICLE VIII
AMENDMENTS

Section 1. AMENDMENT BY SHAREHOLDERS. New Bylaws may be adopted or these
Bylaws may be amended or repealed by the vote or written consent of holders of a
majority of the outstanding shares entitled to vote.

Section 2. AMENDMENT BY DIRECTORS. Subject to the rights of the
shareholders as provided in Section 1 of this Article VIII to adopt, amend, or
repeal Bylaws, Bylaws may be adopted, amended, or repealed by the Board.

CERTIFICATE OF SECRETARY

I, the undersigned, do hereby certify:

1. That I am the duly elected and acting Secretary of Teknekron
Communications Systems, Inc., a Nevada corporation; and

2. That the foregoing Bylaws, comprising twenty (20) pages, are a true and
correct copy of the Bylaws of said corporation as duly adopted by approval of
the Board of Directors thereof by written consent dated 1987.

IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the seal of
said corporation on November 2, 1987.

/s/ Mary Hofmann
- --------------------------------------------------
Mary Hofmann, Secretary

Exhibit 10.33

SETTLEMENT AGREEMENT AND RELEASE

This Agreement is between TCSI Corporation, a Nevada corporation,
(hereinafter referred to as "TCSI") and Ram Banin ("BANIN"), collectively
referred to as "the Parties".

WHEREAS, BANIN has resigned his position as President, Chief Executive
Officer and a Director of TCSI as of December 17, 1999; and it is the present
intention of the Parties that BANIN continue to be employed by TCSI as a
business advisor through January 17, 2001 (the "Termination Date").

WHEREAS, the express purpose of this Agreement is to set forth the terms
of BANIN's employment with TCSI during the Employment Continuation Period
(defined below) and to forever release TCSI, as defined above, from any and all
potential liability regarding every claim, cause of action, complaint and
dispute that BANIN has, or may ever have, against TCSI arising out of, or
related to, any and all events, whether currently known or unknown, occurring
prior to the execution of this Agreement.

NOW THEREFORE, in consideration of the mutual promises made herein, TCSI
and BANIN hereby agree as follows:

1. Resignation of Officer Positions. Effective December 17, 1999 (the
"Effective Date") BANIN resigned his position as President, Chief Executive
Officer and Director. BANIN shall continue to be employed by the Company from
the Effective Date in the capacity of business advisor until the close of
business on January 17, 2001 (the "Termination Date"). A form letter of
resignation of BANIN's position as President, Chief Executive Officer and
Director of TCSI is attached hereto as Exhibit A.

2. Severance Payment. TCSI shall pay BANIN a severance payment of
$20,000 per month, less applicable withholding and deductions, through the
Termination Date. Such payments shall be made according to the normal payroll
practices of TCSI. This Severance Payment represents a settlement and compromise
of any potential claims that BANIN may have against TCSI.

3. Compensation. TCSI shall compensate BANIN for his services as a
business advisor at the rate of $1,875 per month, less applicable withholding
and deductions, through the Termination Date (the "Employment Continuation
Period").

4. Stock Options. All stock options of BANIN shall continue to vest and
become exercisable during the Employment Continuation Period. Upon the
Termination Date, such options shall cease to vest and shall be exercisable
according to the terms of the applicable option agreement(s).

5. Benefits. BANIN shall continue to be eligible to participate in the
employee benefit plans of TCSI during the Employment Continuation Period.

1
<PAGE>

6. Expense Reimbursement. TCSI also agrees to reimburse BANIN up to a
maximum of $3,500 for attorneys' fees and other fees incurred in connection with
this agreement and for outplacement counseling and related services.

7. Office Equipment. BANIN shall retain possession and obtain ownership
rights to the office equipment listed in Exhibit B to this Agreement.

8. Employer's Obligations. TCSI's obligations under this agreement shall
not commence until the eighth day after BANIN has executed this agreement.

9. Employee Obligations.

(a) Return of Property. BANIN shall promptly return to TCSI all
confidential or proprietary documents and records obtained by BANIN in the
course of, or incident to, his employment with TCSI.

(b) Confidential Information. BANIN shall not, for the benefit of any
person or entity other than TCSI, disclose or use any information regarding
TCSI's business operations which BANIN obtained during his employment with
TCSI and which is not in the public domain.

10. Release. BANIN and his representatives, heirs, successors, and
assigns do hereby completely release and forever discharge TCSI, and its and
their present and former shareholders, officers, directors, agents, employees,
attorneys, successors, and assigns, (collectively, "Released Parties") from all
claims, rights, demands, actions, obligations, liabilities, and causes of action
of every kind and character, known or unknown, mature or unmatured, which BANIN
may have now or in the future arising from any act or omission or condition
occurring on or prior to the Effective Date (including, without limitation, the
future effects of such acts, omissions, or conditions), whether based on tort,
contract (express or implied), or any federal, state, or local law, statute, or
regulation, including, but not limited to, the matters that were raised or could
have been raised in the Civil Action (collectively, the "Released Claims"). By
way of example and not in limitation of the foregoing, Released Claims shall
include any claims arising under Title VII of the Civil Rights Act of 1964, the
Age Discrimination in Employment Act, the Americans with Disabilities Act, the
California Fair Employment and Housing Act, the California Labor Code as well as
any claims asserting wrongful termination, fraud, harassment, breach of
contract, breach of the covenant of good faith and fair dealing, negligent
infliction of emotional distress, negligent or intentional misrepresentation,
negligent or intentional interference with contract or prospective economic
advantage, defamation, invasion of privacy, and claims related to disability.
Released Claims shall also include, but not be limited to, claims for severance
pay, bonuses, sick leave, vacation pay, life or health insurance, or any other
fringe benefit. Notwithstanding the foregoing, Released Claims shall not include
(i) any claims based on obligations or rights created by or reaffirmed in this
Agreement; (ii) any vested pension rights or any workers' compensation claims
(the settlement of which would require approval by the California Workers'
Compensation Appeals Board); and (iii) any and all rights of indemnity as a
former employee of TCSI which BANIN may have under statute or otherwise.

2
<PAGE>

11. Section 1542 Waiver. The parties understand and agree that the
Released Claims include not only claims presently known to BANIN, but also
include all unknown or unanticipated claims, rights, demands, actions,
obligations, liabilities, and causes of action of every kind and character that
would otherwise come within the scope of the Released Claims as described in
Section 3. BANIN understands that he may hereafter discover facts different from
what he now believes to be true, which if known, could have materially affected
this Agreement, but he nevertheless waives any claims or rights based on
different or additional facts. BANIN knowingly and voluntarily waives any and
all rights or benefits that he may now have, or in the future may have, under
the terms of Section 1542 of the California Civil Code, which provides as
follows:

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE,
WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE
DEBTOR.

12. Age Discrimination Claims. BANIN understands and agrees that, by
entering into this Agreement, (i) he is waiving any rights or claims he might
have under the Age Discrimination in Employment Act, as amended by the Older
Workers Benefit Protection Act; (ii) he has received consideration for this
release; (iii) he has been advised to consult with an attorney before signing
this Agreement; and (iv) he has been offered the opportunity to evaluate the
terms of this Agreement for not less than twenty-one (21) days prior to his
execution of the Agreement. BANIN may revoke this Agreement (by written notice
to TCSI) for a period of seven (7) days after his execution of the Agreement,
and it shall become enforceable only upon the expiration of this revocation
period without prior revocation by BANIN.

13. Covenant Not to Sue. Except as provided in Section 9, BANIN shall
not sue or initiate against any Released Party any compliance review,
administrative action, lawsuit or other proceeding, or participate in the same,
individually or as a member of a class, under any contract (express or implied),
or any federal, state, or local law, statute, or regulation pertaining in any
manner to the Released Claims.

14. Confidentiality. The parties understand and agree that this
Agreement and each of its terms, and the negotiations surrounding it, are
confidential and shall not be disclosed by either party to any entity or person,
for any reason, at any time, without the prior written consent of the other
party, except to BANIN's spouse and unless required by law or necessary to
obtain advice of an attorney or an accountant or to enforce this Agreement.

15. Nonadmission. The parties understand and agree that this is a
compromise settlement of potential claims and that the furnishing of the
consideration for this Agreement shall not be deemed or construed at any time or
for any purpose as an admission of liability by TCSI. The liability for any and
all claims is expressly denied by TCSI.

16. Arbitration. All claims that BANIN may have against TCSI or any
other Released Party, or which TCSI may have against BANIN, in any way related
to the subject matter, interpretation, enforcement, application, or alleged
breach of this Agreement ("Arbitrable Claims") shall be resolved by arbitration.
Arbitration of Arbitrable Claims shall be in

3
<PAGE>

accordance with the National Rules for the Resolution of Employment Disputes of
the American Arbitration Association, as amended, and as augmented by this
Agreement. Arbitration shall be final and binding upon the parties and shall be
the exclusive remedy for all Arbitrable Claims. Either party may bring an action
in court to compel arbitration under this Agreement and to enforce an
arbitration award. Otherwise, neither party shall initiate or prosecute any
lawsuit or administrative action in any way related to any Arbitrable Claim.
Notwithstanding the foregoing, either party may, at its option, seek injunctive
relief pursuant to section 1281.8 of the California Code of Civil Procedure. The
Federal Arbitration Act shall govern the interpretation and enforcement of this
Section 9. THE PARTIES HEREBY WAIVE ANY RIGHTS THEY MAY HAVE TO TRIAL BY JURY IN
REGARD TO ARBITRABLE CLAIMS, INCLUDING WITHOUT LIMITATION ANY RIGHT TO TRIAL BY
JURY AS TO THE MAKING, EXISTENCE, VALIDITY, OR ENFORCEABILITY OF THE AGREEMENT
TO ARBITRATE.

17. Integration. The parties understand and agree that the preceding
Sections recite the sole consideration for this Agreement; that no
representation or promise has been made by BANIN, Employer, or any other
Released Party concerning the subject matter of this Agreement, except as
expressly set forth in this Agreement; and that all agreements and
understandings between the parties concerning the subject matter of this
Agreement are embodied and expressed in this Agreement. This Agreement shall
supersede all prior or contemporaneous agreements and understandings among
BANIN, TCSI, and any other Released Party, whether written or oral, express or
implied, with respect to the employment, termination, and benefits of BANIN,
including without limitation, any employment-related agreement or benefit plan,
except to the extent that the provisions of any such agreement or plan have been
expressly referred to in this Agreement as having continued effect.

18. Amendments; Waivers. This Agreement may not be amended except by an
instrument in writing, signed by each of the parties. No failure to exercise and
no delay in exercising any right, remedy, or power under this Agreement shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right, remedy, or power under this Agreement preclude any other or further
exercise thereof, or the exercise of any other right, remedy, or power provided
herein or by law or in equity.

19. Assignment; Successors and Assigns. BANIN agrees that he will not
assign, sell, transfer, delegate, or otherwise dispose of, whether voluntarily
or involuntarily, or by operation of law, any of his obligations under this
Agreement. Any such purported assignment, transfer, or delegation shall be null
and void. BANIN represents that he has not previously assigned or transferred
any claims or rights released by him pursuant to this Agreement. Subject to the
foregoing, this Agreement shall be binding upon and shall inure to the benefit
of the parties and their respective heirs, successors, attorneys, and permitted
assigns. This Agreement shall also inure to the benefit of any Released Party.
This Agreement shall not benefit any other person or entity except as
specifically enumerated in this Agreement.

20. Severability. If any provision of this Agreement, or its application
to any person, place, or circumstance, is held by an arbitrator or a court of
competent jurisdiction to be invalid, unenforceable, or void, such provision
shall be enforced to the greatest extent permitted by law,

<PAGE>

and the remainder of this Agreement and such provision as applied to other
persons, places, and circumstances shall remain in full force and effect.

21. Attorneys' Fees. In any legal action, arbitration, or other
proceeding brought to enforce or interpret the terms of this Agreement, the
prevailing party shall be entitled to recover reasonable attorneys' fees and
costs.

22. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.

23. Interpretation. This Agreement shall be construed as a whole,
according to its fair meaning, and not in favor of or against any party. By way
of example and not in limitation, this Agreement shall not be construed in favor
of the party receiving a benefit nor against the party responsible for any
particular language in this Agreement. Captions are used for reference purposes
only and should be ignored in the interpretation of the Agreement.

24. Authority. TCSI represents that the person signing this Agreement on
its behalf has the full power and authority to do so and to bind TCSI thereby.

I understand and agree to the terms and conditions of this Agreement.

/s/ Ram Banin January 21, 2000
_____________________________________ Dated:________________________________
Ram BANIN

I understand and agree to the terms and conditions of this Agreement.
TCSI Corporation

/s/ Art Wilder January 21, 2000
_____________________________________ Dated:________________________________
By: Art Wilder
Its: Chief Financial Officer

5
<PAGE>

Exhibit A

December 17, 1999

To the Board of Directors of TCSI Corporation:

I hereby resign my position as President, Chief Executive Officer and a Director
of TCSI Corporation effective today, December 17, 1999.

Further, I accept the Company's offer of subsequent employment as business
advisor, subject to the terms and conditions set forth in the attached
Settlement Agreement and Release.

Very truly yours,

/s/ Ram Banin
-------------------
Ram Banin

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<PAGE>

Exhibit B

Sony Vaio Laptop, Model PCG505G Serial Number: 4-639-304-02
(includes docking station and 3.5" ext drive)

Brother fax machine, Model MFC4550 Serial Number: N634-79-241

Exhibit 10.34

INDIVIDUAL

ASSOCIATE SERVICES AGREEMENT

THIS AGREEMENT is entered into as of the 17th of December 1999, by and between
Norman E. Friedmann ("Associate") and TCSI Corporation ("Company").

RECITALS

1. Associate is an individual and possesses certain skills and
abilities that may be useful to the Company from time to time.

2. The Company desires to engage Associate to perform certain
services and/or create deliverables for the Company in connection
with its business activities as described in Exhibit A, Statement
of Work, attached hereto and incorporated herein by this
reference.

TERMS AND CONDITIONS

NOW, THEREFORE, in consideration of the mutual covenants, promises and
agreements contained herein, the parties hereto hereby agree as follows:

1. Definition.
----------

"Proprietary Information" means the following classes of information
relating to the Company's business:

(a) Trade secrets and other proprietary and confidential information
which are owned by the Company and which have to do with:

(i) The operation of the Company's business, consisting, for
example, and not intending to be inclusive, of its lists or
other identifications of clients or prospective clients of
the Company (and key individuals employed or engaged by such
clients or prospective clients), and nature and type of
services rendered to such clients (or proposed to be rendered
to prospective clients), fees charged or to be charged,
proposals, inventions, methodologies, algorithms, formulae,
processes, compilations of information, form and content of
data bases, designs, drawings, models, equipment, results of
research proposals, job notes, reports, records,
specifications, software, firmware and procedures used in, or
related to, the Company's products; and

(ii) The Company's relations with its employees including without
limitation, salaries, job classifications and skill levels;

(b) Financial, sales and marketing data compiled by the Company as
well as the Company's financial, sales and marketing plans and
strategies, customer lists and non-public pricing;

(c) All ideas, concepts, information and written material about a
client disclosed to Associate by the Company, or acquired from a
client of the Company, and all financial, accounting, statistical,
personnel and business data and plans of clients, are and shall
remain the sole and exclusive property and Proprietary Information
of the Company or said client;

(d) Any other information designated by the Company to be
confidential, secret and/or proprietary.

2. Engagement. Associate agrees to provide services and/or deliverables
described in Exhibit A to the Company pursuant to the terms and
conditions as set forth in this Agreement.

<PAGE>

3. Term of Agreement. This Agreement shall become effective on the date
first written above and shall continue in effect until the close of
business on June 30, 2000, provided, however, that this Agreement may
be terminated before said date as follows:

(a) At any time upon the provision of two (2) weeks prior written
notice by either party; or

(b) Upon material breach of this Agreement by either party, upon
written notice by the non-breaching party; or

(i) Bankruptcy or insolvency of either party;

(ii) Upon sale of the business of either party;

(iii) Assignment of this Agreement by either party without the
written consent of the other party; or

(iv) Willful misconduct including, but not limited to,
Associate's breach of this Agreement, neglect of duty or
continued incapacity to perform services hereunder.

4. Scope of Services. Associate agrees to perform, to the reasonable
satisfaction of the Company, the work specified in Exhibit A, attached
hereto and made a part hereof. The parties may agree upon additional
services and/or deliverables to be provided by the Associate, and the
same shall be effective when agreed by the parties hereto in writing.
For purposes of this Agreement, the term "Services" shall mean and
include all services and/or deliverables to be provided by Associate.

5. Payment for Services/Reimbursements. Provided that the Associate
complies with the terms and conditions of this Agreement, the Company
shall pay Associate the amounts specified on, or computed in accordance
with, Exhibit A, or on such other basis as the parties may agree upon
in writing. (See attached Exhibit A.) The Company shall reimburse
Associate for all reasonable expenses incurred by Associate in
connection with activities hereunder, provided that such expenses have
been approved by the Company either verbally or in writing before the
same have been incurred. Associate shall submit to the Company each
month an invoice and an itemized statement of hours spent on services
or deliverables provided, or expenses incurred. Payment in U.S. dollar
funds shall be due in thirty (30) days after receipt of invoice; a
charge of 1% per month shall be allowed on any outstanding balance past
due more than 15 days.

6. Obligations of Associate.

(a) Because this Agreement is a personal one, Associate may not
assign or delegate any obligation, or any portion thereof, of
this Agreement.

(b) The relationship of Associate to Company is conclusively
deemed for all purposes to be that of an independent
contractor. Associate in no event shall be considered an
employee of Company within the meaning or application of any
national or state unemployment insurance law, old age benefit
law, workers' compensation or industrial accident law, or
other industrial or labor law, any tax law, or any Company
employee benefit plan.

Associate shall be fully and solely responsible for arranging
for and bearing the expense of his operations, subject only to
his right for reimbursement for reimbursable expenses
hereunder.

<PAGE>

(c) Associate shall devote sufficient time, energy, attention and
efforts to the Company's business in order to promptly and
satisfactorily complete the Services. Company is interested
only in the results to be achieved under this Agreement; the
manner and method of performing the work shall be under the
control of Associate, except that the work contemplated herein
must meet the approval of Company and is subject to Company's
general right of inspection to ensure the satisfactory
performance and completion thereof.

(d) It is understood that Company does not agree to use Associate
exclusively. Further, Associate may represent, perform
services for and be employed by such additional clients,
persons or companies as Associate, in Associate's sole
discretion, sees fit, except as provided in Section 10 herein.

(e) In performing the Services required under this Agreement,
Associate shall comply with all applicable federal, state,
county, and city laws, ordinances and regulations including,
but not limited to, compliance with respect to payment for
FICA wages, SDI, and workers' compensation. Further, Associate
agrees not to use any Proprietary Information or copyright, of
others in performing the services under this Agreement.

(f) Company shall not be liable to Associate or any of its agents,
servants, subcontractors, for any consequential or special
damages resulting from, arising out of or in connection with
this Agreement.

(g) Associate acknowledges and agrees that all Proprietary
Information that comes into Associate's possession (including
any information originated or developed by Associate during
the term of this Agreement) is secret and is the exclusive
property of the Company or its clients. Associate agrees to
use the Proprietary Information only in connection with
Associate's work for the Company. Associate agrees, while
performing services for the Company in any capacity and
thereafter, to hold the Proprietary Information in confidence
and agrees not to disclose or reveal, in any manner, any
Proprietary Information to any person or entity.

7. Obligations of Company.

(a) Company agrees to comply with all reasonable requests of
Associate and to provide access to all documents reasonably
necessary for the performance of Associate's duties under this
Agreement.

8. Results Belong to Company. Associate acknowledges and agrees that the
results of all work, including but not limited to all intellectual
property rights, such as copyrights, inventions, discoveries or
improvements (hereinafter collectively referred to as "Inventions")
which Associate makes during Associate's performance of services for
the Company, whether made individually or jointly with others, which
relate or pertain to, or are in any way connected with, the specific
application systems and products, Company proprietary apparatus,
methods, and subjects of research or development by the Company shall
be the sole and exclusive property of the Company, and the inventions
shall be deemed to be works for hire.

(a) Associate agrees to make prompt and full disclosure to the
Company of all Inventions and advise the Company,
periodically, of all work being done by Associate on any
Inventions covered by this paragraph.

(b) To the extent Associate would be an owner of any rights to the
Invention, Associate hereby assigns to the Company all such
rights to the Inventions. Associate hereby agrees to execute
and sign any and all applications, assignments or other
instruments which the Company may deem necessary in order to
enable it, at its expense, to apply for, prosecute and obtain
Letters of Patent, trademarks, copyrights or other legal
protections in the United States or foreign countries for the
Inventions, or in order to assign or convey to or invest in
the Company the sole and exclusive right, title and interest
in and to the Inventions.

(c) The obligations contained in this Paragraph 8, do not apply to
any rights Associate may have acquired in connection with an
invention, discovery or improvement for which no equipment,
supplies, facility or Proprietary Information of the Company
was used and which was developed entirely on the Associate's
own time, and provided that such invention, discovery or
improvement does not result from any work performed by
Associate for, or on behalf of, the Company.
<PAGE>

(d) Upon request and/or upon the termination of this Agreement,
Associate shall promptly deliver to the Company all notes,
writings, lists, files, reports, correspondence, tape cards,
maps, machines, technical data or any other tangible products
or documents which Associate produced or received while
performing this Agreement.

9. Governing Law and Disputes. This Agreement shall be governed by the
laws of the State of California, and California shall be the
appropriate forum.

In case a dispute in connection with this Agreement arises between the
parties, both parties shall negotiate in good faith to resolve such
dispute. However, if the parties are unable to reach an agreement
within thirty (30) days after the occurrence of such dispute, then the
parties shall submit the dispute to binding arbitration in San
Francisco, California in accordance with rules of commercial
arbitration of the American Arbitration Association ("AAA"). If within
thirty (30) days no single arbitrator is mutually acceptable, then the
AAA shall designate an arbitrator. The arbitrator shall be a
knowledgeable individual familiar with the fields of the subject of
this Agreement. Under the arbitration, both parties shall cooperate
with and agree to abide finally by any decision of the arbitration
process. The arbitrator shall first undertake to mediate the dispute
and the parties shall cooperate in good faith with said arbitrator. The
costs of the arbitration proceeding shall be borne according to the
decision of the arbitrator, who may apportion costs equally, or in
accordance with any finding of fault or lack of good faith of either
party. The award of the arbitrator including the grant of injunctive
relief shall be non-appealable and enforceable in any court of
competent jurisdiction.

10. Business Opportunities. While performing work under this Agreement,
Associate shall not undertake or participate in any marketing or
business development activities related to opportunities which may be
brought to his/her attention due to his/her involvement in this work or
due to his/her knowledge of Company business activities. Associate
acknowledges that the identity of Company's customers, the needs of
such customers, and work product of Associate all represent proprietary
information as defined in Section 1 above. Associate promises that
he/she will not become directly or indirectly engaged with or employed
by any customer of Company for whom Associate has performed services
under this Agreement for at least one year after termination of the
Agreement.

11. Assignment. This Agreement may not be assigned by Associate voluntarily
or by operation of law, in whole or in part, without the prior written
consent of Company.

12. Notices. All notices or other communications provided for by this
Agreement shall be made in writing and shall be deemed properly
delivered when (i) delivered personally or (ii) by the mailing of such
notice by registered or certified mail, postage prepaid, to the parties
at the addresses set forth on the signature page of this Agreement (or
to such other address as one party designates to the other in writing).

13. Entire Agreement and Waiver. This Agreement is the entire agreement
between the parties relating to the engagement of Associate. It
supersedes all prior agreements, arrangement, negotiations and
understandings related thereto. No waiver of any term, provision or
condition of the Agreement shall be deemed to be, or shall constitute,
a waiver of any other term, provision or condition herein, whether or
not similar. No such waiver shall be binding unless in writing and
signed by the waiving party.

14. Amendments. No supplement, modification or amendment of any term,
provision or condition of this Agreement shall be binding or
enforceable unless evidenced in writing executed by the parties hereto.

15. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.

16. Reformation/Severability. If any of this Agreement is declared invalid
by any tribunal, then such provision shall be deemed automatically
adjusted to the minimum extent necessary to conform to the requirements
for validity as declared at such time and, as so adjusted, shall be
deemed a provision of this Agreement as though originally included
herein. In the event that the provision invalidated is of such a nature
that it cannot be adjusted, the provision shall be deemed deleted from
this Agreement as though such provision had never been included herein.
In either case, the remaining provisions of this Agreement shall remain
in effect.
<PAGE>

17. Survival. The provisions of paragraphs 6, 7, 8 and 9 shall survive the
termination of this Agreement.

After carefully reading and considering the foregoing provisions and Exhibit A,
Associate has voluntarily signed this Agreement to be effective as of the date
first written above.

TCSI Corporation: Associate:

/s/ John Bolger /s/ Norman E. Friedmann
- --------------------------------------- ------------------------------------
Signature Signature

John Bolger
Chairman of the Board Norman E. Friedmann

January 1, 2000 February 1, 2000
- -------------------------------------- ------------------------------------
Date Date

TCSI Corporation 1043 Angelo Drive

1080 Marina Village Parkway Beverly Hills, California 90210
Alameda, CA 94501
Tel: (510) 749-8500 310 550-6933
Fax: (510) 749-8700
Federal ID #/Social Security #: ###-##-####

<PAGE>

Exhibit A

STATEMENT OF WORK FOR INDIVIDUAL ASSOCIATE

Pursuant to the Individual Associate Services Agreement between Norman E.
Friedmann ("Associate"), and TCSI Corporation ("Company"), dated December 17,
1999, Associate and Company agree as follows:

Associate agrees to perform the following services:

1. Describe the services to be rendered:

Interim President and Chief Executive Officer.

2. Estimated length of time for services described above:

From December 17, 1999 until appointment of a permanent
President and Chief Executive Officer, estimated to be 3 - 6
months.

3. Billing Rate: $2,750 per day

This Statement of Work may be amended from time-to-time, by mutual consent.

Exhibit 23.1

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration
Statements (Forms S-8) pertaining to the 1991 Stock Incentive Plan (No.
33-57540, 333-8353 and 333-66101), as amended, Equity Sharing Plan (No.
33-41808), as amended, 1994 Board of Directors Stock Option Plan (No. 33-98842),
as amended, and Employee Stock Purchase Plan (No. 333-31705), of TCSI
Corporation of our report dated February 1, 2000, with respect to the
consolidated financial statements and financial statement schedule of TCSI
Corporation included in the Annual Report (Form 10-K) for the year ended
December 31, 1999.

/s/ Ernst & Young LLP

Walnut Creek, California
March 29, 2000

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 8,788 22,308
<SECURITIES> 22,926 19,371
<RECEIVABLES> 13,342 12,709
<ALLOWANCES> 1,208 1,139
<INVENTORY> 0 0
<CURRENT-ASSETS> 46,041 57,756
<PP&E> 30,873 29,452
<DEPRECIATION> 22,416 18,853
<TOTAL-ASSETS> 58,163 80,829
<CURRENT-LIABILITIES> 8,681 9,685
<BONDS> 0 0
0 0
0 0
<COMMON> 2,268 2,245
<OTHER-SE> 47,214 68,899
<TOTAL-LIABILITY-AND-EQUITY> 58,163 80,829
<SALES> 0 0
<TOTAL-REVENUES> 32,766 42,320
<CGS> 0 0
<TOTAL-COSTS> 20,154 20,297
<OTHER-EXPENSES> 15,879 12,592
<LOSS-PROVISION> 300 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (18,430) (3,467)
<INCOME-TAX> 4,052 1,054
<INCOME-CONTINUING> (22,482) (4,521)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (22,482) (4,521)
<EPS-BASIC> (0.99) (0.20)
<EPS-DILUTED> (0.99) (0.20)

</TABLE>