##### Table of Contents

________________________________________________________________________________

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-K

|                                                |  |                                                                                                 
|----------------------------------------------- |  | ------------------------------------------------------------------------------------------------
|(Mark One)                                      |  |                                                                                                 
|                                               
|x                                               |  | ANNUAL REPORT PURSUANT TO
    SECTION 13 OR 15(d) OF
    THE SECURITIES EXCHANGE ACT OF 1934    
|For the year ended
    December 31, 2004
    OR
|o                                               |  | TRANSITION REPORT PURSUANT TO
    SECTION 13 OR 15(d) OF
    THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 0-30821


TELECOMMUNICATION SYSTEMS, INC.




|                                                                               |  |                                                   
|------------------------------------------------------------------------------ |  | --------------------------------------------------
|Maryland(State or Other
    Jurisdiction of Incorporation or Organization)     |  | 52-1526369(I.R.S. Employer
    Identification No.)
|275 West Street, Annapolis,
    MD(Address of principal
    executive offices) |  | 21401(Zip Code)                                   

(410) 263-7616








x o


o


x o






DOCUMENTS INCORPORATED BY REFERENCE


|                                                                                                          |  |                                         
|--------------------------------------------------------------------------------------------------------- |  | ----------------------------------------
|Document                                                                                                  |  | Part of 10-K into which
    incorporated
|Proxy Statement related to
    registrants Annual Meeting of Stockholders to be held on
    June 9, 2005 |  | Part III                                











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TABLE OF CONTENTS

|                                               |  |                                                                                                                      |     |             |    | 
|---------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- | --- | ----------- | -- | 
|                                               |  |                                                                                                                      |     | Page Number |   
|                                               |  |                                                                                                                      |     |             |   
|Part I                                         |  |                                                                                                                      |     |             |    | 
|Item 1                                         |  | Business                                                                                                             |     |             | 2  | 
|Item 2                                         |  | Properties                                                                                                           |     |             | 10 | 
|Item 3                                         |  | Legal
    Proceedings                                                                                                |     |             | 11 | 
|Item 4                                         |  | Submission of
    Matters to a Vote of Security Holders                                                              |     |             | 11 | 
|Part II                                        |  |                                                                                                                      |     |             |    | 
|Item 5                                         |  | Market for
    Registrants Common Equity, Related Stockholder Matters and
    Issuer Purchases of Equity Securities |     |             | 12 | 
|Item 6                                         |  | Selected
    Financial Data                                                                                          |     |             | 14 | 
|Item 7                                         |  | Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations                        |     |             | 15 | 
|Item 7A                                        |  | Qualitative
    and Quantitative Disclosure About Market Risk                                                        |     |             | 28 | 
|Item 8                                         |  | Financial
    Statements and Supplementary Data                                                                      |     |             | 30 | 
|Item 9                                         |  | Changes In and
    Disagreements With Accountants on Accounting and Financial
    Disclosure                         |     |             | 30 | 
|Item 9A                                        |  | Controls and
    Procedures                                                                                          |     |             | 30 | 
|Item 9B                                        |  | Other
    Information                                                                                                |     |             | 30 | 
|Part III                                       |  |                                                                                                                      |     |             |    | 
|Item 10                                        |  | Directors and
    Executive Officers of the Registrant                                                               |     |             | 31 | 
|Item 11                                        |  | Executive
    Compensation                                                                                           |     |             | 31 | 
|Item 12                                        |  | Security
    Ownership of Certain Beneficial Owners and Management                                                   |     |             | 31 | 
|Item 13                                        |  | Certain
    Relationships and Related Transactions                                                                   |     |             | 31 | 
|Item 14                                        |  | Principal
    Accountant Fees and Services                                                                           |     |             | 31 | 
|Part IV                                        |  |                                                                                                                      |     |             |    | 
|Item 15                                        |  | Exhibits,
    Financial Statement Schedules                                                                          |     |             | 32 | 
|Signatures                                     |  |                                                                                                                      | 33  |            
|Exhibit Index                                  |  |                                                                                                                      | 34  |            
|Index to
    Consolidated Financial Statements |  |                                                                                                                      | F-1 |            
|Exhibit 12.1                                  
|Exhibit 21.1                                  
|Exhibit 23.1                                  
|Exhibit 31.1                                  
|Exhibit 31.2                                  
|Exhibit 32.1                                  
|Exhibit 32.2                                  
|Exhibit 99.1                                  



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##### Table of Contents

This document contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of
1934, as amended. Forward-looking statements are statements
other than historical information or statements of current
condition. We generally identify forward-looking statements by
the use of terms such as believe,
intend, expect, may,
should, plan, project,
contemplate, anticipate, or other
similar statements. Examples of forward looking statements in
this Annual Report on Form 10-K include: the statement
about our expectations concerning the continued growth in the
use of wireless communications, the statement concerning our
belief in our ability to leverage our expertise to provide
wireless infrastructure to first responders in the U.S.; the
statement concerning our intent to expand our domestic and
international carrier base by capitalizing on our relationships
with original equipment manufacturers; the statement concerning
our intent to expand our integrated package of products and
services for wireless carriers and enterprises; the statements
regarding our belief as to the sufficiency of our capital
resources to meet our anticipated working capital and capital
expenditures for the next twelve months; the statement that we
expect to compete primarily on the basis of the functionality,
breadth, time to market, ease of integration, price and quality
of our products and services; and the statement concerning our
expectations with regard to research and development expenses.
Other such statements include without limitation risks and
uncertainties relating to our financial results and our ability
to (i) reach profitability as early as anticipated or at
all, (ii) continue to rely on our customers and other third
parties to provide additional products and services that create
a demand for our products and services, (iii) conduct our
business in foreign countries, (iv) adapt and integrate new
technologies into our products, (v) develop software
without any errors or defects, (vi) protect our
intellectual property rights, (vii) implement our business
strategy, (viii) realize backlog, and (ix) achieve
continued revenue growth in the foreseeable future for our
E9-1-1 business. This list should not be considered exhaustive.

These forward-looking statements relate to our plans, objectives
and expectations for future operations. We base these statements
on our beliefs as well as assumptions made using information
currently available to us. In light of the risks and
uncertainties inherent in all projected operational matters, the
inclusion of forward-looking statements in this document should
not be regarded as a representation by us or any other person
that our objectives or plans will be achieved or that any of our
operating expectations will be realized. Revenues, results of
operations, and other matters are difficult to forecast and
could differ materially from those projected in the
forward-looking statements contained in this Annual Report on
Form 10-K as a result of factors discussed in
Managements Discussion and Analysis of Financial
Conditions and Results of Operations, the matters
discussed in Risk Factors Affecting Our Business and
Future Results, which are included as Exhibit 99.01
hereto, and those factors discussed elsewhere in this Annual
Report on Form 10-K including, changes in economic
conditions, technology and the market in general, and our
ability to adapt our products and services to these changes. We
undertake no obligation to release publicly the results of any
future revisions we make to forward-looking statements to
reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events. We caution you
not to put undue reliance on these forward-looking statements.

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##### Table of Contents

Item 1.
    BusinessOverview

TeleCommunication Systems, Inc. applies highly reliable wireless
data communications technology to solutions for customers.

We are a Maryland corporation founded in 1987 with our
headquarters located at 275 West Street, Annapolis, Maryland
21401. Our Web address is www.telecomsys.com. The information
contained on our Web site does not constitute part of this
Annual report on Form 10-K. All of our filings with the
Securities and Exchange Commission will be available through a
link on our website. The terms TCS, we,
us and our as used in this Annual Report
on Form 10-K refer to TeleCommunication Systems, Inc. and
its subsidiaries as a combined entity, except where it is made
clear that such terms mean only TeleCommunication Systems, Inc.

On January 13, 2004, we purchased the Enterprise business
unit of Aether Systems, Inc. with an effective date of
January 1, 2004. On September 20, 2004, we acquired
substantially all the assets of Kivera, Inc. Prior to 2004, we
managed our business in three operating segments: Network
Software, Service Bureau and Network Solutions. During the first
three quarters of 2004, we combined the previous Network
Software and Service Bureau units into a single
Carrier segment; we renamed Network Solutions
Government, and we managed the business acquired from
Aether as our Enterprise segment. In the fourth
quarter of 2004, we realigned our segments to better manage the
business subsequent to the Enterprise and Kivera acquisitions.
Our two operating segments are now (i) our Commercial
Applications Segment, which consists of the previous Network
Software and Service Bureau segments, along with the newly
acquired businesses and (ii) our Government segment which
consists of the previous Network Solutions segment. The
following Business Overview describes TCS after the 2004
realignment of our segments.

Commercial Applications Segment: Our carrier software
system products enable wireless carriers to deliver short text
messages, location information, internet content, and other
enhanced communication services to and from wireless phones. We
earn carrier software revenue through the sale of licenses,
deployment and customization fees and maintenance fees. Pricing
is generally based on the volume of capacity purchased from us
by the carrier. As of December 31, 2004, we had deployed
85 software systems for our customers in wireless carrier
networks around the world, including those of Verizon Wireless,
Vodafone, T-Mobile, Telefonica and its affiliate Vivo, Alltel,
and Hutchison Whampoas
3tm-brand
third generation networks. We also provide carrier technology on
a hosted, i.e., service bureau basis; that is, customers use our
software functionality through connections to and from our
network operations centers, paying us monthly based on the
number of subscribers, cell sites, or call center circuits, or
message volume. We provide enhanced 9-1-1 (E9-1-1) services,
commercial location-based services, and inter-carrier text
message distribution services on a service bureau basis. As of
December 31, 2004, we provide E9-1-1 service under
contracts with 36 wireless carrier networks in the U.S. and
Puerto Rico, as well as Voice-Over-Internet-Protocol
(VOIP) service providers.

Using our proprietary
Fusiontm
behind-the-enterprise-firewall platform uniting messaging,
synchronization and web technologies, the Commercial Application
segments
20/20 Deliverytm
application enables package and vehicle tracking, productivity
tools, and the ability to capture digital signatures for proof
of delivery. We also generate subscriber revenue as a reseller
of Research in Motions BlackBerry® devices and
service, and as a provider of wireless client device software
applications, including access to current traffic information
and real-time financial market data to users.

Government Segment: We design, furnish, install and
operate wireless and data network communication systems,
including our SwiftLink® deployable communication systems,
and incorporating high speed, satellite, and internet protocol
technology. More than 550 of our SwiftLink® deployable
communication systems are in use for security, defense, and law
enforcement around the world. We also own and operate satellite
teleport facilities. Since our founding in 1987 we have provided
communication systems integration, information technology
services, and software solutions to the U.S. Department of
Defense and other government customers.

2



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##### Table of Contents

We continue to protect our intellectual property rights, and
currently have 30 U.S. patents regarding wireless
messaging and location applications, and over 80 patent
applications pending.

Enabling Convergent Technologies®, Swiftlink®,
XYPOINT®, Wireless Internet
Gatewaytm,
Voyagertm,
Attachétm,
20/20
Deliverytm,
Fusiontm,
FX
Alerttm
and
MarketCliptm
are trademarks or service marks of TeleCommunication Systems,
Inc. or our subsidiaries. This Annual Report on Form 10-K
also contains trademarks, trade names and services marks of
other companies that are the property of their respective owners.

Market Opportunities

The following trends are driving demand for our products and
services:

Growth in Wireless Subscribers. The use of
wireless communications has increased significantly in recent
years, driven by expanded wireless network coverage, upgraded
high-speed digital wireless networks, more affordable wireless
communications service plans, and higher quality and less
expensive wireless devices. According to the research firm
Informa Telecoms and Media, the number of worldwide cellular
subscribers has grown from 88 million subscribers in 1995
to over 1.6 billion subscribers at year-end 2004. Wireless
growth is expected to continue to increase in all regions around
the world for the foreseeable future. Driving this growth is the
replacement of landline connections with wireless connections.
Many households are now using cellular phones for their only
means of connection. This is especially true for young adults,
but also true in developing countries where wireless may often
be the only means of communications. Countries including China
and Brazil report that they now have more wireless connections
than landline connections.

Cellular Network Improvements to 2.5 and Third Generation
Capabilities. Mobile operators are deploying high-speed
data networks based on 2.5G and 3G technologies that, in
many cases, equal or surpass data rates that are typically
available for residential wireline users. The deployments of
these high-speed wireless data networks have made it possible
for individuals and enterprises to wireless-enable
many services that previously required a wireline connection,
such as connecting to the Internet and accessing corporate data
outside the office. Our company assists both mobile operators
and enterprises to take advantage of the capabilities of
high-speed networks through applications that utilize high-speed
data functionality, including mobile location-based applications
and virtual private network connections to behind-the-firewall
corporate data.

Improving Wireless Device Functionality.
Manufacturers continue to increase the functionality of mobile
devices including phones and personal digital assistants through
higher resolution and color screens, and having computing
capability inside the devices that can run sophisticated
applications. These devices enable the user to take advantage of
the high-speed data networks for Internet and data usage.

Growing Use of Commercial Location-Based Wireless Services
(LBS). A driver of wireless communications growth is the
delivery of timely, highly specialized, interactive and
location-specific information. Technology incorporated in a
growing number of networks and handsets now enables
determination of the handsets location with sufficient
precision to allow useful applications in addition to public
safetys E 9-1-1. The consulting firm In-Stat stated
in December 2004 that 2005 will be a banner year for carrier
deployments of LBS and that as a category, LBS holds much
broader mass-market appeal among wireless subscribers than other
wireless data services such as short messaging services (SMS),
ring tones, and mobile games. Wireless users benefit from the
ability to receive highly customized location-specific
information in response to their queries or via targeted opt-in
content delivered to the wireless device based on its specific
location. Enterprises benefit from wireless location technology
by utilizing routing and tracking applications for their mobile
field forces. Our software provides wireless location solutions
to mobile operators today through our Xypoint® Location
Platform (XLP) that is deployed in six of Hutchison
Whampoas
3tm
networks as well as Vivos network in Brazil. Our
Fusiontm
Platform can also provide location-based solutions to enterprise
applications such as our proof of delivery and logistics
management software.

The FCCs E9-1-1 Mandate. The ability to call
for help or communicate with family members in need is the
primary reason many people cite for having a wireless phone. A
key to enhancing personal safety through

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##### Table of Contents

a cell phone is the availability of E9-1-1 wireless
capabilities. In 1996, the Federal Communications Commission
(FCC) mandated the adoption of E9-1-1 technology by
wireless carriers in two phases. Phase I requires wireless
carriers to provide the public safety answering point (PSAP)
receiving the call with the E9-1-1 callers telephone
number and the location of the call sector from where the call
was made. Phase II will require wireless carriers to locate
wireless E9-1-1 callers with more precise location parameters
specified in the FCC guidelines. The FCC requires wireless
carriers to issue quarterly reports as to their progress and
compliance with FCC-mandated deployment schedules. Approximately
70% of U.S . jurisdictions had implemented Phase I
service, and only 40% had implemented Phase II, according
to the National Emergency Number Association. We are under
long-term contracts, usually three to five years, with 36
wireless carriers, including five of the ten largest in the
United States, to provide both Phase I and Phase II
E9-1-1 service.

Growing Use of the Internet, Corporate Intranets, E-Mail
and Short Messaging. The Internet and internal corporate
data networks, or intranets, have emerged as global
communications channels that allow users to share information
and conduct business transactions electronically. E-mail and
short messaging services (SMS) are increasingly important
means of communication, with both the number of users and
messages per individual projected to increase significantly.
Mobile operators in the United States are experiencing rapid SMS
traffic growth according to the Cellular Telecommunications and
Internet Association (CTIA) and statistics from
mobile operators. Verizon Wireless has announced that it sent
over 2.6 billion text messages during the third quarter of
2004, while Cingular announced that it had delivered over
1.4 billion SMS messages in the third quarter of 2004,
representing an increase of 60% from third quarter 2003. We
provide solutions for mobile operators to receive and route
e-mail and SMS messages through our Short Message Service Center
and Wireless Internet Gateway systems. We also deliver secure
corporate intranet data to and from customers mobile field
forces through our 20/20
Deliverytm
systems and our subscriber services for access to real time
financial market data.

Growing Use of Wireless Communications and Location
Technology for Defense, Intelligence and Security.
Wireless communications and use of location technology are key
initiatives within the Federal government for both security
requirements as well as supply chain management. For Homeland
Security, wireless communications in emergencies are of
paramount importance, as emergency personnel need to be able to
communicate and share information across agencies and
departments where wireline systems may be unavailable.

Use of Wireless Technology with Location-Based Asset
Tracking for Government Supply Chain Management. The
Department of Defense (DOD) is mandating the use of asset
tracking throughout its logistics supply chain through the use
of technologies such as radio frequency identification
technology (RFID.) We believe that our expertise in the areas of
wireless E 9-1-1, location and messaging services, and
secure satellite communications can be leveraged to provide the
needed wireless infrastructure for Homeland Security and DOD and
we are currently pursuing opportunities to provide such products
and services. Our SwiftLink® deployable communication
systems are also increasingly used by military and other
government agencies around the globe for communications in times
of emergencies. SwiftLink® is designed to provide secure
voice and data communications through encrypted satellite links.

Business Strategy

We plan to continue to develop and sell software and engineered
systems which we will deliver through deployment in customer
networks or through hosted and subscription business models. Our
development investment is focused on the delivery of internet
content, proprietary third party content, short messages,
location information, corporate network data and other enhanced
data communication services to and from wireless devices. The
key elements of our strategy are to:




    Adapt our Software and Integration Capabilities to Evolving
    Carrier and Federal Government Opportunities. Mobile
    operators and the federal government increasingly seek
    integrated solutions that can harness both messaging
    capabilities of networks and location information of end-users.
    We are well positioned to address the evolving integration needs
    of our commercial and government clients through our
    demonstrated expertise in both messaging and location. Mobile
    operators have made very large4



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##### Table of Contents

capital expenditure investments in
    infrastructure for wireless data and location technologies.
    While originally envisioned as separate technologies, we have
    the ability to integrate messaging and location technologies to
    provide value-added services and applications for the
    operators end-users. The federal government is also
    increasingly becoming a client of commercial
    carriers network capabilities. We are working with our
    government and military customers to tap into this potential,
    for civilian security and defense requirements. For our
    government customers, we can also utilize the highest levels of
    military encryption capabilities for secure communications
    throughout the globe.


    Expand Our Sales and Marketing Capabilities. We are
    developing relationships with communication infrastructure
    providers in order to expand our sales channels for our carrier
    software products and services. We have historically leveraged
    our strategic relationships with original equipment
    manufacturers to market our Commercial Applications segment
    products to wireless carriers worldwide. We are adding
    partnerships for our location technologies.


    Grow Our Wireless Carrier Customer Base. We now serve or
    are under contract with 56 wireless carrier networks in
    15 countries. We intend to expand our domestic and
    international carrier base by capitalizing on our relationships
    with original equipment manufacturers and establish new
    distribution partnerships and by expanding our own sales and
    marketing initiatives. We will continue to develop network
    software for wireless carriers that operate on all major types
    of networks.
    Grow Our Enterprise Customer Base. We now serve over
    1,000 enterprises with logistics management, financial
    market data, and data network access technology. We intend to
    expand our enterprise base by expanding our own sales and
    marketing initiatives and expanding our enterprise offerings,
    especially those offerings that take advantage of mobile
    operators high-speed data networks.
    Develop and Enhance Our Technology. We will continue to
    invest in our underlying technology and to capitalize on our
    expertise to meet the growing demand for sophisticated wireless
    applications. As of January 1, 2005, our staff included
    361 engineers who specialize in wireless network and client
    software development, wireless service bureau operations and
    integrated network solutions. We also have research and
    development relationships with wireless handset manufacturers,
    wireless carriers, and content and electronic commerce
    providers. Our
    Xypointtm
    platform architecture efficiently integrates our presence,
    privacy, location, call control and messaging technology,
    resulting in reduced costs, increased reliability, more
    efficient deployments, compatibility with our existing products
    and a migration path to third generation services. Our
    Fusiontm
    platform unites messaging, synchronization, and web technologies
    for enterprise network applications.
    Leverage Our Expertise in Accessing Information Stored Inside
    Wireless Networks. We will continue to leverage our
    knowledge of complex call control technology, including
    Signaling System 7 and internet protocol standards, to unlock
    valuable information such as user location, device on/off status
    and billing and transaction records that resides inside wireless
    networks and is difficult to retrieve and utilize. Using this
    information, we intend to expand the range of capabilities that
    wireless data technology can accomplish for our customers.
    Pursue Select Acquisitions. We intend to continue to
    selectively pursue acquisitions of companies and technologies in
    order to increase the scale and scope of our operations, market
    presence, products, services and customer base.Product and Service Offerings



I.
    Commercial hosted, subscriber, and maintenance services:We own and lease network operation centers that host software
for which customers make recurring monthly usage payments. Our
hosted offerings include wireless and Voice Over IP E9-1-1,
hosted commercial location-based applications, and financial
market data applications. Through wireless carriers, we sell
subscriptions to services using our client software applications
such as Traffic
Matterstm
and Friend
Findertm,
sometimes in collaboration with owners of related brand names
such as Rand McNally. We also provide BlackBerry® network
access service.

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##### Table of Contents

Hosted Location-Based Services, including E9-1-1 and
    Hosted Position Determining Entity
    (PDE) Applications. Our E9-1-1 service bureau works
    with wireless carriers and local emergency services in
    compliance with the Federal Communication Commission
    requirements. When a wireless subscriber covered by this service
    makes an E9-1-1 call from his or her wireless phone, the
    software (1) identifies the call as an emergency call,
    (2) accesses the handsets location information from
    the wireless network (either imprecise or precise),
    (3) routes the call to the appropriate E9-1-1 jurisdiction,
    (4) translates the information into a user friendly format,
    and (5) transmits the data to the local emergency service
    call center. Our E9-1-1 service operates on a platform that
    resides at our two fully redundant data centers in Seattle,
    Washington and Phoenix, Arizona. As of December 31, 2004,
    we are under contract to provide E9-1-1 services to
    36 wireless carriers, including Verizon, Cingular and US
    Cellular. We also provide a related hosted software service,
    Qualcomms
    Snaptracktm
    Position Determining Entity (PDE) application that enables
    carriers to access the more precise location data needed for
    Phase II E9-1-1 compliance without purchasing their own
    license to the PDE software. During 2004, we entered into our
    first contract to provide Phase II E9-1-1 service.Customer subscriptions to
    marketStreamtm,
    FX
    Alerttmand
    MarketCliptm.
    TCS delivers real-time financial market data over various
    wireless devices and networks. FX
    Alerttm
    and
    MarketCliptm
    cover the New York Stock Exchange (NYSE), National Association
    of Securities Dealers (NASDAQ), Over-the-Counter Market Bulletin
    Board (OTCBB), American Stock Exchange (AMEX), Options Price
    Reporting Authority (OPRA), currencies, euro crosses, minor and
    exotic currencies, currency Hi-Los, world indices, money
    markets, world yields and related financial news. Our financial
    market data services work throughout the US and in most major
    European countries.Customer subscriptions to application-based services such
    as Traffic
    Matterstm.
    TCS strategy is to have a suite of location-based
    applications that carrier subscribers sign up for and pay
    recurring monthly fees. TCS first major application
    launched on multiple US carriers is a real-time traffic
    application called Traffic
    Matterstm
    that is sold under the Rand McNally brand. TCS expects to launch
    other location-based applications in 2005 involving fleet
    tracking, family finder, and turn-by-turn navigation.BlackBerry® Enterprise service. Our
    BlackBerry® solution is designed to keep workforces
    connected by email, contact information and other enterprise
    data over Advanced Triple DES encryption technology.
    BlackBerry® by Aether® offers flat-rate wireless
    service pricing, your choice of networks, value-added
    applications such as internet browsing, paging, document
    management, and enterprise-wide customer care. We are one of the
    largest value added resellers of BlackBerry® devices and
    airtime in the United States.Software and system maintenance. For our installed
    base of systems in use by customers (see descriptions below) we
    provide ongoing operational support, including administration of
    system components, system optimization and configuration
    management. Maintenance services include tracking customer
    support issues, trouble shooting, and developing and installing
    maintenance releases. We typically provide maintenance services
    for an annual fee paid in advance, which is priced based on the
    cumulative license fees we have billed for the systems being
    supported.

II.
    Systems:A. Commercial Licensed Software-based Systems: We
design and develop software products for wireless carrier and
enterprise networks that enable the delivery of secure and
personalized content, services and transactions to wireless
devices. We design our software using industry standards for
easy implementation, customization and interoperability with
other network components. Most of our commercial software is now
designed and delivered together with third party software and
related hardware, which is integrated into new and existing
networks by our engineers. Our commercial software-based system
offerings include:



1. Xypoint® Location Platform (XLP) and
    Applications for Location-based Services: Our
    Xypoint® Location Platform system interacts with the
    wireless network to extract location information (the
    X/Y coordinates) of the users device. In
    order to determine a users location with sufficient
    precision for public safety compliance and for commercial
    location-based applications, technology interacts with6



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network triangulation software which some carriers have added to
    cell towers and switches in the network, and it can work with
    networks that have incorporated Assisted GPS systems that use
    Geographic Position System (GPS) chips in user handsets. Our
    platform also provides privacy controls so that the wireless
    device user controls access to the users location
    information. The X/Y information extracted from
    networks by our XLP is used by application software including
    E 9-1-1, driving directions, identification of locations
    near the end user (such as gas stations, restaurants, or
    hotels), and locating other network subscribers near the
    users current position.2. Wireless Messaging Gateway and Message
    Portal. Our Wireless Messaging Gateway is a portal for
    two-way data communication between users of wireless networks
    and the internet. The Wireless Messaging Gateway allows users to
    customize the services they receive on wireless devices by
    setting up a user profile through a single Internet-based
    procedure. Wireless carriers can access these user profiles and
    usage data to gain a better understanding of customer behavior.
    The Wireless Messaging Gateway allows additional wireless
    applications to be added as desired. Our Message Portal software
    supports personalization, instant messaging and spam blocking
    capabilities that can be independently customized by the end
    user. This allows a wireless carrier to provide a unique,
    customizable user interface for their subscribers in order to
    support delivering short messages and e-mail to the users
    mobile devices.3. Short Message Service Center. Our Short
    Message Service Center software enables users to send and
    receive text or data messages to and from wireless devices. It
    provides wireless carriers efficient two-way data delivery and
    supports major industry standards for wireless communications.
    The Short Message Service Center also allows the handset to
    function as a pager and provides single touch callback
    capabilities. The Short Message Service Center can be combined
    with our Wireless Messaging Gateway software to enable
    transmission of short messages between the Internet and wireless
    devices.4. FusiontmPlatform and 20/20
    DeliverytmApplication. The
    Fusiontm
    platform, which is technology that we acquired from Aether
    Systems in January 2004, is an open, standards-based mobile
    enterprise platform that unites messaging, synchronization and
    XML-based web technologies for wireless and mobile applications
    on devices such as phones and personal digital assistants.
    Fusiontm
    can operate behind the enterprise firewall to allow
    secure corporate communications to mobile field workers. 20/20
    Deliverytm,
    which is built on our Fusion platform, is a mobile asset
    management and logistics solution that enables visibility into
    the supply chain by providing real-time vehicle monitoring,
    driver communication, and confirmation-of-delivery information.B. Government Deployable Communication Systems. We
have designed and produce SwiftLink®, lightweight,
satellite-based secure communication systems, which can be
immediately deployed in remote areas where other means of
reliable communications may not be available. SwiftLink®
provides secure voice, video and data communications for up to
eight people and a single person can deploy the system in less
than ten minutes creating critical communication channels from
any location around the world. Uses include emergency response,
news reporting, public safety, drilling and mining operations,
field surveys and other activities that require remote
capabilities for video and data transmissions.



III.
    Services:In addition to hosted, subscriber and maintenance services which
generate monthly, usage-based revenue for indefinite periods, we
enter into fee-for-service contracts under which revenue is
generated based on contract labor billing rates or based on
fixed fees for deliverables.

A. Commercial location database maintenance
services. We provide telematic database maintenance services
for DENSO Corporation of Japan, (a global supplier to the
automotive industry) through the compilation of geographic
information databases used in Densos in-vehicle navigation
systems that are in products including Toyota, Lexus, Land Rover
and Lincoln brands.

B. Government Services.



1. Network Operation Support. We design,
    install and operate networks that integrate computing and
    communications, including systems that provide communications
    via both satellite and terrestrial links. We7



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##### Table of Contents

can provide complete network installation services from cabling
    infrastructure to complex communications system components. We
    also provide ongoing network operation and management support
    services under multi-year contracts with government customers.2. Custom Software. We develop custom
    software applications to support specific customer requirements.
    We have historically tailored enhancements of our software
    products for wireless carrier customers and developed custom
    applications for government agencies.3. Satellite Teleports. We own and operate
    high-speed satellite communications teleports in Baltimore,
    Maryland and Manassas, Virginia that are connected to the public
    switched telephone network. These facilities provide transport
    services for internet protocol (IP)-based media content
    consisting of Voice Over IP (VOIP), Internet, video and
    messaging data using Very Small Aperture Terminal
    (VSAT) satellite technology as part of our communication
    solutions for our customers.Customers

Commercial Applications Segment. Our commercial customers
include wireless telecommunications carriers in the United
States and foreign countries, either directly or through our
channel partners. We provide licensed software-based systems,
and hosted service bureau offerings in our Commercial
Applications segment to carriers around the world. Our wireless
carrier customers include Cingular Wireless, Verizon Wireless,
and the Hutchison Whampoa third generation 3 brand
networks. Customers for our enterprise systems include Corporate
Express and Staples. Commercial subscriber contract customers
include Johnson & Johnson, Goldman Sachs, Bank of
America, and Merrill Lynch.

Government Segment. Our major Government segment
customers include units of the U.S. Departments of Defense,
Justice, and State, the General Services Administration, the
City of Baltimore, Computer Sciences Corporation, and Northrop
Grumman.

Backlog

As of January 1, 2005, we had unfilled orders, or backlog,
of approximately $104 million, of which $64 million
was in our commercial applications segment and $40 million
was in our government segment. Approximately $58 million of
January 1, 2005 backlog is expected to be realized in 2005.
Total backlog as of January 1, 2004 was approximately
$93 million. Backlog for our hosted services is computed by
multiplying the most recent months recurring revenue times
the remaining months under existing long-term agreements with no
assumption as to additional deployments of Public Safety
Answering Point connections. The backlog at any given time may
be affected by a number of factors, including contracts being
renewed or new contracts being signed before existing contracts
are completed. Some of our backlog could be canceled for causes
such as late delivery, poor performance and other factors.
Accordingly, a comparison of backlog from period to period is
not necessarily meaningful and may not be indicative of eventual
actual revenue.

Sales and Marketing

We sell our products and services through our direct sales force
and through indirect channels. Our direct sales force consists
of approximately 31 professionals in the U.S. and Europe. We
have also historically leveraged our relationship with original
equipment manufacturers (OEMs) to market our commercial systems
to wireless carrier customers, including a relationship with
Lucent Technologies that began in 1996. Additional indirect
sales relationships include Ericsson, Motorola, Symbol,
Intermec, and Qualcomm. During the indirect sales process, as
well as during installation and maintenance, we have extensive
direct contact with prospective carrier customers. We are
pre-qualified as an approved vendor for some government
contracts, and some of our products and services are available
to government customers via the General Services Administration
information technology schedule 70. Our marketing efforts
also include advertising, public relations, speaking engagements
and attending and sponsoring industry conferences.

8



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##### Table of Contents

Competition

The markets for our products and services are competitive. The
adoption of industry standards may make it easier for new market
entrants to compete with us. We expect that we will continue to
compete primarily on the basis of the functionality, breadth,
time to market, ease of integration, price and quality of our
products and services. The market and competitive conditions are
continually developing. Our software products for both carriers
and enterprises compete with many similar products provided by
other companies. It is difficult to present a meaningful
comparison between our competitors and us because there is a
large variation in revenue generated by different customers,
different products and services, as well as the different
combinations of products and services offered by our
competitors. We cannot, therefore, quantify our relative
competitive position.

Our current and potential competitors include:




    Commercial Applications Segment. Openwave, Logica CMG,
    Huawei Technologies, Comverse, NEC, Intrado, InfoSpace; IBM,
    Semotus Solutions, and Gearworks.
    Government Segment. Computer Sciences Corporation;
    Electronic Data Systems Corporation; Keane, Inc.; Northrop
    Grumman; Turtle Mountain Communications, Inc.Many of our existing and potential competitors have
substantially greater financial, technical, marketing and
distribution resources than we do. Many of these companies have
greater name recognition and more established relationships with
their target customers. Furthermore, these competitors may be
able to adopt more aggressive pricing policies and offer
customers more attractive terms than we can. With time and
capital, it would be possible for our competitors to replicate
our products and services.

We partner with vendors of precise location technology. Certain
of our partners may attempt to compete with our operating
platform by developing their own transmission platform or by
purchasing another mobile location platform. The markets for
commercial location and other mobile wireless applications for
carriers and enterprises are relatively new and continually
developing. The convergence of wireless technologies and the
Internet is creating many initiatives to bring data and
transaction capabilities to wireless devices. There is a wide
array of potential competitors in this market, including
providers of competing location management platforms, competing
e-mail products, competing enterprise mobility platforms and
other competing applications for wireless devices.

Research and Development

Our success depends on a number of factors, which include our
ability to identify and respond to emerging technological trends
in our target markets, to develop and maintain competitive
products, to enhance our existing products by adding features
and functionality that differentiate the products from those of
our competitors and to bring products to market on a timely
basis and at competitive prices. As of January 1, 2005, our
staff included 361 professionals who specialize in wireless
network and client software development. Since 1996, we have
made substantial investments in research and development, most
of which has been devoted to the development of carrier and
enterprise network software products and services. We are
primarily focusing our current research and development
investments in cellular location-based technology and government
and enterprise customer needs, such as an asset tracking
solution. Research and development expenditures, including
capitalized costs, for the years ended December 31, 2004,
2003, and 2002 were approximately $20 million,
$17 million, and $17 million, respectively.

We actively support existing telecommunications standards and
promote new telecommunications standards in order to expand the
market for wireless data. In 1996, we co-founded the Intelligent
Network Forum; an organization dedicated to expanding the role
of intelligent networks in telecommunications. As part of our
strategy to expand the role of short messaging, we co-founded
the Short Message Peer-to-Peer Forum in 1999.

Certain of our government customers contract with us from time
to time to conduct research on telecommunications software,
equipment and systems.

9



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##### Table of Contents

Intellectual Property Rights

We rely on a combination of patent, copyright, trademark,
service mark and trade secret laws and restrictions to establish
and protect certain proprietary rights in our products and
services.

We currently hold thirty issued patents relating to wireless
text messaging, inter-carrier messaging, number portability, GPS
ephemeris data, emergency public safety data routing and
electronic commerce. We have filed over 80 additional patent
applications for certain apparatus and processes we believe we
have invented to enable key features of the locations services,
wireless text alerts, Financial Market Data, Short Message
Service Center, Prepaid Wireless, mobile-originated data and
E9-1-1 network software. There is no assurance that these
patent applications will result in a patent being issued by the
U.S. Patent and Trademark Office or other patent offices,
nor is there any guarantee that any issued patent will be valid
and enforceable. Additionally, foreign patent rights may or may
not be available or pursued in any technology area for which
U.S. patent applications have been filed.

Under our development agreement with Lucent, we developed the
Short Message Service Center software in late 1996. Under the
development agreement, we share ownership rights in this
software application with Lucent. The scope of each partys
ownership interest is subject to each partys various
underlying ownership rights in intellectual property and also to
confidential information contributed to the applications, and
could be subject to challenge by either party.

As a member of various industry standard-setting forums, we have
agreed to license certain of our intellectual property to other
members on fair and reasonable terms to the extent that the
license is required to develop non-infringing products under the
specifications promulgated by those forums.

Employees

As of December 31, 2004, we had 588 employees,
581 full-time and 7 part-time. We believe relations
with our employees are good. None of our employees is
represented by a union.

Geographical Information

During the fiscal years ended December 31, 2004, 2003, and
2002, our total revenues generated from products and services in
the U.S. were $130.2 million, $88.5 million, and
$83.3 million, respectively, and our total revenues
generated from products and services outside of the
U.S. were $12.7 million, $3.6 million, and
$8.7 million, respectively. As of December 31, 2004,
$17.5 million of our tangible long-lived assets were
located in the U.S. and $0.4 million of our tangible
long-lived assets were located outside the U.S. The assets
located outside the U.S. are used by our Commercial
Applications segment. As of December 31, 2003, all of our
long-lived assets were located in the U.S. We are subject
to risks related to offering our products and services in
foreign countries. See the information under the heading
Risk Factors  Because our product offerings are
sold internationally, we are subject to risks of conducting
business in foreign countries included in
Exhibit 99.01 to this report.







Item 2.
    PropertiesOur principal executive office is located in Annapolis, Maryland
in a 27,000 square foot facility under a lease expiring in
March 2008. We have a second 26,000 square foot facility in
Annapolis, Maryland under a lease expiring in April 2010. The
Annapolis facilities are utilized for the executive and
administrative offices, as well as portions of our Commercial
Applications and Government segments. Other leased facilities
include a 33,000 square foot facility in Owings Mills,
Maryland under a lease expiring March 2008, a 50,000 square
foot facility in Seattle, Washington under a lease expiring in
September 2010, an 11,000 square foot facility in Oakland,
California under a lease expiring May 2007, and a
10,000 square foot facility in Tampa, Florida under a lease
expiring in December 2009. We also lease a hosting facility in
Phoenix, Arizona in a 1,400 square foot office under a
lease that expires in February 2006, which is utilized by our
Commercial Applications segment. Our international locations
lease a total of approximately 7,000 square feet of office

10



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##### Table of Contents

space in London, Madrid, Amsterdam, and Stockholm. The leases
for these facilities have varying expirations, but the
agreements are generally short-term and renewable.

In addition to the leased office space, we own a 7-acre teleport
facility in Manassas, Virginia, and lease space in Baltimore, MD
utilized for teleport services primarily to our Government
segment customers.







Item 3.
    Legal ProceedingsIn November 2001, a shareholder class action lawsuit was filed
against us, certain of our current officers and a director, and
several investment banks that were the underwriters of our
initial public offering (the Underwriters):
Highstein v. Telecommunication Systems, Inc.,
et al., United States District Court for the Southern
District of New York, Civil Action No. 01-CV-9500. The
plaintiffs seek an unspecified amount of damages. The lawsuit
purports to be a class action suit filed on behalf of purchasers
of our Class A Common Stock during the period
August 8, 2000 through December 6, 2000. The
plaintiffs allege that the Underwriters agreed to allocate our
Class A Common Stock offered for sale in our initial public
offering to certain purchasers in exchange for excessive and
undisclosed commissions and agreements by those purchasers to
make additional purchases of our Class A Common Stock in
the aftermarket at pre-determined prices. The plaintiffs allege
that all of the defendants violated Sections 11, 12 and 15
of the Securities Act of 1933, as amended, and that the
underwriters violated Section 10(b) of the Securities
Exchange Act of 1934, as amended, and Rule 10b-5
promulgated thereunder. The claims against us of violation of
Rule 10b-5 have been dismissed with the plaintiffs having
the right to re-plead. On February 15, 2005, the Honorable
Judge Shira A. Scheindlin, U.S.D.J. entered an order
preliminarily approving a settlement proposal which we believe
will result in a resolution that will not materially impact our
consolidated results of operations, financial position, or cash
flows. We intend to continue to defend the lawsuit until the
settlement has received final approval or the matter is resolved
otherwise. More than 300 other companies have been named in
nearly identical lawsuits that have been filed by some of the
same law firms that represent the plaintiffs in the lawsuit
against us, and we believe that the majority of those companies
will participate in the same settlement if approved.

Research In Motion Limited (RIM) which supplies our
Commercial Applications segment with hardware and wireless
services that it in turn packages with other services and
resells, is engaged in legal proceedings with NTP Inc. which
alleges that certain RIM products infringed on patents held by
NTP Inc. This creates uncertainty regarding RIMs ability
to continue to supply our enterprise customers with services.
RIMs inability to supply services to our enterprise
customers could cause a loss of revenue and increase our net
losses.

Other than the items discussed immediately above, we are not
currently subject to any other material legal proceedings.
However, we may from time to time become a party to various
legal proceedings arising in the ordinary course of our business.







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

11



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##### Table of Contents

Part II







Item 5.
    Market for Registrants Common Equity, Related
    Stockholder Matters and Issuer Purchases of Equity
    SecuritiesOur Class A Common Stock has been traded on the NASDAQ
National Market under the symbol TSYS since our
initial public offering on August 8, 2000. The following
table sets forth, for the periods indicated, the high and low
closing prices for our common stock as reported by the NASDAQ
Stock Markets National Market:

|                                                 |  |      |      |  |     |   |      | 
|------------------------------------------------ |  | ---- | ---- |  | --- | - | ---- | 
|                                                 |  | High |      |  | Low |  
|                                                 |  |      |      |  |     |  
|2005                                             |  |      |      |  |     |   |      | 
|First Quarter 2005 (as of
    February 14, 2005) |  | $    | 3.22 |  |     | $ | 2.12 | 
|                                                
|2004                                             |  |      |      |  |     |   |      | 
|First Quarter 2004                               |  | $    | 8.39 |  |     | $ | 4.80 | 
|Second Quarter 2004                              |  | $    | 8.30 |  |     | $ | 4.20 | 
|Third Quarter 2004                               |  | $    | 6.11 |  |     | $ | 3.18 | 
|Fourth Quarter 2004                              |  | $    | 3.85 |  |     | $ | 2.75 | 
|                                                
|2003                                             |  |      |      |  |     |   |      | 
|First Quarter 2003                               |  | $    | 2.18 |  |     | $ | 1.49 | 
|Second Quarter 2003                              |  | $    | 2.25 |  |     | $ | 1.52 | 
|Third Quarter 2003                               |  | $    | 4.70 |  |     | $ | 2.32 | 
|Fourth Quarter 2003                              |  | $    | 6.12 |  |     | $ | 4.09 | 



Dividend Policy




Change in Securities and Use of Proceeds






12



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##### Table of Contents

cash through the sale of 2,500,000 shares of our
Class A Common Stock. We used the majority of the proceeds
from this offering to fund the acquisition of Kivera, Inc. on
September 20, 2004 as described in Note 3 to our
Consolidated Financial Statements and for a $1 million cash
fee paid in connection with a Waiver Agreement signed on the
same day. The remainder of the proceeds, approximately
$3 million net of direct costs of the offering, was used to
fund capital spending.

The Waiver Agreement (the Waiver) with the holder of
the Debenture modified certain provisions of the Debenture as
follows: (1) the holder of the Debenture was required to
convert the entire $15 million principal amount into shares
of our Class A Common Stock by the end of 2004,
(2) all of the material restrictive covenants contained in
the Debenture were nullified and (3) the conversion price
set forth in the Debenture was decreased from $5.3753 to
$5.01581 as an inducement to enter into the Waiver (an
adjustment such that conversion of the Debenture yielded an
additional 200,000 shares of Class A Common Stock). As
additional consideration for the holder of the Debenture
agreeing to the Waiver, we paid the holder of the Debenture a
$1 million one-time fee in cash. The $1 million fee
was recognized ratably to debt conversion expense in our
Consolidated Financial Statements as the Debenture was converted
during 2004. The fair value of the additional shares of
Class A Common Stock issued as an inducement, measured as
of the date of the Waiver, was $0.9 million, which was
recognized ratably to debt conversion expense as the Debenture
was converted. The remaining deferred debt discount of
approximately $5.8 million and unamortized deferred
financing fees of $0.7 million as of the date of the Waiver
were recognized as expense ratably as the Debentures were
converted through the end of 2004. Monthly amortization of the
remaining debt discount and deferred financing fees based on the
original term of the Debenture was recognized as interest
expense and the additional expense recognized in 2004 as a
result of the Waiver was recorded as debt conversion expense. As
of December 31, 2004, the $15 million principal amount
of the Debenture was converted into 2,990,015 shares of our
Class A Common Stock. See Notes 4 and 5 to our
Consolidated Financial Statements presented elsewhere in this
Annual Report on Form 10-K.

All of the securities issued by us in connection with these
transactions have been registered under the Securities Act of
1933, as amended.

Issuer Purchases of Equity Securities

None.

13



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##### Table of Contents

Item 6.
    Selected Financial DataThe table that follows presents portions of our consolidated
financial statements. You should read the following selected
financial data together with our Consolidated Financial
Statements and related notes and with Managements
Discussion and Analysis of Financial Condition and Results of
Operations and the more complete financial information
included elsewhere in this Form 10-K. We have derived the
statement of operations data for the years ended
December 31, 2004, 2003 and 2002 and the balance sheet data
as of December 31, 2004 and 2003 from our consolidated
financial statements which have been audited by Ernst &
Young LLP, independent registered public accounting firm, and
which are included beginning on page F-1. We have derived
the statement of operations data for the years ended
December 31, 2001 and 2000 and the balance sheet data as of
December 31, 2002, 2001 and 2000, from our audited
financial statements which are not included in this
Form 10-K. Some prior year data have been reclassified for
comparability to our current financial reporting practices. As
described in Note 1 to our Consolidated Financial
Statements, we have reclassified prior period revenues, direct
cost of revenues, and gross profit for comparability with the
three revenue categories we currently use to manage our
business. The historical results presented below are not
necessarily indicative of the results to be expected for any
future fiscal year. See Managements Discussion and
Analysis of Financial Condition and Results of Operations.

|                                                 |                                                                |                                       |         |        |         |   |         |        |        |   |         |        |        |      |         |        |         |   |        |        |        | 
|------------------------------------------------ | -------------------------------------------------------------- | ------------------------------------- | ------- | ------ | ------- | - | ------- | ------ | ------ | - | ------- | ------ | ------ | ---- | ------- | ------ | ------- | - | ------ | ------ | ------ | 
|                                                 |                                                                | Year Ended December 31,               |        
|                                                 |                                                                |                                       |        
|                                                 |                                                                | 2004**                                |         |        | 2003    |   |         | 2002   |        |   | 2001*   |        |        | 2000 |        
|                                                 |                                                                |                                       |         |        |         |   |         |        |        |   |         |        |        |      |        
|                                                 |                                                                | (In thousands, except per share data) |        
|Statement of Operations
    Data:                |                                                                |                                       |         |        |         |   |         |        |        |   |         |        |        |      |         |        |         |   |        |       
|Revenue                                          |                                                                |                                       |         |        |         |   |         |        |        |   |         |        |        |      |         |        |         |   |        |       
|                                                 | Hosted, subscriber, and maintenance                            |                                       | $       | 82,793 |         |   | $       | 37,656 |        |   | $       | 26,936 |        |      | $       | 18,740 |         |   | $      | 1,262  |       
|                                                 | Systems                                                        |                                       |         | 44,154 |         |   |         | 40,486 |        |   |         | 56,289 |        |      |         | 39,053 |         |   |        | 39,329 |       
|                                                 | Services                                                       |                                       |         | 15,978 |         |   |         | 13,923 |        |   |         | 8,820  |        |      |         | 11,759 |         |   |        | 17,472 |       
|                                                 |                                                                |                                       |         |        |         |   |         |        |        |   |         |        |        |      |        
|                                                 |                                                                | Total revenue                         |         |        | 142,925 |   |         |        | 92,065 |   |         |        | 92,045 |      |         |        | 69,552  |   |        |        | 58,063 | 
|                                                 |                                                                |                                       |         |        |         |   |         |        |        |   |         |        |        |      |        
|Operating costs and expenses:                    |                                                                |                                       |         |        |         |   |         |        |        |   |         |        |        |      |         |        |         |   |        |       
|                                                 | Direct cost of hosted, subscriber,
    and maintenance revenue |                                       |         | 51,197 |         |   |         | 18,082 |        |   |         | 15,741 |        |      |         | 9,535  |         |   |        | 937    |       
|                                                 | Direct cost of systems                                         |                                       |         | 26,621 |         |   |         | 32,299 |        |   |         | 40,297 |        |      |         | 26,668 |         |   |        | 24,730 |       
|                                                 | Direct cost of services revenue                                |                                       |         | 9,669  |         |   |         | 9,835  |        |   |         | 5,744  |        |      |         | 8,819  |         |   |        | 13,978 |       
|                                                 |                                                                |                                       |         |        |         |   |         |        |        |   |         |        |        |      |        
|                                                 |                                                                | Total direct cost of revenue          |         |        | 87,487  |   |         |        | 60,216 |   |         |        | 61,782 |      |         |        | 45,022  |   |        |        | 39,645 | 
|                                                 |                                                                |                                       |         |        |         |   |         |        |        |   |         |        |        |      |        
|                                                 | Hosted, subscriber, and maintenance
    gross profit           |                                       |         | 31,596 |         |   |         | 19,574 |        |   |         | 11,195 |        |      |         | 9,205  |         |   |        | 325    |       
|                                                 | Systems gross profit                                           |                                       |         | 17,533 |         |   |         | 8,187  |        |   |         | 15,992 |        |      |         | 12,385 |         |   |        | 14,599 |       
|                                                 | Services gross profit                                          |                                       |         | 6,309  |         |   |         | 4,088  |        |   |         | 3,076  |        |      |         | 2,940  |         |   |        | 3,494  |       
|                                                 |                                                                |                                       |         |        |         |   |         |        |        |   |         |        |        |      |        
|                                                 |                                                                | Total gross profit                    |         |        | 55,438  |   |         |        | 31,849 |   |         |        | 30,263 |      |         |        | 24,530  |   |        |        | 18,418 | 
|                                                 |                                                                |                                       |         |        |         |   |         |        |        |   |         |        |        |      |        
|                                                 | Research and development                                       |                                       |         | 19,598 |         |   |         | 16,932 |        |   |         | 17,047 |        |      |         | 18,083 |         |   |        | 5,272  |       
|                                                 | Sales and marketing                                            |                                       |         | 12,982 |         |   |         | 8,917  |        |   |         | 10,029 |        |      |         | 13,826 |         |   |        | 6,930  |       
|                                                 | General and administrative                                     |                                       |         | 19,108 |         |   |         | 11,251 |        |   |         | 12,235 |        |      |         | 14,325 |         |   |        | 11,007 |       
|                                                 | Non-cash stock compensation expense                            |                                       |         | 1,195  |         |   |         | 1,501  |        |   |         | 1,554  |        |      |         | 2,587  |         |   |        | 1,711  |       
|                                                 | Depreciation and amortization of
    property and equipment    |                                       |         | 7,795  |         |   |         | 6,612  |        |   |         | 6,156  |        |      |         | 4,550  |         |   |        | 2,388  |       
|                                                 | Amortization of goodwill and other
    intangible assets       |                                       |         | 2,165  |         |   |         | 531    |        |   |         | 553    |        |      |         | 9,226  |         |   |        |       |       
|                                                 | Acquired in-process research and
    development               |                                       |         |       |         |   |         |       |        |   |         |       |        |      |         | 9,700  |         |   |        |       |       
|                                                 | Impairment of goodwill and other
    intangible assets         |                                       |         |       |         |   |         |       |        |   |         |       |        |      |         | 43,000 |         |   |        |       |       
|                                                 |                                                                |                                       |         |        |         |   |         |        |        |   |         |        |        |      |        
|                                                 |                                                                | Total operating costs and expenses    |         |        | 62,843  |   |         |        | 45,744 |   |         |        | 47,574 |      |         |        | 115,297 |   |        |        | 27,308 | 
|                                                 |                                                                |                                       |         |        |         |   |         |        |        |   |         |        |        |      |        
|Loss from operations                             |                                                                |                                       | (7,405  | )      |         |   | (13,895 | )      |        |   | (17,311 | )      |        |      | (90,767 | )      |         |   | (8,890 | )     
|Interest expense                                 |                                                                |                                       | (3,196  | )      |         |   | (1,088  | )      |        |   | (897    | )      |        |      | (684    | )      |         |   | (1,394 | )     
|Debt conversion expense                          |                                                                |                                       | (7,886  | )      |         |   |        |        |        |   |        |        |        |      |        |        |         |   |       |       
|Other (expense)/income, net                      |                                                                |                                       | (61     | )      |         |   | 1,497   |        |        |   | 370     |        |        |      | 1,968   |        |         |   | 1,912  |       
|                                                 |                                                                |                                       |         |        |         |   |         |        |        |   |         |        |        |      |        
|Loss before income taxes                         |                                                                |                                       | (18,548 | )      |         |   | (13,486 | )      |        |   | (17,838 | )      |        |      | (89,483 | )      |         |   | (8,372 | )     
|Income tax benefit                               |                                                                |                                       |        |        |         |   |        |        |        |   |        |        |        |      |        |        |         |   | 2,601  |       
|                                                 |                                                                |                                       |         |        |         |   |         |        |        |   |         |        |        |      |        
|Net loss before extraordinary item               |                                                                | $                                     | (18,548 | )      |         | $ | (13,486 | )      |        | $ | (17,838 | )      |        | $    | (89,483 | )      |         | $ | (5,771 | )     
|                                                 |                                                                |                                       |         |        |         |   |         |        |        |   |         |        |        |      |        
|Net loss                                         |                                                                | $                                     | (18,548 | )      |         | $ | (13,486 | )      |        | $ | (17,838 | )      |        | $    | (89,483 | )      |         | $ | (6,530 | )     
|                                                 |                                                                |                                       |         |        |         |   |         |        |        |   |         |        |        |      |        
|Loss per common share, basic and
    diluted     |                                                                | $                                     | (0.56   | )      |         | $ | (0.45   | )      |        | $ | (0.61   | )      |        | $    | (3.16   | )      |         | $ | (0.39  | )     
|                                                 |                                                                |                                       |         |        |         |   |         |        |        |   |         |        |        |      |        
|Basic and diluted shares used in
    computation |                                                                |                                       | 33,381  |        |         |   | 29,796  |        |        |   | 29,149  |        |        |      | 28,297  |        |         |   | 16,948 |       
|                                                 |                                                                |                                       |         |        |         |   |         |        |        |   |         |        |        |      |        

|                                                                  |  |                    |         |  |      |   |        |      |  |   |        |  |  |      |        |  |  |   |         | 
|----------------------------------------------------------------- |  | ------------------ | ------- |  | ---- | - | ------ | ---- |  | - | ------ |  |  | ---- | ------ |  |  | - | ------- | 
|                                                                  |  | As of December 31, |        
|                                                                  |  |                    |        
|                                                                  |  | 2004**             |         |  | 2003 |   |        | 2002 |  |   | 2001*  |  |  | 2000 |       
|                                                                  |  |                    |         |  |      |   |        |      |  |   |        |  |  |      |       
|                                                                  |  | (In thousands)     |        
|Balance Sheet Data:                                               |  |                    |         |  |      |   |        |      |  |   |        |  |  |      |        |  |  |   |         | 
|Cash and cash equivalents                                         |  | $                  | 18,251  |  |      | $ | 18,785 |      |  | $ | 27,402 |  |  | $    | 42,928 |  |  | $ | 66,117  | 
|Working capital                                                   |  |                    | 20,204  |  |      |   | 28,538 |      |  |   | 31,690 |  |  |      | 46,138 |  |  |   | 72,442  | 
|Total assets                                                      |  |                    | 102,382 |  |      |   | 65,280 |      |  |   | 81,425 |  |  |      | 89,596 |  |  |   | 100,350 | 
|Capital leases and long-term debt
    (including current portion) |  |                    | 18,392  |  |      |   | 14,598 |      |  |   | 10,313 |  |  |      | 4,825  |  |  |   | 1,102   | 
|Total liabilities                                                 |  |                    | 42,876  |  |      |   | 28,429 |      |  |   | 33,789 |  |  |      | 26,735 |  |  |   | 16,201  | 
|Total stockholders equity                                        |  |                    | 59,506  |  |      |   | 36,851 |      |  |   | 47,636 |  |  |      | 62,861 |  |  |   | 84,149  | 




| |   |                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | * | In January 2001, we acquired Xypoint Corporation. Revenues for
    these operations are included for 2001 and all subsequent
    periods presented.

14



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##### Table of Contents

**
    In 2004, we acquired the Enterprise business from Aether
    Systems, Inc. and substantially all of the assets of Kivera,
    Inc. See Note 2, Enterprise Acquisition, and
    Note 3, Kivera Acquisition to our Consolidated
    Financial Statements for a description of these acquisitions.





Item 7.
    Managements Discussion and Analysis of Financial
    Condition and Results of OperationsCritical Accounting Policies and Estimates

Managements Discussion and Analysis of Financial Condition
and Results of Operations addresses our consolidated financial
statements, which have been prepared in accordance with
U.S. generally accepted accounting principles. The
preparation of these financial statements requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, management
evaluates its estimates and judgments. Our most significant
estimates relate to accounting for our percentage-of-completion
and proportional performance contracts, accounts receivable
reserve, evaluating goodwill for impairment, the realizability
and remaining useful lives of long-lived assets, and contingent
liabilities. Management bases its estimates and judgments on
historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying
value of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

We identified our most critical accounting policies to be those
related to revenue recognition for our software contracts with
multiple elements, revenue recognition for our contracts
accounted for using the percentage-of-completion and
proportional performance methods, revenue recognition for the
operations of our 2004 acquisitions, accounts receivable
reserves, capitalized software development costs, acquired
intangible assets, goodwill impairment, stock compensation
expense, and income taxes. We describe these accounting policies
in relevant sections of this discussion and analysis. This
discussion and analysis should be read in conjunction with our
consolidated financial statements and related notes included
elsewhere in this report.

Overview and Recent Developments

Effective January 1, 2004, we purchased the Enterprise
Mobility Solutions business unit of Aether Systems, Inc. This
unit brought to us a base of over 1,000 enterprise customers and
wireless data applications for logistics, financial services and
the mobile office. On September 20, 2004, we acquired
substantially all of the assets of Kivera, Inc., a provider of
internet-based location application software and geo-data
professional services. This acquisition represented a
buy-vs.-build opportunity, as Kiveras software platform
integrates easily with existing wireless carrier network
elements and our Xypoint® Location Platform (XLP).

Effective in the fourth quarter of 2004, we realigned our
business across two market segments more closely aligned with
how the company now operates: (i) our Commercial
Applications segment, which consists principally of enhanced
communication services to and from wireless phones, location
application software, our E9-1-1 application and other hosted
services, and subscriber-based data services and (ii) our
Government segment, which includes the design, development and
deployment of information processing and communication systems
and related services to government agencies. The information in
this section presents our historical information restated to
conform with our current operating segments.

This Managements Discussion and Analysis of Financial
Condition and Results of Operations provides information that
our management believes to be necessary to achieve a clear
understanding of our financial statements and results of
operations.

Our management monitors and analyzes a number of key performance
indicators in order to manage our business and evaluate our
financial and operating performance. Those indicators include:




    Revenue. We derive revenue from products and services
    including recurring monthly service and subscriber fees,
    software licenses and related service fees for the design,
    development, and15



---



##### Table of Contents

deployment of software and
    communication systems, and products and services derived from
    the delivery of information processing and communication systems
    to governmental agencies.
    Cost of
    revenue.The major items
    comprising our cost of revenue are compensation and benefits,
    third-party hardware and software, amortization of software
    development costs, and overhead expenses. The costs of hardware
    and third-party software are primarily associated with the
    delivery of systems, and fluctuate from period to period as a
    result of the relative volume, mix of projects, level of service
    support required and the complexity of customized products and
    services delivered. Amortization of software development costs,
    including acquired technology, is associated with the
    recognition of hosted and subscriber revenue and systems from
    our Commercial Applications segment.
    Operating
    expenses.Our operating
    expenses are primarily compensation and benefits, professional
    fees, facility costs, marketing and sales-related expenses, and
    travel costs as well as certain non-cash expenses such as
    non-cash stock compensation expense, depreciation and
    amortization of property and equipment, and amortization of
    acquired intangible assets.
    Liquidity and cash
    flows.The primary
    driver of our cash flows is the results of our operations.
    Important sources of our liquidity have been cash raised from
    our January 2004 and August 2004 financings in connection with
    our recent acquisitions (as described below under
    Liquidity and Capital Resources), and borrowings
    under our bank credit agreement and lease financings secured for
    the purchase of equipment.
    Balance
    sheet.We view cash,
    working capital, and accounts receivable balances and days
    revenues outstanding as important indicators of our financial
    health.Results of Operations

Revenue and Cost of Revenue

The following discussion addresses the revenue and cost of
revenue for the two segments of our business.

16



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##### Table of Contents

Commercial Applications
    Segment:The following table sets forth year-to-year comparisons of the
components of our Commercial Applications revenue and cost of
revenue.

|                                                       |                                                  |      |       |    |      |               |      |    |   |   |               |   |  |      |     |    |   |   |      |    |   |   |       |   |  |  |      |    | 
|------------------------------------------------------ | ------------------------------------------------ | ---- | ----- | -- | ---- | ------------- | ---- | -- | - | - | ------------- | - |  | ---- | --- | -- | - | - | ---- | -- | - | - | ----- | - |  |  | ---- | -- | 
|                                                       |                                                  |      |       |    |      | 2004 vs. 2003 |      |    |   |   | 2003 vs. 2002 |  
|                                                       |                                                  |      |       |    |      |               |      |    |   |   |               |  
|($ in millions)                                        |                                                  | 2004 |       |    | 2003 |               |      | $  |   |   | %             |   |  | 2002 |     |    | $ |   |      | %  |  
|                                                       |                                                  |      |       |    |      |               |      |    |   |   |               |   |  |      |     |    |   |   |      |    |  
|Hosted, subscriber, and maintenance
    revenue        |                                                  | $    | 82.8  |    |      | $             | 37.7 |    |   | $ | 45.1          |   |  |      | 120 | %  |   | $ | 26.9 |    |   |   | 10.7  |   |  |  | 40   | % 
|Systems revenue                                        |                                                  |      | 20.5  |    |      |               | 11.1 |    |   |   | 9.4           |   |  |      | 85  | %  |   |   | 24.1 |    |   |   | (13.0 | ) |  |  | (54  | %)
|Services revenue                                       |                                                  |      | 0.4   |    |      |               |     |    |   |   | 0.4           |   |  |      | NM  |    |   |   |     |    |   |   |      |   |  |  | NM   |   
|                                                       |                                                  |      |       |    |      |               |      |    |   |   |               |   |  |      |     |    |   |   |      |    |  
|Commercial Applications segment
    revenue            |                                                  |      | 103.7 |    |      |               | 48.8 |    |   |   | 54.9          |   |  |      | 113 | %  |   |   | 51.0 |    |   |   | (2.3  | ) |  |  | (4   | %)
|                                                       |                                                  |      |       |    |      |               |      |    |   |   |               |   |  |      |     |    |   |   |      |    |  
|Direct cost of hosted, subscriber,
    and maintenance |                                                  |      | 51.2  |    |      |               | 18.1 |    |   |   | 33.1          |   |  |      | 183 | %  |   |   | 15.7 |    |   |   | 2.3   |   |  |  | 15   | % 
|Direct cost of systems                                 |                                                  |      | 11.2  |    |      |               | 13.6 |    |   |   | (2.4          | ) |  |      | (18 | %) |   |   | 15.7 |    |   |   | (2.0  | ) |  |  | (13  | %)
|Direct cost of services                                |                                                  |      | 0.2   |    |      |               |     |    |   |   | 0.2           |   |  |      | NM  |    |   |   |     |    |   |   |      |   |  |  | NM   |   
|                                                       |                                                  |      |       |    |      |               |      |    |   |   |               |   |  |      |     |    |   |   |      |    |  
|Commercial Applications segment
    cost of revenue    |                                                  |      | 62.6  |    |      |               | 31.7 |    |   |   | 30.9          |   |  |      | 97  | %  |   |   | 31.4 |    |   |   | 0.3   |   |  |  | 1    | % 
|                                                       |                                                  |      |       |    |      |               |      |    |   |   |               |   |  |      |     |    |   |   |      |    |  
|Hosted, subscriber, and maintenance
    gross profit   |                                                  |      | 31.6  |    |      |               | 19.6 |    |   |   | 12.0          |   |  |      | 61  | %  |   |   | 11.2 |    |   |   | 8.4   |   |  |  | 75   | % 
|Systems gross profit                                   |                                                  |      | 9.3   |    |      |               | (2.5 | )  |   |   | 11.8          |   |  |      | NM  |    |   |   | 8.4  |    |   |   | (10.9 | ) |  |  | (130 | %)
|Services gross profit                                  |                                                  |      | 0.2   |    |      |               |     |    |   |   | 0.2           |   |  |      | NM  |    |   |   |     |    |   |   |      |   |  |  | NM   |   
|                                                       |                                                  |      |       |    |      |               |      |    |   |   |               |   |  |      |     |    |   |   |      |    |  
|Commercial Applications segment
    gross profit*      |                                                  | $    | 41.1  |    |      | $             | 17.1 |    |   | $ | 24.0          |   |  |      | 141 | %  |   | $ | 19.6 |    |   | $ | (2.6  | ) |  |  | (13  | %)
|                                                       |                                                  |      |       |    |      |               |      |    |   |   |               |   |  |      |     |    |   |   |      |    |  
|                                                       | Segment gross profit as a percent
    of revenue |      |       | 40 | %    |               |      | 35 | % |   |               |   |  |      |     |    |   |   |      | 38 | % |   |       |   |  |  |      |    | 
|                                                       |                                                  |      |       |    |      |               |      |    |   |   |               |   |  |      |     |    |   |   |      |    |  




|  |                                                                                                                                                                
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | See discussion of segment reporting in Note 23 to the
    audited Consolidated Financial Statements presented elsewhere in
    this Annual Report on Form 10-K.

Hosted, Subscriber, and Maintenance Revenue and Cost of
Revenue:




tm


17



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##### Table of Contents

Maintenance fees on our systems and software licenses are
collected in advance and recognized ratably over the maintenance
period. Unrecognized maintenance fees are included in deferred
revenue. Custom software development, implementation and
maintenance services may be provided under time and materials or
fixed-fee contracts. The direct costs of maintenance revenue
consist primarily of compensation and benefits.

The direct cost of our hosted, subscriber, and maintenance
revenue consists primarily of network access, data feed and
circuit costs, compensation and benefits, equipment and software
maintenance. In 2004, we added the direct costs of providing the
subscriber services provided by our acquired Enterprise
business. Also, labor and circuit costs for our network
operations centers increased proportionately to the increased
number of PSAPs and cell sites, and we incurred higher
facilities expense related to renovations and enhancements to
our principal network operations center. For the year ended
December 31, 2004, the cost of airtime, circuit costs,
access fees, and data feeds accounted for approximately 57% of
the total direct costs of our commercial hosted, subscriber, and
maintenance revenues. Cost of revenue in 2003 increased over
2002 due to a 47% increase in headcount for our hosted
operations, as well as higher costs for temporary contract staff
to meet customer deployment deadlines imposed by the Federal
Communications Commission. This increase in headcount during
2003 was partially offset by a reduction in circuit costs that
resulted from renegotiating several contracts during the year.
Prior to the 2004 acquisition of our subscriber operations,
circuit costs and other data access costs accounted for
approximately 20% of the total direct costs of hosted,
subscriber, and maintenance revenues in 2003. The composition of
direct costs was similar to 2003 in 2002.

Systems Revenue and Cost of Revenue

We sell communications systems for enhanced services to wireless
carriers, and we sell asset tracking and proof of delivery
mobile asset management systems to enterprise customers. These
systems are based on our licensed software applications.
Licensing fees for our software are a function of the number of
subscribers or other measure of usage in our customers
network. As a carriers subscriber base or usage increases,
the carrier must purchase additional capacity under its license
agreement and we receive additional revenue. Systems typically
contain multiple elements, which may include the product
license, installation, integration, and hardware. The total
arrangement fee is allocated among each element based on
vendor-specific objective evidence of the relative fair value of
each of the elements. Fair value is generally determined based
on the price charged when the element is sold separately. In the
absence of evidence of fair value of a delivered element,
revenue is allocated first to the undelivered elements based on
fair value and the residual revenue to the delivered elements.
The software licenses are generally perpetual licenses for a
specified number of users that allow for the purchase of annual
maintenance at a specified rate. Generally, we recognize license
fee revenue when each of the following has occurred:
(1) evidence of an arrangement is in place; (2) we
have delivered the software; (3) the fee is fixed or
determinable; and (4) collection of the fee is probable.
Software projects that require significant customization are
accounted for under the percentage-of-completion method. We
measure progress to completion using costs incurred compared to
estimated total costs. We recognize estimated losses under
long-term contracts in their entirety upon discovery. If we did
not accurately estimate total costs to complete a contract or do
not manage our contracts within the planned budget, then future
margins may be negatively affected or losses on existing
contracts may need to be recognized. Software license fees
billed and not recognized as revenue are included in deferred
revenue. In 2004, revenue from Commercial Applications systems
sales increased compared to 2003 primarily due to the inclusion
of Enterprise systems revenue and a large purchase of increased
license capacity by a major carrier during the second quarter of
2004. These revenues decreased in 2003 from 2002 primarily
because new business was not booked to replace revenue generated
from a large contract to deliver a location platform for
multiple carrier networks in Europe and the Pacific.

We have also historically sold systems through our channel
relationship with Lucent. This sales process typically includes
participation of our engineers along with original equipment
manufacturers in presenting our products to prospective
customers. Lucent pays us initial license fees ranging from 50%
to 80% of the revenue it generates from sales of the SMSC
application that we developed under our 1996 development
agreement. For sales of our WIG, Lucent pays us initial fees
ranging between 75% and 90% of the sale value which we negotiate
on a case by case basis.

18



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##### Table of Contents

The direct cost of our systems consists primarily of
compensation, benefits, purchased equipment, third-party
software, travel expenses, and consulting fees as well as the
amortization of both acquired and capitalized software
development costs. In 2004, such costs consisted primarily of
compensation, benefits, third-party hardware and software, and
$0.6 million of amortization of software development costs.
In 2003, such costs primarily included compensation, benefits,
travel and consulting fees plus $8.9 million of
amortization of software development costs, which included the
accelerated amortization recorded during the year. The
composition of direct costs was similar to 2003 in 2002, except
that direct costs in 2002 included only $4.3 million of
amortization of software development costs.

Hardware revenue from sales of BlackBerry® devices is
included in systems revenue. For 2004, these hardware sales
comprised approximately 3% of total hosted, subscriber, and
maintenance revenues. The direct cost of these hardware sales is
almost exclusively comprised of third-party purchased hardware
and shipping expenses.



Government Segment:The following table sets forth the year-to-year comparisons of
the key components of our government revenue and related cost:

|                        |                                    |                                                  |      |      |      |               |      |      |    |   |               |      |   |      |     |     |    |   |      |      |    |   |      |      |   |  |     |    |    | 
|----------------------- | ---------------------------------- | ------------------------------------------------ | ---- | ---- | ---- | ------------- | ---- | ---- | -- | - | ------------- | ---- | - | ---- | --- | --- | -- | - | ---- | ---- | -- | - | ---- | ---- | - |  | --- | -- | -- | 
|                        |                                    |                                                  |      |      |      | 2004 vs. 2003 |      |      |    |   | 2003 vs. 2002 |     
|                        |                                    |                                                  |      |      |      |               |      |      |    |   |               |     
|($ in millions)         |                                    | 2004                                             |      |      | 2003 |               |      | $    |    |   | %             |      |   | 2002 |     |     | $  |   |      | %    |   
|                        |                                    |                                                  |      |      |      |               |      |      |    |   |               |      |   |      |     |     |    |   |      |      |   
|Systems revenue         |                                    | $                                                | 23.6 |      |      | $             | 29.4 |      |    | $ | (5.8          | )    |   |      | (20 | %)  |    | $ | 32.2 |      |    |   | (2.8 | )    |   |  | (9  | %)
|Services revenue        |                                    |                                                  | 15.6 |      |      |               | 13.9 |      |    |   | 1.7           |      |   |      | 12  | %   |    |   | 8.8  |      |    |   | 5.1  |      |   |  | 58  | % 
|                        |                                    |                                                  |      |      |      |               |      |      |    |   |               |      |   |      |     |     |    |   |      |      |   
|                        | Government Segment
    revenue     |                                                  |      | 39.2 |      |               |      | 43.3 |    |   |               | (4.1 | ) |      |     | (9  | %) |   |      | 41.0 |    |   |      | 2.3  |   |  |     | 6  | % 
|                        |                                    |                                                  |      |      |      |               |      |      |    |   |               |      |   |      |     |     |    |   |      |      |   
|Direct cost of systems  |                                    |                                                  | 15.4 |      |      |               | 18.7 |      |    |   | (3.3          | )    |   |      | (18 | %)  |    |   | 24.6 |      |    |   | (5.9 | )    |   |  | (24 | %)
|Direct cost of services |                                    |                                                  | 9.5  |      |      |               | 9.8  |      |    |   | (0.3          | )    |   |      | (4  | %)  |    |   | 5.7  |      |    |   | 4.1  |      |   |  | 71  | % 
|                        |                                    |                                                  |      |      |      |               |      |      |    |   |               |      |   |      |     |     |    |   |      |      |   
|                        | Government Segment cost of revenue |                                                  |      | 24.9 |      |               |      | 28.5 |    |   |               | (3.6 | ) |      |     | (13 | %) |   |      | 30.3 |    |   |      | (1.8 | ) |  |     | (6 | %)
|                        |                                    |                                                  |      |      |      |               |      |      |    |   |               |      |   |      |     |     |    |   |      |      |   
|Systems gross profit    |                                    |                                                  | 8.2  |      |      |               | 10.7 |      |    |   | (2.5          | )    |   |      | (23 | %)  |    |   | 7.6  |      |    |   | (3.1 | )    |   |  | 41  | % 
|Services gross profit   |                                    |                                                  | 6.1  |      |      |               | 4.1  |      |    |   | 2.0           |      |   |      | 50  | %   |    |   | 3.1  |      |    |   | (1.0 | )    |   |  | 33  | % 
|                        |                                    |                                                  |      |      |      |               |      |      |    |   |               |      |   |      |     |     |    |   |      |      |   
|                        | Government Segment gross profit*   |                                                  | $    | 14.4 |      |               | $    | 14.8 |    |   | $             | (0.5 | ) |      |     | (3  | %) |   | $    | 10.7 |    |   | $    | (4.1 | ) |  |     | 39 | % 
|                        |                                    |                                                  |      |      |      |               |      |      |    |   |               |      |   |      |     |     |    |   |      |      |   
|                        |                                    | Segment gross profit as a percent
    of revenue |      |      | 37   | %             |      |      | 34 | % |               |      |   |      |     |     |    |   |      |      | 26 | % |      |      |   |  |     |    |    | 
|                        |                                    |                                                  |      |      |      |               |      |      |    |   |               |      |   |      |     |     |    |   |      |      |   




|  |                                                                                                                                                                
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | See discussion of segment reporting in Note 23 to the
    audited Consolidated Financial Statements presented elsewhere in
    this Annual Report on Form 10-K.

Systems Revenue and Cost of Revenue:




19



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##### Table of Contents

Services Revenue and Cost of Revenue:

Government service revenue primarily consists of communications
engineering, program management, help desk outsource, network
design and management to government agencies. Most such services
are delivered under time and materials contracts. For fixed
price service contracts, we recognize revenue using the
proportional performance method. We recognize estimated losses
on contracts in their entirety upon discovery. If we did not
accurately estimate total labor hours or costs to complete a
contract or do not manage our contracts within the planned
budget, then future margins may be negatively affected or losses
on existing contracts may need to be recognized. The direct cost
of service revenue consists of compensation, benefits and travel
incurred in delivering these services.

The year over year changes in overall Government systems and
services business were as follows. In 2004, a decline in volume
of system sales, due to a change in customer preferences
observed in the second half of the year, was partly offset by
increased service revenue. The effect of lower revenue was
partly offset by higher average gross margins due to cost
savings as a result of established vendor relationships. In
2003, systems and services revenue increased, and average
margins increased over that of 2002, in conjunction with the
high sales volumes of our SwiftLink® products and the
corresponding growth of our Government business.

We generally provide Government products and services under
long-term contracts. We recognize contract revenue as billable
costs are incurred and for fixed-price product delivery
contracts using the percentage-of-completion method or
proportional performance method, measured by either total labor
hours or total costs incurred compared to total estimated labor
hours or costs. We recognize estimated losses on contracts in
their entirety upon discovery. If we did not accurately estimate
total labor hours or costs to complete a contract or do not
manage our contracts within the planned budget, then future
margins may be negatively affected or losses on existing
contracts may need to be recognized. Under our contracts with
the U.S. government, contract costs, including the
allocated indirect expenses, are subject to audit and adjustment
by the Defense Contract Audit Agency. We record revenue under
these contracts at estimated net realizable amounts.

Major Customers

For 2004, 2003, and 2002, customers that accounted for 10% or
more of total revenue were Verizon Wireless and the
U.S. Government. For the year ended December 31, 2002,
in addition to Verizon Wireless and the U.S. Government,
Hutchison 3G also accounted for 10% or more of total revenue.
The loss of any of these customers could have a material adverse
impact on our business.

Revenue Backlog

Total company backlog at January 1, 2005 was
$104.2 million, of which $64.1 million was in our
commercial applications segment and $40.1 million was in
our government segment. We expect to realize approximately
$57.9 million of this backlog in the next twelve months.
The remaining backlog represents primarily the balance of
multi-year contracts for our commercial applications segment.
Total backlog as of January 1, 2004 was $92.8 million.
Our backlog at any given time may be affected by a number of
factors, including contracts being renewed or new contracts
being signed before existing contracts are completed. Some of
our backlog could be canceled for causes such as late delivery,
poor performance, and other factors. Accordingly, a comparison
of backlog from period to period is not necessarily meaningful
and may not be indicative of eventual actual revenue.

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Operating
Expenses:

Research and Development Expense.

The following table sets forth a year-over-year comparison of
our research and development expense:

|                                 |  |      |      |   |      |               |      |   |  |   |               |  |  |      |    |   |   |   |      |   |  |   |      |   |  |  |    |   
|-------------------------------- |  | ---- | ---- | - | ---- | ------------- | ---- | - |  | - | ------------- |  |  | ---- | -- | - | - | - | ---- | - |  | - | ---- | - |  |  | -- | --
|                                 |  |      |      |   |      | 2004 vs. 2003 |      |   |  |   | 2003 vs. 2002 | 
|                                 |  |      |      |   |      |               |      |   |  |   |               | 
|($ in millions)                  |  | 2004 |      |   | 2003 |               |      | $ |  |   | %             |  |  | 2002 |    |   | $ |   |      | % | 
|                                 |  |      |      |   |      |               |      |   |  |   |               |  |  |      |    |   |   |   |      |   | 
|Research and development expense |  | $    | 19.6 |   |      | $             | 16.9 |   |  | $ | 2.7           |  |  |      | 16 | % |   | $ | 17.0 |   |  | $ | (0.1 | ) |  |  | (1 | %)
|Percent of revenue               |  |      | 14   | % |      |               | 18   | % |  |   |               |  |  |      |    |   |   |   | 19   | % |  |   |      |   |  |  |    |   







Sales and Marketing Expense:




|                            |  |      |      |   |      |          |     |   |  |   |               |  |  |      |    |   |   |   |      |   |  |   |      |   |  |  |     |   
|--------------------------- |  | ---- | ---- | - | ---- | -------- | --- | - |  | - | ------------- |  |  | ---- | -- | - | - | - | ---- | - |  | - | ---- | - |  |  | --- | --
|                            |  |      |      |   |      | 2004 vs. |     |   |  |   |              
|                            |  |      |      |   |      | 2003     |     |   |  |   | 2003 vs. 2002 | 
|                            |  |      |      |   |      |          |     |   |  |   |               | 
|($ in millions)             |  | 2004 |      |   | 2003 |          |     | $ |  |   | %             |  |  | 2002 |    |   | $ |   |      | % | 
|                            |  |      |      |   |      |          |     |   |  |   |               |  |  |      |    |   |   |   |      |   | 
|Sales and marketing expense |  | $    | 13.0 |   |      | $        | 8.9 |   |  | $ | 4.1           |  |  |      | 46 | % |   | $ | 10.0 |   |  | $ | (1.1 | ) |  |  | (11 | %)
|Percent of total revenue    |  |      | 9    | % |      |          | 10  | % |  |   |               |  |  |      |    |   |   |   | 11   | % |  |   |      |   |  |  |     |   



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result of costs incurred for our Enterprise market. In 2003,
such costs decreased from 2002 largely due to reduced headcount
and the alignment of resources with products and services to
more effectively target certain markets. Such costs may
fluctuate quarter to quarter depending on spending on tradeshows
and variable compensation based on level of revenue.

General and Administrative Expense:

The following table sets forth a year-over-year comparison of
our general and administrative expense:

|                                   |  |      |      |   |      |          |      |   |  |   |          |  |  |      |    |   |   |   |      |   |  |   |      |   |  |  |    |   
|---------------------------------- |  | ---- | ---- | - | ---- | -------- | ---- | - |  | - | -------- |  |  | ---- | -- | - | - | - | ---- | - |  | - | ---- | - |  |  | -- | --
|                                   |  |      |      |   |      | 2004 vs. |      |   |  |   | 2003 vs. | 
|                                   |  |      |      |   |      | 2003     |      |   |  |   | 2002     | 
|                                   |  |      |      |   |      |          |      |   |  |   |          | 
|($ in millions)                    |  | 2004 |      |   | 2003 |          |      | $ |  |   | %        |  |  | 2002 |    |   | $ |   |      | % | 
|                                   |  |      |      |   |      |          |      |   |  |   |          |  |  |      |    |   |   |   |      |   | 
|General and administrative expense |  | $    | 19.1 |   |      | $        | 11.3 |   |  | $ | 7.8      |  |  |      | 70 | % |   | $ | 12.2 |   |  | $ | (1.0 | ) |  |  | (8 | %)
|Percent of total revenue           |  |      | 13   | % |      |          | 12   | % |  |   |          |  |  |      |    |   |   |   | 13   | % |  |   |      |   |  |  |    |   



Non-Cash Stock Compensation Expense:




|                                    |  |      |     |  |      |               |     |   |  |   |               |   |  |      |     |    |   |   |     |   |  |   |      |   |  |  |    |   
|----------------------------------- |  | ---- | --- |  | ---- | ------------- | --- | - |  | - | ------------- | - |  | ---- | --- | -- | - | - | --- | - |  | - | ---- | - |  |  | -- | --
|                                    |  |      |     |  |      | 2004 vs. 2003 |     |   |  |   | 2003 vs. 2002 |  
|                                    |  |      |     |  |      |               |     |   |  |   |               |  
|($ in millions)                     |  | 2004 |     |  | 2003 |               |     | $ |  |   | %             |   |  | 2002 |     |    | $ |   |     | % | 
|                                    |  |      |     |  |      |               |     |   |  |   |               |   |  |      |     |    |   |   |     |   | 
|Non-cash stock compensation expense |  | $    | 1.2 |  |      | $             | 1.5 |   |  | $ | (0.3          | ) |  |      | (20 | %) |   | $ | 1.6 |   |  | $ | (0.1 | ) |  |  | (3 | %)







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Depreciation and Amortization of Property and Equipment:

The following table sets forth a year-over-year comparison of
our depreciation and amortization of property and equipment:

|                                                            |  |      |      |  |      |               |      |   |  |   |               |  |  |      |    |   |   |   |      |   |  |   |     |  |  |  |    |  
|----------------------------------------------------------- |  | ---- | ---- |  | ---- | ------------- | ---- | - |  | - | ------------- |  |  | ---- | -- | - | - | - | ---- | - |  | - | --- |  |  |  | -- | -
|                                                            |  |      |      |  |      | 2004 vs. 2003 |      |   |  |   | 2003 vs. 2002 | 
|                                                            |  |      |      |  |      |               |      |   |  |   |               | 
|($ in millions)                                             |  | 2004 |      |  | 2003 |               |      | $ |  |   | %             |  |  | 2002 |    |   | $ |   |      | % | 
|                                                            |  |      |      |  |      |               |      |   |  |   |               |  |  |      |    |   |   |   |      |   | 
|Depreciation and amortization of
    property and equipment |  | $    | 7.8  |  |      | $             | 6.6  |   |  | $ | 1.2           |  |  |      | 18 | % |   | $ | 6.2  |   |  | $ | 0.4 |  |  |  | 7  | %
|Average gross cost of property and
    equipment            |  | $    | 39.2 |  |      | $             | 29.2 |   |  | $ | 10.0          |  |  |      | 34 | % |   | $ | 23.1 |   |  | $ | 6.1 |  |  |  | 26 | %



Amortization of Acquired Intangible Assets:




|                                               |  |      |     |  |      |               |     |   |  |   |               |  |  |      |    |  |   |   |     |   |  |   |      |   |  |  |    |   
|---------------------------------------------- |  | ---- | --- |  | ---- | ------------- | --- | - |  | - | ------------- |  |  | ---- | -- |  | - | - | --- | - |  | - | ---- | - |  |  | -- | --
|                                               |  |      |     |  |      | 2004 vs. 2003 |     |   |  |   | 2003 vs. 2002 | 
|                                               |  |      |     |  |      |               |     |   |  |   |               | 
|($ in millions)                                |  | 2004 |     |  | 2003 |               |     | $ |  |   | %             |  |  | 2002 |    |  | $ |   |     | % | 
|                                               |  |      |     |  |      |               |     |   |  |   |               |  |  |      |    |  |   |   |     |   | 
|Amortization of acquired intangible
    assets |  | $    | 2.2 |  |      | $             | 0.5 |   |  | $ | 1.7           |  |  |      | NM |  |   | $ | 0.6 |   |  | $ | (0.1 | ) |  |  | (4 | %)



Goodwill and
Other Intangible Assets


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Interest Expense:

The following table sets forth a year-over-year comparison of
our components of interest expense:

|                                                                                          |  |      |     |  |      |               |     |   |  |   |               |   |  |      |     |    |   |   |      |   |  |   |      |   |  |  |     |   
|----------------------------------------------------------------------------------------- |  | ---- | --- |  | ---- | ------------- | --- | - |  | - | ------------- | - |  | ---- | --- | -- | - | - | ---- | - |  | - | ---- | - |  |  | --- | --
|                                                                                          |  |      |     |  |      | 2004 vs. 2003 |     |   |  |   | 2003 vs. 2002 |  
|                                                                                          |  |      |     |  |      |               |     |   |  |   |               |  
|($ in millions)                                                                           |  | 2004 |     |  | 2003 |               |     | $ |  |   | %             |   |  | 2002 |     |    | $ |   |      | % | 
|                                                                                          |  |      |     |  |      |               |     |   |  |   |               |   |  |      |     |    |   |   |      |   | 
|Interest expense incurred on
    capital lease obligations                                |  | $    | 0.2 |  |      | $             | 0.4 |   |  | $ | (0.2          | ) |  |      | (44 | %) |   | $ | 0.9  |   |  | $ | (0.5 | ) |  |  | (53 | %)
|Interest expense incurred on notes
    payable and under our bank credit agreement        |  |      | 1.2 |  |      |               | 0.5 |   |  |   | 0.7           |   |  |      | NM  |    |   |   | 0.1  |   |  |   | 0.4  |   |  |  | NM  |   
|Amortization of deferred financing
    fees                                               |  |      | 0.5 |  |      |               | 0.2 |   |  |   | 0.3           |   |  |      | NM  |    |   |   | 0.2  |   |  |   |     |   |  |  | (27 | %)
|Amortization of deferred debt
    discount related to convertible subordinated debentures |  |      | 1.3 |  |      |               |    |   |  |   |              |   |  |      | NM  |    |   |   |     |   |  |   |     |   |  |  | NM  |   
|Capitalized interest                                                                      |  |      |    |  |      |               |    |   |  |   |              |   |  |      | NM  |    |   |   | (0.3 | ) |  |   | 0.3  |   |  |  | NM  |   
|                                                                                          |  |      |     |  |      |               |     |   |  |   |               |   |  |      |     |    |   |   |      |   | 
|Total Interest Expense                                                                    |  | $    | 3.2 |  |      | $             | 1.1 |   |  | $ | 2.1           |   |  |      | NM  |    |   | $ | 0.9  |   |  | $ | 0.2  |   |  |  | 21  | % 
|                                                                                          |  |      |     |  |      |               |     |   |  |   |               |   |  |      |     |    |   |   |      |   | 





Debt Conversion Expense:




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paid as an inducement to the Waiver and the fair value of the
additional shares of our Class A Common Stock issued upon
conversion of the Debenture were also recorded as debt
conversion expense. There was no such arrangement in either 2003
or 2002.

Other(Expense)/Income, Net:

The following table sets forth a year-over-year comparison of
our components of other income, net:

|                                                                                     |  |      |       |   |      |               |      |   |  |   |               |   |  |      |     |    |   |   |       |   |  |   |       |   |  |  |     |   
|------------------------------------------------------------------------------------ |  | ---- | ----- | - | ---- | ------------- | ---- | - |  | - | ------------- | - |  | ---- | --- | -- | - | - | ----- | - |  | - | ----- | - |  |  | --- | --
|                                                                                     |  |      |       |   |      | 2004 vs. 2003 |      |   |  |   | 2003 vs. 2002 |  
|                                                                                     |  |      |       |   |      |               |      |   |  |   |               |  
|($ in millions)                                                                      |  | 2004 |       |   | 2003 |               |      | $ |  |   | %             |   |  | 2002 |     |    | $ |   |       | % | 
|                                                                                     |  |      |       |   |      |               |      |   |  |   |               |   |  |      |     |    |   |   |       |   | 
|Foreign currency
    translation/transaction (loss)/gain                             |  | $    | (0.1) |   |      | $             | 0.5  |   |  | $ | (0.6          | ) |  |      | NM  |    |   | $ | 0.4   |   |  | $ | 0.2   |   |  |  | 42  | % 
|Foreign currency forward contract
    loss                                           |  |      |      |   |      |               |     |   |  |   |              |   |  |      | NM  |    |   |   | (0.3) |   |  |   | 0.3   |   |  |  | 100 | % 
|Proceeds from insurance recovery of
    a theft claim                                |  |      |      |   |      |               | 0.7  |   |  |   | (0.7          | ) |  |      | NM  |    |   |   |      |   |  |   | 0.7   |   |  |  |    |   
|Investment income                                                                    |  |      | 0.1   |   |      |               | 0.1  |   |  |   |              |   |  |      | NM  |    |   |   | 0.3   |   |  |   | (0.3  | ) |  |  | (68 | %)
|Legal settlement and miscellaneous
    other expense                                 |  |      | (0.3) |   |      |               |     |   |  |   | (0.3          | ) |  |      | NM  |    |   |   |      |   |  |   |      |   |  |  |    |   
|Gain on the conversion of a loan to
    a state grant and miscellaneous other income |  |      | 0.2   |   |      |               | 0.2  |   |  |   |              |   |  |      | NM  |    |   |   |      |   |  |   | 0.2   |   |  |  |    |   
|                                                                                     |  |      |       |   |      |               |      |   |  |   |               |   |  |      |     |    |   |   |       |   | 
|Total other (expense)/ income, net                                                   |  | $    | (0.1) |   |      | $             | 1.5  |   |  | $ | (1.6          | ) |  |      | NM  |    |   | $ | 0.4   |   |  | $ | 1.1   |   |  |  | NM  |   
|                                                                                     |  |      |       |   |      |               |      |   |  |   |               |   |  |      |     |    |   |   |       |   | 
|Revenues billed in foreign currency                                                  |  | $    | 8.0   |   |      | $             | 3.6  |   |  | $ | 4.4           |   |  |      | 122 | %  |   | $ | 8.8   |   |  | $ | (5.2  | ) |  |  | (59 | %)
|Average interest rate earned on
    investments                                      |  |      | 1     | % |      |               | 1    | % |  |   |               |   |  |      |     |    |   |   | 1     | % |  |   |       |   |  |  |     |   
|Average cash balance                                                                 |  | $    | 17.5  |   |      | $             | 19.8 |   |  | $ | (2.3          | ) |  |      | (12 | %) |   | $ | 30.9  |   |  | $ | (11.1 | ) |  |  | (36 | %)



Income Taxes:




Net Loss:




|                |  |      |       |   |      |               |       |   |  |          |      |   |  |      |     |    |   |   |       |   |  |   |     |  |  |  |    |  
|--------------- |  | ---- | ----- | - | ---- | ------------- | ----- | - |  | -------- | ---- | - |  | ---- | --- | -- | - | - | ----- | - |  | - | --- |  |  |  | -- | -
|                |  |      |       |   |      |               |       |   |  | 2003 vs. |     
|                |  |      |       |   |      | 2004 vs. 2003 |       |   |  |          | 2002 |  
|                |  |      |       |   |      |               |       |   |  |          |      |  
|($ in millions) |  | 2004 |       |   | 2003 |               |       | $ |  |          | %    |   |  | 2002 |     |    | $ |   |       | % | 
|                |  |      |       |   |      |               |       |   |  |          |      |   |  |      |     |    |   |   |       |   | 
|Net loss        |  | $    | (18.5 | ) |      | $             | (13.5 | ) |  | $        | (5.1 | ) |  |      | (38 | %) |   | $ | (17.8 | ) |  | $ | 4.4 |  |  |  | 24 | %



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##### Table of Contents

margin percentage. Net loss decreased for 2003 as compared to
2002 as a result of increased gross profit from growing revenue.

Liquidity and Capital Resources

The following table summarizes our comparative statements of
cash flow:

|                                                                                    |                                             |      |       |       |      |               |      |      |   |  |               |       |   |      |     |     |   |  |      |       |   |  |      |       |   |  |     |     |   
|----------------------------------------------------------------------------------- | ------------------------------------------- | ---- | ----- | ----- | ---- | ------------- | ---- | ---- | - |  | ------------- | ----- | - | ---- | --- | --- | - |  | ---- | ----- | - |  | ---- | ----- | - |  | --- | --- | --
|                                                                                    |                                             |      |       |       |      | 2004 vs. 2003 |      |      |   |  | 2003 vs. 2002 |      
|                                                                                    |                                             |      |       |       |      |               |      |      |   |  |               |      
|($ in millions)                                                                     |                                             | 2004 |       |       | 2003 |               |      | $    |   |  | %             |       |   | 2002 |     |     | $ |  |      | %     |  
|                                                                                    |                                             |      |       |       |      |               |      |      |   |  |               |       |   |      |     |     |   |  |      |       |  
|Net cash and cash equivalents
    provided by (used in):                            |                                             |      |       |       |      |               |      |      |   |  |               |       |   |      |     |     |   |  |      |       |   |  |      |       |   |  |     |    
|                                                                                    | Operating activities                        |      | $     | 0.2   |      |               | $    | (4.0 | ) |  | $             | 4.2   |   |      |     | 105 | % |  | $    | (10.9 | ) |  | $    | 6.9   |   |  |     | 63  | % 
|                                                                                    | Investing activities                        |      |       | (29.0 | )    |               |      | (9.5 | ) |  |               | (19.5 | ) |      |     | NM  |   |  |      | (6.7  | ) |  |      | (2.8  | ) |  |     | (43 | %)
|                                                                                    | Financing activities                        |      |       | 28.2  |      |               |      | 4.9  |   |  |               | 23.3  |   |      |     | NM  |   |  |      | 2.0   |   |  |      | 2.9   |   |  |     | 144 | % 
|                                                                                    | Net change in cash and cash
    equivalents |      |       | (0.6  | )    |               |      | (8.6 | ) |  |               | 8.9   |   |      |     | 104 | % |  |      | (15.5 | ) |  |      | 6.9   |   |  |     | 45  | % 
|Acquisitions, net of cash acquired                                                  |                                             |      | (24.8 | )     |      |               |     |      |   |  | (24.8         | )     |   |      | NM  |     |   |  | (0.3 | )     |   |  | 0.3  |       |   |  | NM  |    
|Purchases of property and equipment                                                 |                                             |      | (7.0  | )     |      |               | (6.0 | )    |   |  | (1.1          | )     |   |      | (18 | %)  |   |  | (4.9 | )     |   |  | (1.0 | )     |   |  | (21 | %) 
|Capitalized software development
    costs                                          |                                             |      |      |       |      |               | (1.9 | )    |   |  | 1.9           |       |   |      | 100 | %   |   |  | (4.8 | )     |   |  | 2.9  |       |   |  | (61 | %) 
|Payments under long term debt and
    lease obligations                             |                                             |      | (9.0  | )     |      |               | (5.5 | )    |   |  | (3.5          | )     |   |      | 65  | %   |   |  | (3.9 | )     |   |  | (1.6 | )     |   |  | (41 | %) 
|Proceeds from issuance of stock and
    debentures, net                             |                                             |      | 28.2  |       |      |               |     |      |   |  | 28.2          |       |   |      | NM  |     |   |  |     |       |   |  |     |       |   |  | NM  |    
|Proceeds from line of credit                                                        |                                             |      | 5.0   |       |      |               |     |      |   |  | 5.0           |       |   |      | NM  |     |   |  |     |       |   |  |     |       |   |  | NM  |    
|Proceeds from long-term debt                                                        |                                             |      | 2.5   |       |      |               | 9.3  |      |   |  | (6.8          | )     |   |      | (73 | %)  |   |  | 5.3  |       |   |  | 4.0  |       |   |  | 76  | %  
|Cash and cash equivalents                                                           |                                             |      | 18.3  |       |      |               | 18.8 |      |   |  | (0.5          | )     |   |      | (3  | %)  |   |  | 27.4 |       |   |  | (8.6 | )     |   |  | (31 | %) 
|Changes in:                                                                         |                                             |      |       |       |      |               |      |      |   |  |               |       |   |      |     |     |   |  |      |       |   |  |      |       |   |  |     |    
|                                                                                    | Accounts receivable, net                    |      |       | 3.4   |      |               |      | 2.3  |   |  |               | 1.1   |   |      |     |     |   |  |      | (8.7  | ) |  |      | 11.0  |   |  |     |     |   
|                                                                                    | Unbilled receivables                        |      |       | (1.1  | )    |               |      | (1.5 | ) |  |               | 0.4   |   |      |     |     |   |  |      | (2.0  | ) |  |      | 0.5   |   |  |     |     |   
|                                                                                    | Inventory                                   |      |       | (2.9  | )    |               |      |     |   |  |               | (2.9  | ) |      |     |     |   |  |      |      |   |  |      |      |   |  |     |     |   
|                                                                                    | Other current assets                        |      |       | 0.3   |      |               |      | (0.7 | ) |  |               | 0.8   |   |      |     |     |   |  |      |      |   |  |      | (0.7  | ) |  |     |     |   
|                                                                                    | Accounts payable and accrued
    expenses   |      |       | (2.4  | )    |               |      | (7.5 | ) |  |               | 5.0   |   |      |     |     |   |  |      | 3.9   |   |  |      | (11.3 | ) |  |     |     |   
|                                                                                    | Accrued payroll and related
    liabilities |      |       | 0.1   |      |               |      | (0.1 | ) |  |               | 0.2   |   |      |     |     |   |  |      | (0.1  | ) |  |      |      |   |  |     |     |   
|                                                                                    | Deferred revenue                            |      |       | 0.5   |      |               |      | (1.2 | ) |  |               | 1.6   |   |      |     |     |   |  |      | 0.6   |   |  |      | (1.8  | ) |  |     |     |   
|Days revenues outstanding in
    accounts receivable including unbilled receivables |                                             |      | 97    |       |      |               | 107  |      |   |  |               |       |   |      |     |     |   |  | 99   |       |   |  |      |       |   |  |     |    





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Operating cash flows improved in 2004 primarily as a result of
the cash provided by the changes in working capital compared to
the prior year. Changes in accounts receivable and unbilled
receivables each provided a more favorable impact on our cash
balance during 2004 as a result of increased collection efforts
initiated by management during the fourth quarter of the year.
The changes in accounts payable and accrued expenses and
deferred revenue each also had a less significant impact on cash
during 2004 as a result of the status of certain long-term
projects that remained open at the end of 2004 and 2003,
respectively.

Net cash used in investing activities increased significantly in
2004 from 2003 as a result of our Enterprise and Kivera
acquisitions (described below) and increased capital
expenditures to support and expand our businesses during 2004.
The Enterprise and Kivera acquisitions accounted for
approximately $24.8 million of the cash used for financing
activities during 2004, while we spent approximately
$7.0 million for capital expenditures during the year. Net
cash used in investing activities also increased in 2003 from
2002, primarily as a result of increased capital spending during
2003 as well as $3.5 million of proceeds from notes
receivable from employees during 2002. These changes were
partially offset by decreased capitalized software development
costs in 2003 due to the completion of certain software
development projects that were under development in prior years.

Net cash provided by financing activities increased
significantly during 2004 as a result of our January 2004 and
August 2004 financings (see below). These offerings provided net
proceeds of approximately $28.2 million. These proceeds
were used to fund our acquisitions and for payments under our
existing long-term debt and capital lease obligations. Net cash
provided by financing activities increased in 2003 from previous
year levels as we secured financing to fund our capital
expenditure needs while meeting our commitment to repay lease
and long-term debt obligations.

We have a $15.0 million bank line of credit, extending
until April 2006. We can borrow an amount equal to up to 80% of
receivables less than 90 days old. The line of credit is
secured by accounts receivable and bears interest at prime plus
1.0% for loans other than the equipment loan, with a minimum
prime rate of 4.25% and a borrowing rate of 6.25% at
December 31, 2004. Our line of credit contains covenants
requiring us to maintain at least $25 million of tangible
net worth, as defined, and at least $10 million in cash and
cash availability (borrowing available under our line of credit)
as well as restrictive covenants, including, among others,
restrictions on our ability to merge, acquire assets above
prescribed thresholds, undertake actions outside the ordinary
course of our business (including the incurrence of
indebtedness), guarantee debt, distribute dividends, and
repurchase our stock. We were in compliance with all of these
covenants as of December 31, 2004.

As part of this agreement, in 2003 we borrowed $2.5 million
under the terms of an equipment loan secured by purchased
equipment for a term of three years. As of February 15,
2005, $1.5 million was outstanding under the equipment
loan, which bears interest at 5.5% and is payable monthly
through December 2006. As of December 31, 2004, we have
borrowed $5.0 million under the line of credit and had
$5.2 million of unused availability. This borrowing had
been repaid as of February 15, 2005, and there were no
borrowings other than the equipment loan outstanding under the
line of credit.

On January 13, 2004, we purchased the Enterprise Division
of Aether Systems, Inc. Consideration for the acquisition was
valued at approximately $22.2 million, consisting of
$18.2 million in cash, $1.0 million in the form of a
note payable, approximately $2.0 million of direct costs
incurred, and 204,020 newly issued shares of Class A Common
Stock. Concurrent with the acquisition, we closed on
$21.0 million of financing with two accredited
institutional investors, which included a subordinated
convertible debenture with stated principal of $15 million,
bearing interest at a stated rate of 3% per annum and due
in lump sum on January 13, 2009 in cash or shares of our
Class A Common Stock, approximately 1.4 million newly
issued shares of our Class A Common Stock and warrants to
purchase 341,072 shares of our Class A Common
Stock at a strike price of $6.50 per share, expiring in
January 2007. The majority of the proceeds from this financing
transaction were used to fund the purchase of the acquired
assets.

On September 20, 2004, we acquired substantially all of the
assets of Kivera, Inc., for approximately $5.5 million in
cash. To fund the Kivera acquisition, on August 30, 2004 we
entered a Securities Purchase Agreement with the same third
party investors who purchased our securities used to finance the
Enterprise

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Acquisition. Pursuant to this agreement, we raised
$10.0 million in cash through the sale of
2,500,000 shares of our Class A Common Stock. Combined
proceeds from both the January and August financings, after
financing fees, were approximately $28.2 million.

As of the same date, we entered into a Waiver Agreement with the
holder of the Debenture. The Waiver modified certain provisions
of the Debenture as follows: (1) the holder of the
Debenture was required to convert the entire $15 million
principal amount into shares of our Class A Common Stock by
the end of 2004, (2) all of the material restrictive
covenants contained in the Debenture were nullified and
(3) the conversion price set forth in the Debenture was
decreased from $5.3753 to $5.01581 as an inducement to enter
into the Waiver (an adjustment such that conversion of the
Debenture will yield an additional 200,000 shares of
Class A Common Stock). As additional consideration, we paid
the holder of the Debenture a $1 million one-time fee in
cash. As a result, the entire face amount of the Debenture had
been converted into shares of our Class A Common Stock as
of December 31, 2004.

Off-Balance Sheet Arrangements

As of December 31, 2004, we had standby letters of credit
totaling approximately $0.8 million. The standby letters of
credit are in support of processing credit card payments from
our customers and an outstanding bid. As of December 31,
2003, there were standby letters of credit totaling
$0.2 million.

Contractual Commitments

As of December 31, 2004, our most significant commitments
consisted of long-term debt, obligations under capital leases
and non-cancelable operating leases. We lease certain furniture
and computer equipment under capital leases. We lease office
space and equipment under non-cancelable operating leases. As of
December 31, 2004 our commitments consisted of the
following:

|                          |  |      |      |  |           |   |      |           |  |   |        |  |  |       |     |  |  |   |      | 
|------------------------- |  | ---- | ---- |  | --------- | - | ---- | --------- |  | - | ------ |  |  | ----- | --- |  |  | - | ---- | 
|($ in millions)           |  | 2005 |      |  | 2006-2007 |   |      | 2008-2009 |  |   | Beyond |  |  | Total |    
|                          |  |      |      |  |           |   |      |           |  |   |        |  |  |       |    
|Notes payable             |  | $    | 12.0 |  |           | $ | 0.8  |           |  | $ |       |  |  | $     |    |  |  | $ | 12.8 | 
|Capital lease obligations |  |      | 3.0  |  |           |   | 3.9  |           |  |   |       |  |  |       |    |  |  |   | 6.9  | 
|Operating leases          |  |      | 4.0  |  |           |   | 7.9  |           |  |   | 5.2    |  |  |       | 1.3 |  |  |   | 18.4 | 
|                          |  |      |      |  |           |   |      |           |  |   |        |  |  |       |    
|                          |  | $    | 19.0 |  |           | $ | 12.6 |           |  | $ | 5.2    |  |  | $     | 1.3 |  |  | $ | 38.1 | 
|                          |  |      |      |  |           |   |      |           |  |   |        |  |  |       |    

Related Party Transactions









|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Qualitative and Quantitative Disclosures about Market
    Risk

Interest Rate Risk




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##### Table of Contents

December 31, 2004 by approximately $38,000, resulting in no
significant impact on our consolidated financial position,
results of operations or cash flows.

At December 31, 2004, we had cash and cash equivalents of
$18.3 million. Cash and cash equivalents consisted of
demand deposits and money market accounts that are interest rate
sensitive. However, these investments have short maturities
mitigating their sensitivity to interest rates. A hypothetical
100 basis point adverse movement (decrease) in interest
rates would have increased our net loss for 2004 by
approximately $0.2 million, resulting in no significant
impact on our consolidated financial position, results of
operations or cash flows.

Foreign Currency Risk

In January 2002, we entered into a contract for the sale of our
products and services, which is denominated in British Pounds
Sterling. Fluctuations in the value of the British Pound
Sterling relative to the United States dollar could cause us to
incur foreign currency exchange gains or losses. In April 2002,
we entered into several foreign currency option contracts. A
portion of the option contracts (notional amount of
£4.6 million British Pound Sterling) was entered into
to manage our exposure to changes in the foreign currency
exchange rate related to the forecasted net cash receipts under
our January 2002 contract for products and services. We also
entered into foreign currency options, notional amount of
£2.3 million British Pound Sterling, for speculative
purposes in April 2002. The change in fair value of these
options is reflected in Other Income on our Consolidated
Statements of Operations. These options had various expiration
dates between October 2002 and March 2003.

During 2002, we settled options with a notational value of
£1.4 million British Pound Sterling and options with a
notational value of £2.9 million British Pound
Sterling expired and were not exercised. The expense recognized
for settled options was $0.3 million. The expense
recognized for remaining settled options in 2003 was $17,000.

As of December 31, 2003, all of the option contracts had
expired and we did not utilize any foreign currency option
contracts or foreign currency options during the year ended
December 31, 2004.

As a result of our Enterprise Acquisition more fully described
in Item 1. Business  Overview,
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and
Capital Resources and Note 2 to our audited
Consolidated Financial Statements included elsewhere in this
Annual Report on Form 10-K, we acquired international
subsidiaries operating throughout Europe. These subsidiaries,
primarily in the U.K., transact business in several foreign
currencies, and fluctuations in the value of these currencies
relative to the U.S. dollar could cause us to incur foreign
currency translation adjustments. As described in Note 1 to
our Consolidated Financial Statements, results of operations and
cash flows for these foreign subsidiaries are translated at
average exchange rates during the period, and assets and
liabilities are translated at end-of-period exchange rates.
Translation adjustments for our international subsidiaries are
included as a separate component of accumulated other
comprehensive loss in stockholders equity. For the year
ended December 31, 2004, these foreign subsidiaries
generated revenues of $6.2 million and as of
December 31, 2004, there were total assets of
$4.8 million subject to foreign currency translation
adjustments. The total average assets subject to exchange rate
risk was approximately $3.5 million during 2004. A change
in the relevant foreign currency exchange rates would not impact
our net loss for the year ended December 31, 2004, as the
financial statements of these subsidiaries are prepared in the
foreign currency and then revenues and expenses are translated
to U.S. dollars at a common exchange rate. A 1% unfavorable
change in exchange rates would have decreased our net assets by
approximately $48,000 as of December 31, 2004, which would
not have a significant impact on our Consolidated Financial
Statements.

For the year ended December 31, 2004, our domestic
subsidiaries generated $6.5 million of revenue outside the
U.S., the majority of which was denominated in
U.S. dollars. As the majority of the revenues generated
outside the U.S. are denominated in U.S. dollars, a
change in exchange rates would not have a material impact on our
Consolidated Financial Statements. As of December 31, 2004,
our domestic subsidiaries had approximately $0.3 million in
accounts receivable and $1.0 million in unbilled
receivables that

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##### Table of Contents

are exposed to foreign currency exchange risk. We recorded
transaction gains of $64,000 on foreign currency denominated
receivables for the year ended December 31, 2004.







Item 8.
    Financial Statements and Supplementary DataThe financial statements listed in Item 15 are included in
this Annual Report on Form 10-K beginning on page F-1.







Item 9.
    Changes In and Disagreements With Accountants on
    Accounting and Financial DisclosureNone.







Item 9A.
    Controls and ProceduresEvaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Annual Report on
Form 10-K, we carried out an evaluation, under the
supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures.

Managements Report on Internal Control over Financial
Reporting

Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act rules 13a-15(f) and 15d-15(f). The
Sarbanes-Oxley Act of 2002 (the Act) imposed many
requirements regarding corporate governance and financial
reporting. One requirement under section 404 of the Act,
beginning with this Annual Report on Form 10-K, is for
management to report on the Companys internal controls
over financial reporting and for our independent registered
public accountants to attest to this report. In late November
2004, the Securities and Exchange Commission issued an exemptive
order providing a 45 day extension for the filing of these
reports and attestations by eligible companies. We elected to
utilize this 45 day extension; therefore, this
Form 10-K does not include these reports. These reports
will be included in an amended Form 10-K expected to be
filed no later than April 30, 2005. During 2004, we spent
considerable time and resources analyzing, documenting and
testing our system of internal controls. Currently, we are not
aware of any material weaknesses in our internal controls over
financial reporting and related disclosures.

Changes in Internal Control over Financial Reporting

There was no change in the registrants internal control
over financial reporting identified in connection with the
required evaluation that occurred during the registrants
fourth fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrants
internal control over financial reporting.







Item 9B.
    Other InformationNone.

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##### Table of Contents

Part III







Item 10.
    Directors and Executive Officers of the
    RegistrantThe information required by this Item 10 is incorporated by
reference from the information captioned Management of
TeleCommunication Systems, Inc. and Proposal to
Elect Two Directors to be included in the Companys
definitive proxy statement to be filed in connection with the
annual meeting of stockholders, to be held on June 9, 2005
(the Proxy Statement).







Item 11.
    Executive CompensationThe information required by this Item 11 is incorporated
by reference from the information captioned Executive
Compensation to be included in the Proxy Statement.







Item 12.
    Security Ownership of Certain Beneficial Owners and
    ManagementThe information required by this Item 12 is incorporated
by reference from the information captioned Beneficial
Ownership of TCS Common Stock to be included in the Proxy
Statement.







Item 13.
    Certain Relationships and Related
    TransactionsThe information required by this Item 13 is incorporated
by reference from the information captioned Certain
Transactions Relating to TeleCommunication Systems, Inc.
to be included in the Proxy Statement.







Item 14.
    Principle Accountant Fees and ServicesThe information required by this Item 14 is incorporated
by reference from the information captioned Principle
Accountant Fees and Services to be included in the Proxy
Statement.

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##### Table of Contents

Part IV







Item 15.
    Exhibits, Financial Statement Schedules(a)(1) Financial Statements

The financial statements listed in Item 15 are included in
this Annual Report on Form 10-K beginning on page F-1.

(a)(2) Financial Statement Schedules

The financial statement schedule required by Item 15 is
included in Exhibit 12 to this Annual Report on
Form 10-K.

Exhibits

The exhibits are listed in the Exhibit Index immediately
preceding the exhibits.

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##### Table of Contents

Index to Consolidated Financial Statements

|                                                                                                                          |  |  |     | 
|------------------------------------------------------------------------------------------------------------------------- |  |  | --- | 
|Report of
    Independent Registered Public Accounting Firm                                                               |  |  | F-2 | 
|Consolidated
    Balance Sheets as of December 31, 2004 and 2003                                                          |  |  | F-3 | 
|Consolidated
    Statements of Operations for each of the three years in the
    period ended December 31, 2004           |  |  | F-4 | 
|Consolidated
    Statements of Stockholders Equity for each of the three
    years in the period ended December 31, 2004 |  |  | F-5 | 
|Consolidated
    Statements of Cash Flows for each of the three years in the
    period ended December 31, 2004           |  |  | F-7 | 
|Notes to
    Consolidated Financial Statements                                                                            |  |  | F-8 | 

F-1



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##### Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

TeleCommunication Systems, Inc.

We have audited the accompanying consolidated balance sheets of
TeleCommunication Systems, Inc. as of December 31, 2004 and
2003, and the related consolidated statements of operations,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2004. Our audits
also included the financial statement schedule listed in the
Index at Item 15(a)(2). These financial statements and
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (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 TeleCommunication Systems, Inc. at
December 31, 2004 and 2003, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2004, in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related 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 LLPBaltimore, Maryland

March 8, 2005

F-2



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##### Table of Contents

TeleCommunication Systems, Inc.

Consolidated Balance Sheets

(amounts in thousands, except share data)

|                                         |                                                                                                                         |                                                                              |                                                                                                                     |                                                |              |     |         |        |          |     |        | 
|---------------------------------------- | ----------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | ------------ | --- | ------- | ------ | -------- | --- | ------ | 
|                                         |                                                                                                                         | December 31,                                                                 |                                                                                                                     |                                                | December 31, |    
|                                         |                                                                                                                         | 2004                                                                         |                                                                                                                     |                                                | 2003         |    
|                                         |                                                                                                                         |                                                                              |                                                                                                                     |                                                |              |    
|Assets                                   |                                                                                                                         |                                                                              |                                                                                                                     |                                                |              |     |         |       
|                                         | Current assets:                                                                                                         |                                                                              |                                                                                                                     |                                                |              |     |         |        |         
|                                         |                                                                                                                         | Cash and cash equivalents                                                    |                                                                                                                     | $                                              | 18,251       |     |         | $      | 18,785   |    
|                                         |                                                                                                                         | Accounts receivable, net of
    allowance of $1,355 in 2004 and $393 in 2003 |                                                                                                                     |                                                | 23,952       |     |         |        | 20,208   |    
|                                         |                                                                                                                         | Unbilled receivables                                                         |                                                                                                                     |                                                | 10,503       |     |         |        | 8,862    |    
|                                         |                                                                                                                         | Inventory                                                                    |                                                                                                                     |                                                | 3,985        |     |         |        | 451      |    
|                                         |                                                                                                                         | Other current assets                                                         |                                                                                                                     |                                                | 2,755        |     |         |        | 1,915    |    
|                                         |                                                                                                                         |                                                                              |                                                                                                                     |                                                |              |    
|                                         |                                                                                                                         |                                                                              |                                                                                                                     | Total current assets                           |              |     | 59,446  |        |          |     | 50,221 | 
|                                         | Property and equipment, net of
    accumulated depreciation and amortization of $27,946 in 2004 and
    $20,925 in 2003 |                                                                              |                                                                                                                     | 17,917                                         |              |     |         | 11,449 |         
|                                         | Software development costs, net of
    accumulated amortization of $1,351 in 2004 and $754 in 2003                      |                                                                              |                                                                                                                     | 2,791                                          |              |     |         | 518    |         
|                                         | Acquired intangible assets, net of
    accumulated amortization of $2,165 in 2004                                       |                                                                              |                                                                                                                     | 5,842                                          |              |     |         |       |         
|                                         | Goodwill                                                                                                                |                                                                              |                                                                                                                     | 14,798                                         |              |     |         |       |         
|                                         | Other assets                                                                                                            |                                                                              |                                                                                                                     | 1,588                                          |              |     |         | 3,092  |         
|                                         |                                                                                                                         |                                                                              |                                                                                                                     |                                                |              |    
|                                         |                                                                                                                         |                                                                              |                                                                                                                     | Total assets                                   |              | $   | 102,382 |        |          | $   | 65,280 | 
|                                         |                                                                                                                         |                                                                              |                                                                                                                     |                                                |              |    
|Liabilities and
    stockholders equity |                                                                                                                         |                                                                              |                                                                                                                     |                                                |              |     |         |       
|                                         | Current liabilities:                                                                                                    |                                                                              |                                                                                                                     |                                                |              |     |         |        |         
|                                         |                                                                                                                         | Accounts payable and accrued
    expenses                                    |                                                                                                                     | $                                              | 14,749       |     |         | $      | 8,817    |    
|                                         |                                                                                                                         | Accrued payroll and related
    liabilities                                  |                                                                                                                     |                                                | 4,507        |     |         |        | 3,331    |    
|                                         |                                                                                                                         | Deferred revenue                                                             |                                                                                                                     |                                                | 5,228        |     |         |        | 1,683    |    
|                                         |                                                                                                                         | Current portion of notes payable,
    including line of credit               |                                                                                                                     |                                                | 11,993       |     |         |        | 5,698    |    
|                                         |                                                                                                                         | Current portion of capital lease
    obligations                             |                                                                                                                     |                                                | 2,765        |     |         |        | 2,154    |    
|                                         |                                                                                                                         |                                                                              |                                                                                                                     |                                                |              |    
|                                         |                                                                                                                         |                                                                              |                                                                                                                     | Total current liabilities                      |              |     | 39,242  |        |          |     | 21,683 | 
|                                         | Capital lease obligations and notes
    payable, less current portion                                                   |                                                                              |                                                                                                                     | 3,634                                          |              |     |         | 6,746  |         
|                                         | Stockholders equity:                                                                                                   |                                                                              |                                                                                                                     |                                                |              |     |         |        |         
|                                         |                                                                                                                         | Class A Common Stock; $0.01
    par value:                                   |                                                                                                                     |                                                |              |     |         |        |          |    
|                                         |                                                                                                                         |                                                                              | Authorized shares 
    225,000,000; issued and outstanding shares of 30,626,454 in 2004
    and 22,062,974 in 2003 |                                                |              | 306 |         |        |          | 221 |       
|                                         |                                                                                                                         | Class B Common Stock; $0.01
    par value:                                   |                                                                                                                     |                                                |              |     |         |        |          |    
|                                         |                                                                                                                         |                                                                              | Authorized shares 
    75,000,000; issued and outstanding shares of 8,409,001 in 2004
    and 9,363,688 in 2003    |                                                |              | 84  |         |        |          | 94  |       
|                                         |                                                                                                                         | Deferred compensation                                                        |                                                                                                                     |                                                | (787         | )   |         |        | (1,399   | )  
|                                         |                                                                                                                         | Additional paid-in capital                                                   |                                                                                                                     |                                                | 209,778      |     |         |        | 169,256  |    
|                                         |                                                                                                                         | Accumulated other comprehensive
    loss:                                    |                                                                                                                     |                                                |              |     |         |        |          |    
|                                         |                                                                                                                         |                                                                              | Cumulative foreign currency
    translation adjustment                                                              |                                                |              | (6  | )       |        |          |    |       
|                                         |                                                                                                                         | Accumulated deficit                                                          |                                                                                                                     |                                                | (149,869     | )   |         |        | (131,321 | )  
|                                         |                                                                                                                         |                                                                              |                                                                                                                     |                                                |              |    
|                                         |                                                                                                                         |                                                                              |                                                                                                                     | Total stockholders equity                     |              |     | 59,506  |        |          |     | 36,851 | 
|                                         |                                                                                                                         |                                                                              |                                                                                                                     |                                                |              |    
|                                         |                                                                                                                         |                                                                              |                                                                                                                     | Total liabilities and
    stockholders equity |              | $   | 102,382 |        |          | $   | 65,280 | 
|                                         |                                                                                                                         |                                                                              |                                                                                                                     |                                                |              |    



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##### Table of Contents

TeleCommunication Systems, Inc.

Consolidated Statements of Operations

(amounts in thousands, except per share data)

|                                                          |                                                                                                                                                              |                                               |         |        |         |   |         |        |        |   |         |        |        | 
|--------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------- | ------- | ------ | ------- | - | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                          |                                                                                                                                                              | Year ended December 31,                       |        
|                                                          |                                                                                                                                                              |                                               |        
|                                                          |                                                                                                                                                              | 2004                                          |         |        | 2003    |   |         | 2002   |       
|                                                          |                                                                                                                                                              |                                               |         |        |         |   |         |        |       
|Revenue                                                   |                                                                                                                                                              |                                               |         |        |         |   |         |        |        |   |         |       
|                                                          | Hosted, subscriber, and maintenance                                                                                                                          |                                               | $       | 82,793 |         |   | $       | 37,656 |        |   | $       | 26,936 |       
|                                                          | Systems                                                                                                                                                      |                                               |         | 44,154 |         |   |         | 40,486 |        |   |         | 56,289 |       
|                                                          | Services                                                                                                                                                     |                                               |         | 15,978 |         |   |         | 13,923 |        |   |         | 8,820  |       
|                                                          |                                                                                                                                                              |                                               |         |        |         |   |         |        |       
|                                                          |                                                                                                                                                              | Total revenue                                 |         |        | 142,925 |   |         |        | 92,065 |   |         |        | 92,045 | 
|                                                          |                                                                                                                                                              |                                               |         |        |         |   |         |        |       
|Direct costs of
    revenue                               |                                                                                                                                                              |                                               |         |        |         |   |         |        |        |   |         |       
|                                                          | Direct cost of hosted, subscriber,
    and maintenance revenue, including amortization of software
    development costs of $0, $161, and $552, respectively |                                               |         | 51,197 |         |   |         | 18,082 |        |   |         | 15,741 |       
|                                                          | Direct cost of systems, including
    amortization of software development costs of $597, $8,874, and
    $4,279, respectively                               |                                               |         | 26,621 |         |   |         | 32,299 |        |   |         | 40,297 |       
|                                                          | Direct cost of services revenue                                                                                                                              |                                               |         | 9,669  |         |   |         | 9,835  |        |   |         | 5,744  |       
|                                                          |                                                                                                                                                              |                                               |         |        |         |   |         |        |       
|                                                          |                                                                                                                                                              | Total direct cost of revenue                  |         |        | 87,487  |   |         |        | 60,216 |   |         |        | 61,782 | 
|                                                          |                                                                                                                                                              |                                               |         |        |         |   |         |        |       
|Hosted, subscriber, and maintenance
    gross profit      |                                                                                                                                                              |                                               | 31,596  |        |         |   | 19,574  |        |        |   | 11,195  |       
|Systems gross profit                                      |                                                                                                                                                              |                                               | 17,533  |        |         |   | 8,187   |        |        |   | 15,992  |       
|Services gross profit                                     |                                                                                                                                                              |                                               | 6,309   |        |         |   | 4,088   |        |        |   | 3,076   |       
|                                                          |                                                                                                                                                              |                                               |         |        |         |   |         |        |       
|                                                          |                                                                                                                                                              | Total gross profit                            |         |        | 55,438  |   |         |        | 31,849 |   |         |        | 30,263 | 
|                                                          |                                                                                                                                                              |                                               |         |        |         |   |         |        |       
|Operating costs and
    expenses                          |                                                                                                                                                              |                                               |         |        |         |   |         |        |        |   |         |       
|                                                          | Research and development expense                                                                                                                             |                                               |         | 19,598 |         |   |         | 16,932 |        |   |         | 17,047 |       
|                                                          | Sales and marketing expense                                                                                                                                  |                                               |         | 12,982 |         |   |         | 8,917  |        |   |         | 10,029 |       
|                                                          | General and administrative expense                                                                                                                           |                                               |         | 19,108 |         |   |         | 11,251 |        |   |         | 12,235 |       
|                                                          | Non-cash stock compensation expense                                                                                                                          |                                               |         | 1,195  |         |   |         | 1,501  |        |   |         | 1,554  |       
|                                                          | Depreciation and amortization of
    property and equipment                                                                                                  |                                               |         | 7,795  |         |   |         | 6,612  |        |   |         | 6,156  |       
|                                                          | Amortization of acquired intangible
    assets                                                                                                               |                                               |         | 2,165  |         |   |         | 531    |        |   |         | 553    |       
|                                                          |                                                                                                                                                              |                                               |         |        |         |   |         |        |       
|                                                          |                                                                                                                                                              | Total operating costs and expenses            |         |        | 62,843  |   |         |        | 45,744 |   |         |        | 47,574 | 
|                                                          |                                                                                                                                                              |                                               |         |        |         |   |         |        |       
|Loss from operations                                      |                                                                                                                                                              |                                               | (7,405  | )      |         |   | (13,895 | )      |        |   | (17,311 | )     
|Interest expense                                          |                                                                                                                                                              |                                               | (3,196  | )      |         |   | (1,088  | )      |        |   | (897    | )     
|Debt conversion expense                                   |                                                                                                                                                              |                                               | (7,886  | )      |         |   |        |        |        |   |        |       
|Other (expense)/income, net                               |                                                                                                                                                              |                                               | (61     | )      |         |   | 1,497   |        |        |   | 370     |       
|                                                          |                                                                                                                                                              |                                               |         |        |         |   |         |        |       
|Net loss                                                  |                                                                                                                                                              | $                                             | (18,548 | )      |         | $ | (13,486 | )      |        | $ | (17,838 | )     
|                                                          |                                                                                                                                                              |                                               |         |        |         |   |         |        |       
|Loss per share-basic and diluted                          |                                                                                                                                                              | $                                             | (0.56   | )      |         | $ | (0.45   | )      |        | $ | (0.61   | )     
|                                                          |                                                                                                                                                              |                                               |         |        |         |   |         |        |       
|Weighted average shares
    outstanding-basic and diluted |                                                                                                                                                              |                                               | 33,381  |        |         |   | 29,796  |        |        |   | 29,149  |       
|                                                          |                                                                                                                                                              |                                               |         |        |         |   |         |        |       
|                                                         
|Composition of non-cash stock
    compensation expense:   |                                                                                                                                                              |                                               |         |        |         |   |         |        |        |   |         |       
|                                                          | Direct costs of revenue                                                                                                                                      |                                               | $       | 53     |         |   | $       | 93     |        |   | $       | 142    |       
|                                                          | Research and development expense                                                                                                                             |                                               |         | 140    |         |   |         | 245    |        |   |         | 378    |       
|                                                          | Sales and marketing expense                                                                                                                                  |                                               |         | 56     |         |   |         | 171    |        |   |         | 263    |       
|                                                          | General and administrative expense                                                                                                                           |                                               |         | 946    |         |   |         | 992    |        |   |         | 771    |       
|                                                          |                                                                                                                                                              |                                               |         |        |         |   |         |        |       
|                                                          |                                                                                                                                                              | Total non-cash stock compensation
    expense |         | $      | 1,195   |   |         | $      | 1,501  |   |         | $      | 1,554  | 
|                                                          |                                                                                                                                                              |                                               |         |        |         |   |         |        |       



F-4



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##### Table of Contents

TeleCommunication Systems, Inc.

Consolidated Statements of Stockholders Equity

(amounts in thousands, except share data)

|                                                                                                               |  |         |     |  |         |   |     |              |  |             |         |   |       |               |         |             |  |   |       |  |  |   |          |   |  |   |         |  
|-------------------------------------------------------------------------------------------------------------- |  | ------- | --- |  | ------- | - | --- | ------------ |  | ----------- | ------- | - | ----- | ------------- | ------- | ----------- |  | - | ----- |  |  | - | -------- | - |  | - | ------- | -
|                                                                                                               |  |         |     |  |         |   |     |              |  | Accumulated |         |   |       |              
|                                                                                                               |  | Class A |     |  | Class B |   |     |              |  | Additional  |         |   | Other |               |         |             | 
|                                                                                                               |  | Common  |     |  | Common  |   |     | Deferred     |  |             | Paid-in |   |       | Comprehensive |         | Accumulated |  |   |      
|                                                                                                               |  | Stock   |     |  | Stock   |   |     | Compensation |  |             | Capital |   |       | Loss          |         | Deficit     |  |   | Total | 
|                                                                                                               |  |         |     |  |         |   |     |              |  |             |         |   |       |               |         |             |  |   |       | 
|Balance at January 1,
    2002                                                                                 |  | $       | 182 |  |         | $ | 106 |              |  | $           |        |   |       | $             | 162,570 |             |  | $ |      |  |  | $ | (99,997  | ) |  | $ | 62,861  |  
|Options exercised for the purchase
    of 415,713 shares of Class A Common Stock                               |  |         | 4   |  |         |   |    |              |  |             |        |   |       |               | 372     |             |  |   |      |  |  |   |         |   |  |   | 376     |  
|Issuance of 116,141 shares of
    Class A Common Stock under Employee Stock Purchase Plan                      |  |         | 1   |  |         |   |     |              |  |             |        |   |       |               | 216     |             |  |   |      |  |  |   |         |   |  |   | 217     |  
|Stock compensation expense for
    issuance of Class A Common Stock options at below fair market
    value     |  |         |    |  |         |   |    |              |  |             |        |   |       |               | 1,554   |             |  |   |      |  |  |   |         |   |  |   | 1,554   |  
|Issuance of 232,210 shares of
    Class A Common Stock for the acquisition of Otelnet                          |  |         | 2   |  |         |   |    |              |  |             |        |   |       |               | 259     |             |  |   |      |  |  |   |         |   |  |   | 261     |  
|Issuance of stock options to
    purchase 125,000 shares of Class A Common Stock for
    non-employee services |  |         |    |  |         |   |    |              |  |             |        |   |       |               | 205     |             |  |   |      |  |  |   |         |   |  |   | 205     |  
|Conversion of Class B Common
    Stock into Class A Common Stock  702,628 shares                              |  |         | 7   |  |         |   | (7  | )            |  |             |        |   |       |               |        |             |  |   |      |  |  |   |         |   |  |   |        |  
|Net loss for 2002                                                                                              |  |         |    |  |         |   |    |              |  |             |        |   |       |               |        |             |  |   |      |  |  |   | (17,838  | ) |  |   | (17,838 | )
|                                                                                                               |  |         |     |  |         |   |     |              |  |             |         |   |       |               |         |             |  |   |       |  | 
|Balance at December 31,
    2002                                                                               |  |         | 196 |  |         |   | 99  |              |  |             |        |   |       |               | 165,176 |             |  |   |      |  |  |   | (117,835 | ) |  |   | 47,636  |  
|Options exercised for the purchase
    of 735,151 shares of Class A Common Stock                               |  |         | 7   |  |         |   |    |              |  |             |        |   |       |               | 919     |             |  |   |      |  |  |   |         |   |  |   | 926     |  
|Issuance of 91,243 shares of
    Class A Common Stock under Employee Stock Purchase Plan                       |  |         | 1   |  |         |   |    |              |  |             |        |   |       |               | 142     |             |  |   |      |  |  |   |         |   |  |   | 143     |  
|Issuance of 1,077,250 shares of
    restricted Class A Common Stock to directors and key
    executives        |  |         | 11  |  |         |   |    |              |  |             | (1,890  | ) |       |               | 1,879   |             |  |   |      |  |  |   |         |   |  |   |        |  
|Amortization of deferred
    compensation expense                                                              |  |         |    |  |         |   |    |              |  |             | 491     |   |       |               |        |             |  |   |      |  |  |   |         |   |  |   | 491     |  
|Conversion of 527,272 shares of
    Class B Common Stock to Class A Common Stock                               |  |         | 5   |  |         |   | (5  | )            |  |             |        |   |       |               |        |             |  |   |      |  |  |   |         |   |  |   |        |  
|Stock compensation expense for
    issuance of Class A Common Stock options at below fair
    market value     |  |         |    |  |         |   |    |              |  |             |        |   |       |               | 1,010   |             |  |   |      |  |  |   |         |   |  |   | 1,010   |  
|Stock compensation expense for
    options issued to non-employees for service                                 |  |         |    |  |         |   |    |              |  |             |        |   |       |               | 131     |             |  |   |      |  |  |   |         |   |  |   | 131     |  
|Net loss for 2003                                                                                              |  |         |    |  |         |   |    |              |  |             |        |   |       |               |        |             |  |   |      |  |  |   | (13,486  | ) |  |   | (13,486 | )
|                                                                                                               |  |         |     |  |         |   |     |              |  |             |         |   |       |               |         |             |  |   |       |  | 

F-5



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##### Table of Contents



|                                                                                                                                                        |  |         |     |   |         |   |     |              |  |             |         |   |       |               |         |   |             |   |    |       |  |   |          |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------- | --- | - | ------- | - | --- | ------------ |  | ----------- | ------- | - | ----- | ------------- | ------- | - | ----------- | - | -- | ----- |  | - | -------- | - |  | - | ------- | -
|                                                                                                                                                        |  |         |     |   |         |   |     |              |  | Accumulated |         |   |       |               |        
|                                                                                                                                                        |  | Class A |     |   | Class B |   |     |              |  | Additional  |         |   | Other |               |         |   |             |  
|                                                                                                                                                        |  | Common  |     |   | Common  |   |     | Deferred     |  |             | Paid-in |   |       | Comprehensive |         |   | Accumulated |   |    |      
|                                                                                                                                                        |  | Stock   |     |   | Stock   |   |     | Compensation |  |             | Capital |   |       | Loss          |         |   | Deficit     |   |    | Total | 
|                                                                                                                                                        |  |         |     |   |         |   |     |              |  |             |         |   |       |               |         |   |             |   |    |       | 
|Balance at December 31,
    2003                                                                                                                        |  | $       | 221 |   |         | $ | 94  |              |  | $           | (1,399  | ) |       | $             | 169,256 |   |             | $ |   |       |  | $ | (131,321 | ) |  | $ | 36,851  |  
|Options exercised for the purchase
    of 537,333 shares of Class A Common Stock                                                                        |  |         | 5   |   |         |   |    |              |  |             |        |   |       |               | 1,053   |   |             |   |   |       |  |   |         |   |  |   | 1,058   |  
|Issuance of 85,901 shares of
    Class A Common Stock under Employee Stock Purchase Plan                                                                |  |         | 1   |   |         |   |    |              |  |             |        |   |       |               | 344     |   |             |   |   |       |  |   |         |   |  |   | 345     |  
|Issuance of 1,568,308 shares of
    Class A Common Stock in connection with the Enterprise
    acquisition and related financing, net of issuance costs |  |         | 16  |   |         |   |    |              |  |             |        |   |       |               | 8,366   |   |             |   |   |       |  |   |         |   |  |   | 8,382   |  
|Issuance of 2,500,000 shares of
    Class A Common Stock in connection with a private
    financing, net of issuance costs                              |  |         | 25  |   |         |   |    |              |  |             |        |   |       |               | 9,317   |   |             |   |   |       |  |   |         |   |  |   | 9,342   |  
|Issuance of 2,990,544 shares of
    Class A Common Stock for the conversion of the convertible
    subordinated debentures                              |  |         | 29  |   |         |   |    |              |  |             |        |   |       |               | 15,871  |   |             |   |   |       |  |   |         |   |  |   | 15,900  |  
|Issuance of 45,376 shares of
    Class A Common Stock for accrued interest for convertible
    subordinated debentures                                  |  |         |    |   |         |   |    |              |  |             |        |   |       |               | 209     |   |             |   |   |       |  |   |         |   |  |   | 209     |  
|Surrender of restricted shares of
    Class A Common Stock as payment for payroll tax withholdings                                                      |  |         | (1  | ) |         |   |    |              |  |             |        |   |       |               | (449    | ) |             |   |   |       |  |   |         |   |  |   | (450    | )
|Fair value of beneficial conversion
    feature of convertible subordinated debentures                                                                  |  |         |    |   |         |   |    |              |  |             |        |   |       |               | 3,662   |   |             |   |   |       |  |   |         |   |  |   | 3,662   |  
|Issuance of warrants to purchase
    341,072 shares of Class A Common Stock                                                                             |  |         |    |   |         |   |    |              |  |             |        |   |       |               | 1,395   |   |             |   |   |       |  |   |         |   |  |   | 1,395   |  
|Conversion of 954,687 shares of
    Class B Common Stock to Class A Common Stock                                                                        |  |         | 10  |   |         |   | (10 | )            |  |             |        |   |       |               |        |   |             |   |   |       |  |   |         |   |  |   |        |  
|Stock compensation expense for
    issuance of Class A Common Stock options at below fair
    market value                                              |  |         |    |   |         |   |    |              |  |             |        |   |       |               | 583     |   |             |   |   |       |  |   |         |   |  |   | 583     |  
|Amortization of deferred
    compensation expense                                                                                                       |  |         |    |   |         |   |    |              |  |             | 612     |   |       |               |        |   |             |   |   |       |  |   |         |   |  |   | 612     |  
|Fair value of stock options issued
    to non-employees for service                                                                                     |  |         |    |   |         |   |    |              |  |             |        |   |       |               | 171     |   |             |   |   |       |  |   |         |   |  |   | 171     |  
|Foreign currency translation
    adjustment                                                                                                             |  |         |    |   |         |   |    |              |  |             |        |   |       |               |        |   |             |   | (6 | )     |  |   |         |   |  |   | (6      | )
|Net loss for 2004                                                                                                                                       |  |         |    |   |         |   |    |              |  |             |        |   |       |               |        |   |             |   |   |       |  |   | (18,548  | ) |  |   | (18,548 | )
|                                                                                                                                                        |  |         |     |   |         |   |     |              |  |             |         |   |       |               |         |   |             |   |    |       | 
|Balance at December 31,
    2004                                                                                                                        |  | $       | 306 |   |         | $ | 84  |              |  | $           | (787    | ) |       | $             | 209,778 |   |             | $ | (6 | )     |  | $ | (149,869 | ) |  | $ | 59,506  |  
|                                                                                                                                                        |  |         |     |   |         |   |     |              |  |             |         |   |       |               |         |   |             |   |    |       | 



F-6



---



##### Table of Contents

TeleCommunication Systems, Inc.

Consolidated Statements of Cash Flows

(amounts in thousands)

|                                                                                                           |                                                                          |                                             |         |       |        |   |         |       |        |   |         |       |        |  
|---------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | ------------------------------------------- | ------- | ----- | ------ | - | ------- | ----- | ------ | - | ------- | ----- | ------ | -
|                                                                                                           |                                                                          | Year ended December 31,                     |        
|                                                                                                           |                                                                          |                                             |        
|                                                                                                           |                                                                          | 2004                                        |         |       | 2003   |   |         | 2002  |       
|                                                                                                           |                                                                          |                                             |         |       |        |   |         |       |       
|Operating activities:                                                                                      |                                                                          |                                             |         |       |        |   |         |       |        |   |         |      
|Net loss                                                                                                   |                                                                          | $                                           | (18,548 | )     |        | $ | (13,486 | )     |        | $ | (17,838 | )    
|Adjustments to reconcile net loss
    to net cash used in operating activities:                            |                                                                          |                                             |         |       |        |   |         |       |        |   |         |      
|                                                                                                           | Depreciation and amortization of
    property and equipment              |                                             |         | 7,795 |        |   |         | 6,612 |        |   |         | 6,156 |       
|                                                                                                           | Amortization of acquired intangible
    assets                           |                                             |         | 2,165 |        |   |         | 531   |        |   |         | 553   |       
|                                                                                                           | Non-cash employee compensation
    expense                               |                                             |         | 1,195 |        |   |         | 1,501 |        |   |         | 1,759 |       
|                                                                                                           | Amortization of software
    development costs                           |                                             |         | 597   |        |   |         | 9,035 |        |   |         | 4,831 |       
|                                                                                                           | Non-cash debt conversion expense                                         |                                             |         | 6,886 |        |   |         |      |        |   |         |      |       
|                                                                                                           | Amortization of debt discount                                            |                                             |         | 1,344 |        |   |         |      |        |   |         |      |       
|                                                                                                           | Amortization of deferred financing
    fees included in interest expense |                                             |         | 464   |        |   |         | 69    |        |   |         |      |       
|                                                                                                           | Other non-cash expenses                                                  |                                             |         | 501   |        |   |         | 403   |        |   |         |      |       
|                                                                                                           | State of Maryland loan forgiveness                                       |                                             |         | (100  | )      |   |         | (100  | )      |   |         | (100  | )     
|                                                                                                           | Changes in operating assets and
    liabilities:                         |                                             |         |       |        |   |         |       |        |   |         |       |       
|                                                                                                           |                                                                          | Accounts receivable, net                    |         |       | 3,440  |   |         |       | 2,310  |   |         |       | (8,658 | )
|                                                                                                           |                                                                          | Unbilled receivables                        |         |       | (1,087 | ) |         |       | (1,482 | ) |         |       | (1,990 | )
|                                                                                                           |                                                                          | Inventory                                   |         |       | (2,924 | ) |         |       |       |   |         |       |       |  
|                                                                                                           |                                                                          | Other current assets                        |         |       | 275    |   |         |       | (705   | ) |         |       | 31     |  
|                                                                                                           |                                                                          | Accounts payable and accrued
    expenses   |         |       | (2,410 | ) |         |       | (7,457 | ) |         |       | 3,878  |  
|                                                                                                           |                                                                          | Accrued payroll and related
    liabilities |         |       | 123    |   |         |       | (64    | ) |         |       | (65    | )
|                                                                                                           |                                                                          | Deferred revenue                            |         |       | 479    |   |         |       | (1,163 | ) |         |       | 564    |  
|                                                                                                           |                                                                          |                                             |         |       |        |   |         |       |       
|Net cash provided by/(used in)
    operating activities                                                    |                                                                          |                                             | 195     |       |        |   | (3,996  | )     |        |   | (10,879 | )    
|                                                                                                           |                                                                          |                                             |         |       |        |   |         |       |       
|Investing activities:                                                                                      |                                                                          |                                             |         |       |        |   |         |       |        |   |         |      
|Acquisitions, net of cash acquired                                                                         |                                                                          |                                             | (24,751 | )     |        |   |        |       |        |   | (303    | )    
|Purchases of property and equipment                                                                        |                                                                          |                                             | (7,000  | )     |        |   | (5,951  | )     |        |   | (4,907  | )    
|Other assets                                                                                               |                                                                          |                                             | 2,713   |       |        |   | (1,704  | )     |        |   | (146    | )    
|Payments on notes receivable from
    employees                                                            |                                                                          |                                             |        |       |        |   | 14      |       |        |   | 3,507   |      
|Capitalized software development
    costs                                                                 |                                                                          |                                             |        |       |        |   | (1,865  | )     |        |   | (4,801  | )    
|                                                                                                           |                                                                          |                                             |         |       |        |   |         |       |       
|Net cash used in investing
    activities                                                                  |                                                                          |                                             | (29,038 | )     |        |   | (9,506  | )     |        |   | (6,650  | )    
|                                                                                                           |                                                                          |                                             |         |       |        |   |         |       |       
|Financing activities:                                                                                      |                                                                          |                                             |         |       |        |   |         |       |        |   |         |      
|Payments on long-term debt and
    capital lease obligations                                               |                                                                          |                                             | (8,985  | )     |        |   | (5,450  | )     |        |   | (3,856  | )    
|Proceeds from issuance of
    Class A Common Stock and Convertible subordinated debentures                 |                                                                          |                                             | 31,000  |       |        |   |        |       |        |   |        |      
|Payment to induce conversion of
    convertible subordinated debenture                                     |                                                                          |                                             | (1,000  | )     |        |   |        |       |        |   |        |      
|Financing fees related to issuance
    of Class A Common Stock and Convertible subordinated
    debentures |                                                                          |                                             | (1,758  | )     |        |   |        |       |        |   |        |      
|Proceeds from draws on revolving
    line of credit, net                                                   |                                                                          |                                             | 5,000   |       |        |   |        |       |        |   |        |      
|Proceeds from issuance of long-term
    debt                                                               |                                                                          |                                             | 2,500   |       |        |   | 9,266   |       |        |   | 5,266   |      
|Proceeds from exercise of employee
    stock options and sale of stock                                     |                                                                          |                                             | 1,403   |       |        |   | 1,069   |       |        |   | 593     |      
|                                                                                                           |                                                                          |                                             |         |       |        |   |         |       |       
|Net cash provided by financing
    activities                                                              |                                                                          |                                             | 28,160  |       |        |   | 4,885   |       |        |   | 2,003   |      
|                                                                                                           |                                                                          |                                             |         |       |        |   |         |       |       
|Net decrease in cash                                                                                       |                                                                          |                                             | (683    | )     |        |   | (8,617  | )     |        |   | (15,526 | )    
|Effect of exchange rates on cash
    and cash equivalents                                                  |                                                                          |                                             | 149     |       |        |   |        |       |        |   |        |      
|Cash and cash equivalents at the
    beginning of the period                                               |                                                                          |                                             | 18,785  |       |        |   | 27,402  |       |        |   | 42,928  |      
|                                                                                                           |                                                                          |                                             |         |       |        |   |         |       |       
|Cash and cash equivalents at the
    end of the period                                                     |                                                                          | $                                           | 18,251  |       |        | $ | 18,785  |       |        | $ | 27,402  |      
|                                                                                                           |                                                                          |                                             |         |       |        |   |         |       |       



F-7



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##### Table of Contents

TeleCommunication Systems, Inc.





Notes to Consolidated Financial Statements

(amounts in thousands, except share and per share data)



1.
    Significant Accounting PoliciesDescription of Business

TeleCommunication Systems, Inc. applies highly reliable wireless
data communications technology to solutions for customers. We
manage our business in two segments, our Commercial Applications
segment and our Government segment.

Commercial Applications Segment. Our carrier software
system products enable wireless carriers to deliver short text
messages, location information, internet content, and other
enhanced communication services to and from wireless phones. We
earn network Wireless Carrier revenue through the sale of
licenses, deployment and customization fees and maintenance
fees. Pricing is generally based on the volume of capacity
bought from us by the carrier. As of December 31, 2004, we
had deployed 85 software systems for our customers in wireless
carrier networks around the world, including those of Verizon
Wireless, Vodafone, T-Mobile, Telefonica and its affiliate Vivo,
Alltel, and Hutchison Whampoas
3tm-brand
third generation networks. We also provide carrier technology on
a hosted, i.e.,service bureau basis; that is, customers use our
software functionality through connections to and from our
network operations centers, paying us monthly based on the
number of subscribers, cell sites, or call center circuits, or
message volume. We provide enhanced 9-1-1 (E9-1-1) services,
commercial location-based services, and inter-carrier text
message distribution services on a service bureau basis. As of
December 31, 2004, we provide E9-1-1 service under
contracts with 36 wireless carrier networks in the U.S. and
Puerto Rico, as well as Voice-Over-Internet-Protocol
(VOIP) service providers.

Using our proprietary
Fusiontm
behind-the-enterprise-firewall platform uniting messaging,
synchronization and web technologies, the Commercial Application
segments 20/20
Deliverytm
application enables package and vehicle tracking, productivity
tools, and the ability to capture digital signatures for proof
of delivery. We also generate subscriber revenue as a reseller
of Research in Motions BlackBerry® devices and
service, and as a provider of wireless client device software
applications, including access to current traffic information
and real-time financial market data to users.

Government Segment. We design, furnish, install and
operate wireless and data network communication systems,
including our SwiftLink®deployable communication systems,
and incorporating high speed, satellite, and internet protocol
technology. More than 550 of our SwiftLink®deployable
communication systems are in use for security, defense, and law
enforcement around the world. We also own and operate satellite
teleport facilities. Since our founding in 1987 we have provided
communication systems integration, information technology
services, and software solutions to the U.S. Department of
Defense and other government customers.

As set forth in Note 2, we acquired the Enterprise Mobility
Solutions (Enterprise) division of Aether Systems, Inc. on
January 13, 2004, with an effective date of January 1,
2004. As set forth in Note 3, we acquired substantially all
of the assets of Kivera, Inc. (Kivera), a provider of
internet-based location application software and geo-data
professional services, on September 20, 2004. The acquired
operations are included in our Commercial Applications segment
beginning on the effective date of the acquisitions.

Use of Estimates. The preparation of financial statements
in conformity with generally accepted accounting principles in
the U.S. requires management to make estimates and assumptions
that affect the reported amounts and related disclosures. Actual
results could differ from those estimates.

Principles of Consolidation. The accompanying financial
statements include the accounts of our wholly owned
subsidiaries. All intercompany balances and transactions have
been eliminated in consolidation.

Reclassifications. We have reclassified certain
prior-year amounts for comparative purposes. These
reclassifications did not affect our results of operations for
the years presented. In connection with the

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##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated
Financial Statements  (Continued)

(amounts in thousands, except share and per share data)

realignment of our segments, discussed in Note 23, we have
also reclassified our revenue categories, consistent with the
manner in which we monitor our business. Our current revenue
categories include hosted, subscriber and maintenance revenue,
systems revenue and services revenue. Current and prior year
amounts for revenues, direct costs of revenue and gross profit
have been reclassified to conform with these classifications.

Cash and Cash Equivalents. Cash and cash equivalents
include cash and highly liquid investments with a maturity of
three months or less when purchased. Cash equivalents are
reported at fair value, which approximates cost. None of our
cash is subject to significant restrictions.

Allowances for Doubtful Accounts Receivable. All of our
accounts receivable are trade receivables generated in the
ordinary course of our business. We use estimates to determine
the amount of the allowance for doubtful accounts necessary to
reduce accounts receivable to their expected net realizable
value. We estimate the amount of the required allowance by
reviewing the status of significant past-due receivables and by
establishing provisions for estimated losses by analyzing
current and historical bad debt trends. Changes to our allowance
for doubtful accounts are recorded as a component of general and
administrative expenses in our accompanying Consolidated
Statement of Operations. Our credit and collection policies and
the financial strength of our customers are critical to us in
maintaining a relatively small amount of write-offs of
receivables. Our credit policies are especially crucial, as we
generally do not require collateral from our customers.
Receivables that are ultimately deemed uncollectible are
charged-off as a reduction of receivables and the allowance for
doubtful accounts.

Inventory. We maintain inventory of component parts and
finished product for our Government deployable communications
systems, and of handheld computers, pagers, wireless modems, and
accessories for Commercial subscribers. Inventory is stated at
the lower of cost or market. Cost is based on the weighted
average method.

Property and Equipment. Property and equipment is stated
at cost less accumulated depreciation. Depreciation is computed
using the straight-line method based on the estimated useful
lives of equipment, generally five years for furniture and
fixtures and three years for computer equipment, software and
vehicles. Amortization of leasehold improvements is provided
using the straight-line method over the lesser of the useful
life of the asset or the remaining term of the lease. Assets
held under capital leases are stated at the lesser of the
present value of future minimum lease payments or the fair value
of the property at the inception of the lease. The assets
recorded under capital leases are amortized over the lesser of
the lease term or the estimated useful life of the assets in a
manner consistent with our depreciation policy for owned assets.

Goodwill. Goodwill represents the excess of cost over the
fair value of assets of acquired businesses. Goodwill acquired
in a purchase business combination is not amortized, but instead
is evaluated at least annually for impairment using a discounted
cash flow model in accordance with the provisions of Statement
of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets.

Software Development Costs. We capitalize software
development costs after we establish technological feasibility,
and amortize those costs over the estimated useful lives of the
software beginning on the date when the software is first
installed and used. Acquired technology from the Enterprise
acquisition and the Kivera acquisition, representing the
estimated value of the proprietary technology acquired in each
acquisition, has also been recorded as capitalized software
development costs.

Costs we incurred are capitalized when technological feasibility
has been established. For new products, technological
feasibility is established when an operative version of the
computer software product is completed in the same software
language as the product to be ultimately marketed, performs all
the major functions planned for the product, and has
successfully completed initial customer testing. Technological

F-9



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##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated
Financial Statements  (Continued)

(amounts in thousands, except share and per share data)

feasibility for enhancements to an existing product is
established when a detail program design is completed. Costs
that are capitalized include direct labor, related overhead and
other direct costs. These costs are amortized on a
product-by-product basis using the straight-line method over the
products estimated useful life, which is never greater
than three years. Amortization is also computed using the ratio
that current revenue for the product bears to the total of
current and anticipated future revenue for that product (the
revenue curve method). If this revenue curve method results in
amortization greater than the amount computed using the
straight-line method, amortization is recorded at that greater
amount. Our policies to determine when to capitalize software
development costs and how much to amortize in a given period
require us to make subjective estimates and judgments. If our
software products do not achieve the level of market acceptance
that we expect and our future revenue estimates for these
products change, the amount of amortization that we record may
increase compared to prior periods. The amortization of
capitalized software development costs has been recorded as a
cost of revenue.

Acquired technology is amortized over the products
estimated useful life based on the purchase price allocation and
valuation procedures performed at the time of the acquisition.
Amortization is calculated using the ratio of the estimated
future cash flows generated in each period to the estimated
total cash flows to be contributed from each product or the
straight-line method, whichever is greater.

As of June 30, 2003, it was determined that the expected
margins from selling developed versions of certain software
products over their remaining useful lives was less than their
remaining book value plus costs to complete. Therefore, we
recorded additional amortization of $7,000 for the quarter ended
June 30, 2003. This change in estimate gave consideration
to the low level of license revenues earned during the second
quarter of 2003 from these products and revised estimates of
future revenues net of costs to complete.

Acquired Intangible Assets. In conjunction with the
Enterprise acquisition and the Kivera acquisition in 2004 and
the Xypoint acquisition in 2001, we acquired customer contracts,
customer lists, developed technology, patents, copyrights,
domain names, trademarks, and a tradename that will be amortized
over their respective estimated useful lives.

The intangible assets acquired in the Enterprise acquisition
were determined to have useful lives of 3 to 5 years, with
a weighted-average useful life of 4.1 years, based on the
ratio of the estimated cash flows generated in each period to
the estimated total cash flows to be contributed from each
asset. We are amortizing those assets using the greater of the
straight-line method or the revenue curve method.

The intangible assets acquired in the Kivera acquisition were
determined to have useful lives of 5 to 19 years, with a
weighted-average useful life of 7.3 years, based on the
estimated cash flows to be contributed from each asset. We are
amortizing these assets using the greater of the straight-line
method or the revenue curve method, with amortization having
begun in the fourth quarter of 2004.

The intangible assets acquired in the Xypoint acquisition were
determined to have useful lives of 3 years, and have been
fully amortized.

Impairment of Long-Lived Assets. Long-lived assets,
including intangible assets, are reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset or group of assets may not be fully
recoverable. Certain long-lived assets are reviewed for
impairment annually if no impairment indicators are present
which would otherwise initiate a review.

If an impairment indicator is present, we evaluate
recoverability by a comparison of the carrying amount of the
assets to future undiscounted net cash flows that we expect to
generate from these assets. If the assets are impaired, we
recognize an impairment charge equal to the amount by which the
carrying amount exceeds the fair value of the assets. Assets to
be disposed of are reported at the lower of carrying values or
fair values, less estimated costs of disposal.

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##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated
Financial Statements  (Continued)

(amounts in thousands, except share and per share data)

Other Comprehensive Income/loss. Comprehensive income
includes changes in the equity of a business during a period
from transactions and other events and circumstances from
non-owner sources. Other comprehensive income/loss refers to
revenue, expenses, gains and losses that under U.S. generally
accepted accounting principles are included in comprehensive
income, but excluded from net income. For operations outside the
U.S. that prepare financial statements in currencies other
than the U.S. dollar, results of operations and cash flows
are translated at average exchange rates during the period, and
assets and liabilities are translated at end-of-period exchange
rates. Translation adjustments for our international
subsidiaries are included as a separate component of accumulated
other comprehensive loss in stockholders equity. Total
comprehensive loss for the three years ended December 31,
2004 was not materially different than consolidated net loss.

Revenue Recognition. Revenue is generated from our two
segments as described below and as discussed more fully in
Note 23.

Hosted, Subscriber, and Maintenance Revenue. Revenue from
hosted services consists of monthly recurring service fees and
is recognized in the month earned. Revenue from subscriber
service fees is recognized in the period earned. Revenue from
activation fees is recognized ratably over the determinable
portion of the customer contract, which is typically twelve
months. Maintenance fees are collected in advance and recognized
ratably over the annual maintenance period. Any unearned
revenue, including unrecognized maintenance fees, is included in
deferred revenue.

Systems Revenue. We design, develop, and deploy
communications systems. These systems may include packaged
software licenses. Systems typically contain multiple elements,
which may include the product license, installation,
integration, and hardware. The total arrangement fee is
allocated among each element based on vendor-specific objective
evidence of the relative fair value of each of the elements.
Fair value is generally determined based on the price charged
when the element is sold separately. In the absence of evidence
of fair value of a delivered element, revenue is allocated first
to the undelivered elements based on fair value and the residual
revenue to the delivered elements. The software licenses are
generally perpetual licenses for a specified number of users
that allow for the purchase of annual maintenance at a specified
rate. All fees are recognized as revenue when four criteria are
met. These four criteria are (i) evidence of an arrangement
(ii) delivery has occurred, (iii) the fee is fixed or
determinable and (iv) the fee is probable of collection.
Software license fees billed and not recognized as revenue are
included in deferred revenue. Systems containing software
licenses include a 90-day warranty for defects. We have not
incurred significant warranty costs on any software product to
date, and no costs are currently accrued upon recording the
related revenue.

Systems revenue is also derived from fees for the development,
implementation and maintenance of custom applications. Fees from
the development and implementation of custom applications are
generally performed under time and materials and fixed fee
contracts. Revenue is recognized under time and materials
contracts and cost plus fee contracts as billable costs are
incurred. Fixed-price product delivery contracts are accounted
for using the percentage-of-completion method, measured either
by total costs incurred as a percentage of total estimated costs
at the completion of the contract, or direct labor hours
incurred compared

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##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated
Financial Statements  (Continued)

(amounts in thousands, except share and per share data)

to estimated total direct labor hours for projects for which
third-party hardware represents a significant portion of the
total estimated costs. These contracts generally allow for
monthly billing or billing upon achieving certain specified
milestones. Any estimated losses under long-term contracts are
recognized in their entirety at the date that they become
evident.

Revenue from hardware sales to our monthly subscriber customers
is recognized as systems revenue.

Services Revenue. We recognize services revenue primarily
from the design, development and deployment of information
processing and communication systems primarily for government
enterprises. These services are provided under time and
materials contracts, cost plus fee contracts, or fixed price
contracts. Revenue is recognized under time and materials
contracts and cost plus fee contracts as billable costs are
incurred. Fixed-price service contracts are accounted for using
the proportional performance method. These contracts generally
allow for monthly billing or billing upon achieving certain
specified milestones. Any estimated losses on contracts are
recognized in their entirety at the date that they become
evident.

Under our contracts with the U.S. government for both systems
and services, contract costs, including the allocated indirect
expenses, are subject to audit and adjustment by the Defense
Contract Audit Agency. We record revenue under these contracts
at estimated net realizable amounts.

Advertising Costs. Advertising is expensed as incurred.
Advertising expense totaled $473, $98, and $68 for the years
ended December 31, 2004, 2003 and 2002, respectively.

Capitalized Interest. Total interest incurred was $3,196,
$1,088, and $1,164 for the years ended December 31, 2004,
2003, and 2002, respectively. Approximately $267 of total
interest incurred was capitalized as a component of software
development costs during the year ended December 31, 2002.
No interest was capitalized during the years ended
December 31, 2004 or 2003.

Stock-Based Compensation and Deferred Compensation. We
have two stock-based employee compensation plans, which are
described more fully in Note 19. We record compensation
expense for all stock-based compensation plans using the
intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, (Accounting for Stock Issued to
Employees) (APB No. 25) and related
interpretations. Under APB No. 25, compensation expense is
recorded pro-rata over the vesting period to the extent that the
fair value of the underlying stock on the date of grant exceeds
the exercise or acquisition price of the stock or stock-based
award. The related compensation constitutes portions of our
direct cost of revenue, research and development expense, sales
and marketing expense, and general and administrative expense as
detailed in the table presented with our Consolidated Statements
of Operations.

We have also granted restricted stock to directors and certain
key executives as deferred compensation. The restrictions
expired at the end of one year for directors and expire in
annual increments over three years for executives and are based
on continued employment. The fair value of the restricted stock
on the date of issuance is recognized as deferred compensation
and amortized to non-cash stock compensation expense using the
straight-line method during the period over which the
restrictions expire.

F-12



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##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated
Financial Statements  (Continued)

(amounts in thousands, except share and per share data)

The following table illustrates the effect on net loss and loss
per common share if we had applied the fair value recognition
provisions of Financial Accounting Standards Board Statement
No. 123, Accounting for Stock-Based Compensation,to
stock-based employee compensation.

|                                                                                                                        |             |                                  |         |       |      |   |         |       |   |   |         |       |  
|----------------------------------------------------------------------------------------------------------------------- | ----------- | -------------------------------- | ------- | ----- | ---- | - | ------- | ----- | - | - | ------- | ----- | -
|                                                                                                                        |             | For the Years Ended December 31, |        
|                                                                                                                        |             |                                  |        
|                                                                                                                        |             | 2004                             |         |       | 2003 |   |         | 2002  |  
|                                                                                                                        |             |                                  |         |       |      |   |         |       |  
|Net loss attributable to common
    stockholders, as reported                                                           |             | $                                | (18,548 | )     |      | $ | (13,486 | )     |   | $ | (17,838 | )    
|Add: Stock-based employee
    compensation expense included in reported net loss                                        |             |                                  | 1,195   |       |      |   | 1,501   |       |   |   | 1,554   |      
|Deduct: Total stock-based employee
    compensation expense determined under fair value based method
    for all awards |             |                                  | (8,477  | )     |      |   | (5,102  | )     |   |   | (6,794  | )    
|                                                                                                                        |             |                                  |         |       |      |   |         |       |  
|Pro forma net loss attributable to
    common stockholders                                                              |             | $                                | (25,830 | )     |      | $ | (17,087 | )     |   | $ | (23,078 | )    
|                                                                                                                        |             |                                  |         |       |      |   |         |       |  
|Loss per share  basic
    and diluted:                                                                                 |             |                                  |         |       |      |   |         |       |   |   |         |      
|                                                                                                                        | As reported |                                  | $       | (0.56 | )    |   | $       | (0.45 | ) |   | $       | (0.61 | )
|                                                                                                                        |             |                                  |         |       |      |   |         |       |  
|                                                                                                                        | Pro forma   |                                  | $       | (0.77 | )    |   | $       | (0.57 | ) |   | $       | (0.79 | )
|                                                                                                                        |             |                                  |         |       |      |   |         |       |  



Research
and Development Expense




Hedging and Derivative Activities.


Income Taxes.


F-13



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##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated
Financial Statements  (Continued)

(amounts in thousands, except share and per share data)

Recent Accounting Pronouncements. In December 2004, the
Financial Accounting Standards Board (FASB) revised the
previously issued Statement No. 123, Share Based Payment(Statement No. 123(R)). The objective of Statement
No. 123(R) is to improve financial reporting by requiring
all share based payments to employees, including grants of
employee stock options, to be recognized in the income statement
based on their fair value. The revised Statement will be
effective for us for the fiscal quarter starting July 1,
2005. Statement No. 123(R) permits public companies to
adopt its requirements using one of two methods: (1) a
modified prospective method in which compensation
cost is recognized beginning with the effective date
(a) based on the requirements of Statement No. 123(R)
for all share-based payments granted after the effective date
and (b) based on the requirements of Statement No. 123
for all awards granted to employees prior to the effective date
of Statement No. 123(R) that remain unvested on the
effective date or (2) a modified retrospective
method which includes the requirements of the modified
prospective method described above, but also permits entities to
restate based on the amounts previously recognized under
Statement No. 123 for purposes of pro forma disclosures
either (a) all prior periods presented or (b) prior
interim periods of the year of adoption. We are still in the
process of evaluating the method we will adopt in the third
quarter of 2005.

As permitted by Statement No. 123, we currently account for
share-based payments to employees using
APB No. 25s intrinsic value method and, as such,
generally recognize no compensation cost for employee stock
options. Accordingly, the adoption of Statement 123(R)s
fair value method will have a significant impact on our result
of operations, although it will have no impact on our overall
financial position. The impact of adoption of Statement
No. 123(R) cannot be predicted at this time because it will
depend on levels of share-based payments granted in the future.
However, had we adopted Statement No. 123(R) in prior
periods, the impact of that standard would have approximated the
impact of Statement No. 123 as described in the disclosure
of pro forma net loss and loss per share above.

In November 2004, the EITF issued Issue No. 04-8, The
Effect of Contingently Convertible Instruments on Diluted
Earnings per Share,which addresses the inclusion of certain
contingently convertible instruments in the calculation of
diluted earnings per share.

We adopted this guidance in the fourth quarter of 2004. As of
December 31, 2004, we did not have any contingently
convertible securities outstanding, and upon adoption, there was
no effect on reported operating results.

Also in November 2004, the EITF issued Issue No. 04-10,
Determining Whether to Aggregate Operating Segments That Do
Not Meet the Quantitative Thresholds,which addresses the
practice of aggregating multiple segments that do not
individually meet quantitative thresholds in accordance with
FASB Statement 131. EITF Issue No. 04-10 clarifies the
circumstances under which aggregating segments for disclosure is
permissible under Statement No. 131. We adopted this
guidance in the fourth quarter of 2004. We do not have any
segments that do not individually meet the quantitative
thresholds of Statement No. 131, and therefore the adoption
of this guidance did not have an effect on reported operating
results.



2.
    Enterprise AcquisitionEffective January 1, 2004, we acquired the Enterprise
business from Aether Systems, Inc. in accordance with a Purchase
Agreement dated as of December 18, 2003.

The Enterprise business provides wireless data solutions,
uniting messaging, synchronization and web technologies. These
solutions include package and vehicle tracking, productivity
tools, and the ability to capture digital signatures for proof
of delivery to a growing installed base of logistics customers.
It is a leading reseller of BlackBerry® devices and provide
real-time financial market data to wireless device users under
annual subscriber contracts in the U.S. and Europe. As a result
of the acquisition of the Enterprise business,

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##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated
Financial Statements  (Continued)

(amounts in thousands, except share and per share data)

we believe that we have expanded our product offerings to both
new and existing customers, expanded international sales, and
provided broader technology and expertise to our customers.

The aggregate purchase price for the Enterprise business was
$22,199, consisting of cash payments of $18,150, a note payable
in the amount of $1,000, bearing interest at the prime interest
rate, and 204,020 shares of our Class A Common Stock,
valued at $1,056, based on the average closing price for the
five days immediately preceding the closing of the Enterprise
Acquisition. In addition, management incurred approximately
$1,993 of costs directly related to the acquisition. The total
purchase price has been allocated based on the estimated fair
value of the acquired tangible and intangible assets and assumed
liabilities, with the excess of the purchase price over the
assets acquired and liabilities assumed being allocated to
goodwill. The valuation has resulted in the recognition of
$13,037 of goodwill. This goodwill has been allocated to the
Commercial Applications segment, and we expect it to be
deductible for tax purposes. The results of operations of the
Enterprise business have been included in our Consolidated
Statement of Operations beginning on January 1, 2004.

The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at the date of the
acquisition:

|                    |                                             |                   |        |        |        | 
|------------------- | ------------------------------------------- | ----------------- | ------ | ------ | ------ | 
|Assets:             |                                             |                   |        |       
|                    | Cash                                        |                   | $      | 1,882  |       
|                    | Accounts receivable                         |                   |        | 6,942  |       
|                    | Unbilled receivables                        |                   |        | 554    |       
|                    | Inventory                                   |                   |        | 606    |       
|                    | Other current assets                        |                   |        | 808    |       
|                    | Property and equipment                      |                   |        | 750    |       
|                    | Acquired technology                         |                   |        | 287    |       
|                    | Acquired intangible assets                  |                   |        | 6,819  |       
|                    | Goodwill                                    |                   |        | 13,037 |       
|                    | Other assets                                |                   |        | 30     |       
|                    |                                             |                   |       
|                    |                                             | Total assets      |        |        | 31,715 | 
|                    |                                             |                   |       
|Liabilities:        |                                             |                   |        |       
|                    | Accounts payable and accrued
    expenses   |                   |        | 5,966  |       
|                    | Accrued payroll and related
    liabilities |                   |        | 1,032  |       
|                    | Deferred revenue                            |                   |        | 2,518  |       
|                    |                                             |                   |       
|                    |                                             | Total liabilities |        |        | 9,516  | 
|                    |                                             |                   |       
|Net assets acquired |                                             | $                 | 22,199 |       
|                    |                                             |                   |       

F-15



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##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated
Financial Statements  (Continued)

(amounts in thousands, except share and per share data)

The following unaudited consolidated pro forma results of
operations for the year ended December 31, 2003, gives
effect to the Enterprise Acquisition (which was effective as of
January 1, 2004) as though it had occurred on
January 1, 2003:

|                       |                   |              |         |       |  
|---------------------- | ----------------- | ------------ | ------- | ----- | -
|                       |                   | Year ended   |        
|                       |                   | December 31, |        
|                       |                   | 2003         |        
|                       |                   |              |        
|                       |                   | (unaudited)  |        
|Revenue                |                   | $            | 145,169 |      
|Loss from operations   |                   |              | (18,920 | )    
|Net loss               |                   | $            | (20,353 | )    
|                       |                   |              |        
|Loss per common share: |                   |              |         |      
|                       | Basic and diluted |              | $       | (0.65 | )
|                       |                   |              |        





|   |                   
|-- | ------------------
|3. | Kivera Acquisition





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##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated
Financial Statements  (Continued)

(amounts in thousands, except share and per share data)

The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at the date of the
acquisition:

|                    |                                           |                   |       |       |       | 
|------------------- | ----------------------------------------- | ----------------- | ----- | ----- | ----- | 
|Assets:             |                                           |                   |       |      
|                    | Accounts receivable                       |                   | $     | 171   |      
|                    | Other current assets                      |                   |       | 182   |      
|                    | Property and equipment                    |                   |       | 216   |      
|                    | Acquired technology                       |                   |       | 2,583 |      
|                    | Acquired intangible assets                |                   |       | 1,188 |      
|                    | Goodwill                                  |                   |       | 1,761 |      
|                    | Other assets                              |                   |       | 70    |      
|                    |                                           |                   |      
|                    |                                           | Total assets      |       |       | 6,171 | 
|                    |                                           |                   |      
|Liabilities:        |                                           |                   |       |      
|                    | Accounts payable and accrued
    expenses |                   |       | 171   |      
|                    | Deferred revenue                          |                   |       | 468   |      
|                    |                                           |                   |      
|                    |                                           | Total liabilities |       |       | 639   | 
|                    |                                           |                   |      
|Net assets acquired |                                           | $                 | 5,532 |      
|                    |                                           |                   |      





|   |                       
|-- | ----------------------
|4. | Financing Arrangements





|   |                                          
|-- | -----------------------------------------
|5. | Securities Purchase and Waiver Agreements



F-17



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##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated
Financial Statements  (Continued)

(amounts in thousands, except share and per share data)

Enterprise acquisition. Pursuant to the August 2004 Securities
Purchase Agreement, we raised $9,342, net of offering costs in
cash through the sale of 2,500,000 shares of our
Class A Common Stock.

As of the same date, we entered into a Waiver Agreement (the
Waiver) with the holder of the Debenture. The Waiver
modified certain provisions of the Debenture as follows:
(1) the holder of the Debenture was required to convert the
entire $15,000 principal amount into shares of our Class A
Common Stock by the end of 2004, (2) all of the material
restrictive covenants contained in the Debenture were nullified
and (3) the conversion price set forth in the Debenture was
decreased from $5.3753 to $5.01581 as an inducement to enter
into the Waiver (an adjustment such that conversion of the
Debenture will yield an additional 200,000 shares of
Class A Common Stock). As additional consideration for the
holder of the Debenture agreeing to the Waiver, we paid the
holder of the Debenture a $1,000 one-time fee in cash. The
$1,000 fee was recognized ratably to expense as the Debenture
was converted. The fair value of the additional shares of
Class A Common Stock to be issued as an inducement,
measured as of the date of the Waiver, was $900, which was
recognized ratably to expense as the Debenture was converted.
The remaining deferred debt discount of approximately $5,800 and
deferred financing fees of $700 was recognized as expense
ratably as the Debenture was converted through the end of 2004.
As of December 31, 2004, the entire Debenture had been
converted to Class A Common Stock pursuant to the Waiver.



6.
    Loss Per Common Share

|                                              |                                                                                       |                         |       |         |      |   |       |         |   |   |       |         |  
|--------------------------------------------- | ------------------------------------------------------------------------------------- | ----------------------- | ----- | ------- | ---- | - | ----- | ------- | - | - | ----- | ------- | -
|                                              |                                                                                       | Year Ended December 31, |      
|                                              |                                                                                       |                         |      
|                                              |                                                                                       | 2004                    |       |         | 2003 |   |       | 2002    |  
|                                              |                                                                                       |                         |       |         |      |   |       |         |  
|Numerator:                                    |                                                                                       |                         |       |         |      |   |       |         |   |   |       |        
|                                              | Net loss attributable to common
    stockholders                                      |                         | $     | (18,548 | )    |   | $     | (13,486 | ) |   | $     | (17,838 | )
|Denominator:                                  |                                                                                       |                         |       |         |      |   |       |         |   |   |       |        
|                                              | Denominator for basic and diluted
    loss per common share  weighted-average shares |                         |       | 33,381  |      |   |       | 29,796  |   |   |       | 29,149  |  
|                                              |                                                                                       |                         |       |         |      |   |       |         |  
|Loss per common share 
    basic and diluted |                                                                                       | $                       | (0.56 | )       |      | $ | (0.45 | )       |   | $ | (0.61 | )      
|                                              |                                                                                       |                         |       |         |      |   |       |         |  



|                               |                  |                         |       |       |      |  |       |       |  |  |       |       | 
|------------------------------ | ---------------- | ----------------------- | ----- | ----- | ---- |  | ----- | ----- |  |  | ----- | ----- | 
|                               |                  | Year Ended December 31, |      
|                               |                  |                         |      
|                               |                  | 2004                    |       |       | 2003 |  |       | 2002  | 
|                               |                  |                         |       |       |      |  |       |       | 
|Anti-dilutive securities:      |                  |                         |       |       |      |  |       |       |  |  |       |      
|                               | Stock options    |                         |       | 3,533 |      |  |       | 5,411 |  |  |       | 6,017 | 
|                               | Restricted stock |                         |       | 642   |      |  |       | 1,037 |  |  |       |      | 
|                               | Warrants         |                         |       | 341   |      |  |       |      |  |  |       |      | 
|                               |                  |                         |       |       |      |  |       |       | 
|Total anti-dilutive securities |                  |                         | 4,516 |       |      |  | 6,448 |       |  |  | 6,017 |      
|                               |                  |                         |       |       |      |  |       |       | 



|   |                                                 
|-- | ------------------------------------------------
|7. | Supplemental Disclosure of Cash Flow Information



F-18



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##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated
Financial Statements  (Continued)

(amounts in thousands, except share and per share data)

Interest paid totaled $1,179, $918, and $1,164 during the years
ended December 31, 2004, 2003, and 2002, respectively.



8.
    Unbilled ReceivablesUnbilled receivables consisted of the following at
December 31:

|                                                                           |  |      |        |  |      |   |       | 
|-------------------------------------------------------------------------- |  | ---- | ------ |  | ---- | - | ----- | 
|                                                                           |  | 2004 |        |  | 2003 |  
|                                                                           |  |      |        |  |      |  
|Amounts billable at specified
    milestones                               |  | $    | 9,890  |  |      | $ | 8,567 | 
|Contract retentions                                                        |  |      | 142    |  |      |   | 100   | 
|Rate variances and costs and
    estimated earnings in advance of billings |  |      | 471    |  |      |   | 195   | 
|                                                                           |  |      |        |  |      |  
|                                                                           |  | $    | 10,503 |  |      | $ | 8,862 | 
|                                                                           |  |      |        |  |      |  





|   |          
|-- | ---------
|9. | Inventory



|                |       |      |       |       |      |   |     |     | 
|--------------- | ----- | ---- | ----- | ----- | ---- | - | --- | --- | 
|                |       | 2004 |       |       | 2003 |  
|                |       |      |       |       |      |  
|Component parts |       | $    | 1,928 |       |      | $ | 346 |    
|Finished goods  |       |      | 2,057 |       |      |   | 105 |    
|                |       |      |       |       |      |  
|                | Total |      | $     | 3,985 |      |   | $   | 451 | 
|                |       |      |       |       |      |  



|    |                       
|--- | ----------------------
|10. | Property and Equipment



|                                                    |  |      |         |   |      |   |         |  
|--------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                    |  | 2004 |         |   | 2003 |  
|                                                    |  |      |         |   |      |  
|Computer equipment                                  |  | $    | 28,103  |   |      | $ | 19,325  |  
|Computer software                                   |  |      | 10,048  |   |      |   | 7,693   |  
|Furniture and fixtures                              |  |      | 2,807   |   |      |   | 2,447   |  
|Leasehold improvements                              |  |      | 2,551   |   |      |   | 1,802   |  
|Land                                                |  |      | 1,000   |   |      |   | 1,000   |  
|Vehicles                                            |  |      | 107     |   |      |   | 107     |  
|Construction in progress                            |  |      | 1,247   |   |      |   |        |  
|                                                    |  |      |         |   |      |  
|                                                    |  |      | 45,863  |   |      |   | 32,374  |  
|Less: accumulated depreciation and
    amortization |  |      | (27,946 | ) |      |   | (20,925 | )
|                                                    |  |      |         |   |      |  
|                                                    |  | $    | 17,917  |   |      | $ | 11,449  |  
|                                                    |  |      |         |   |      |  

F-19



---



##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated
Financial Statements  (Continued)

(amounts in thousands, except share and per share data)



11.
    Acquired Intangible Assets and Capitalized Software
    Development CostsOur acquired intangible assets and capitalized software
development costs consisted of the following:

|                                                              |                      |                   |       |       |                   |  |       |       |       |          |        |       |             |              |       |   |       |  |     |   |     |  |     |   |     | 
|------------------------------------------------------------- | -------------------- | ----------------- | ----- | ----- | ----------------- |  | ----- | ----- | ----- | -------- | ------ | ----- | ----------- | ------------ | ----- | - | ----- |  | --- | - | --- |  | --- | - | --- | 
|                                                              |                      | December 31, 2004 |       |       | December 31, 2003 | 
|                                                              |                      |                   |       |       |                   | 
|                                                              |                      | Gross             |       |       |                   |  | Gross |       |       |         
|                                                              |                      | Carrying          |       |       | Accumulated       |  |       |       |       | Carrying |        |       | Accumulated |              |       |  
|                                                              |                      | Amount            |       |       | Amortization      |  |       | Net   |       |          | Amount |       |             | Amortization |       |   | Net   | 
|                                                              |                      |                   |       |       |                   |  |       |       |       |          |        |       |             |              |       |   |       | 
|Acquired intangible assets:                                   |                      |                   |       |       |                   |  |       |       |       |          |        |       |             |              |       |   |       |  |     |   |     |  |     |  
|                                                              | Customer Contracts   |                   | $     | 4,208 |                   |  | $     | 1,381 |       |          | $      | 2,827 |             |              | $     |  |       |  | $   |  |     |  | $   |  |    
|                                                              | Customer Lists       |                   |       | 2,518 |                   |  |       | 666   |       |          |        | 1,852 |             |              |       |  |       |  |     |  |     |  |     |  |    
|                                                              | Trademarks & Patents |                   |       | 1,281 |                   |  |       | 118   |       |          |        | 1,163 |             |              |       |  |       |  |     |  |     |  |     |  |    
|Software development costs,
    including acquired technology |                      |                   | 4,142 |       |                   |  | 1,351 |       |       |          | 2,791  |       |             |              | 1,272 |   |       |  | 754 |   |     |  | 518 |  
|                                                              |                      |                   |       |       |                   |  |       |       |       |          |        |       |             |              |       |   |       | 
|                                                              |                      | Total             |       | $     | 12,149            |  |       | $     | 3,516 |          |        | $     | 8,633       |              |       | $ | 1,272 |  |     | $ | 754 |  |     | $ | 518 | 
|                                                              |                      |                   |       |       |                   |  |       |       |       |          |        |       |             |              |       |   |       | 

|                                           |                               |  |   |       | 
|------------------------------------------ | ----------------------------- |  | - | ----- | 
|Estimated future amortization
    expense: |                               |  |   |      
|                                           | Year ending December 31, 2005 |  | $ | 3,152 | 
|                                           | Year ending December 31, 2006 |  | $ | 2,479 | 
|                                           | Year ending December 31, 2007 |  | $ | 1,230 | 
|                                           | Year ending December 31, 2008 |  | $ | 823   | 
|                                           | Year ending December 31, 2009 |  | $ | 506   | 
|                                           | Thereafter                    |  | $ | 443   | 





|    |                                      
|--- | -------------------------------------
|12. | Accounts Payable and Accrued Expenses



|                 |       |                   |       |        |                   |   |       |       | 
|---------------- | ----- | ----------------- | ----- | ------ | ----------------- | - | ----- | ----- | 
|                 |       | December 31, 2004 |       |        | December 31, 2003 |  
|                 |       |                   |       |        |                   |  
|Accounts payable |       | $                 | 6,759 |        |                   | $ | 2,209 |      
|Accrued expenses |       |                   | 7,990 |        |                   |   | 6,608 |      
|                 |       |                   |       |        |                   |  
|                 | Total |                   | $     | 14,749 |                   |   | $     | 8,817 | 
|                 |       |                   |       |        |                   |  

F-20



---



##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated
Financial Statements  (Continued)

(amounts in thousands, except share and per share data)



13.
    Line of CreditWe maintain a $15,000 bank line of credit that expires in April
2006. The credit agreement allows us to borrow up to 80% of
outstanding receivables less than 90 days old, and amounts
borrowed bear interest at the prime rate plus 1.0% or prime plus
1.25% for equipment loans under the line, with a floor prime
rate of 4.25%. Our bank line of credit contains covenants
requiring us to maintain at least $25,000 of tangible net worth,
as defined, and at least $10,000 in cash and cash availability
(borrowing available under our line of credit) as well as
restrictive covenants, including, among others, restrictions on
our ability to merge, acquire assets above prescribed
thresholds, undertake actions outside the ordinary course of our
business (including the incurrence of indebtedness), guarantee
debt, distribute dividends, and repurchase our stock. As of
December 31, 2004, we were in compliance with all of these
covenants. We are also subject to minimal unused commitment and
collateral monitoring fees related to our line of credit, which
are waived if we maintain certain levels of deposits.

As of December 31, 2004, we borrowed $5,000 under the line
of credit. During 2003, we borrowed $2,500 under the terms of an
equipment loan, secured by purchased equipment, for a term of
36 months at a rate of 5.5%. As of December 31, 2004,
there was approximately $1,700 outstanding under the equipment
loan. At December 31, 2004, there were no other amounts
outstanding under the line and we had approximately $5,200 of
unused availability.



14.
    Long-Term DebtLong-term debt consists of the following at December 31:

|                                                                                                                                                                                                                                                                                                                                  |  |      |       |  |      |  |       | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- |  | ---- |  | ----- | 
|                                                                                                                                                                                                                                                                                                                                  |  | 2004 |       |  | 2003 | 
|                                                                                                                                                                                                                                                                                                                                  |  |      |       |  |      | 
|Note payable dated
    February 20, 2004, due November 30, 2005, and bearing
    interest at 7.75% per annum. The note requires monthly
    installments of principal and interest of $97 through
    November 30, 2005. The note is secured by the accounts
    receivable of one customer                                       |  |      | 1,031 |  |      |  |      | 
|Note payable dated March 30,
    2004, due October 1, 2005, and bearing interest at
    7.75% per annum. The note requires monthly installments of
    principal and interest of $81 through September 1, 2005 and
    a payment of $1,460 on October 1, 2005. The note is secured
    by the accounts receivable of one customer |  |      | 2,079 |  |      |  |      | 
|Note payable dated
    September 25, 2002, due September 30, 2005, and
    bearing interest at 7.75% per annum. The note requires
    monthly installments of principal and interest of $82 through
    September 1, 2005. The note is secured by the accounts
    receivable of one customer                                     |  |      | 714   |  |      |  | 1,605 | 
|Note payable dated
    December 20, 2002, due November 30, 2005, and bearing
    interest at 7.75% per annum. The note requires monthly
    installments of principal and interest of $85 through
    November 1, 2005. The note is secured by the accounts
    receivable of one customer                                        |  |      | 895   |  |      |  | 1,802 | 
|Note payable dated January 16,
    2003, due February 16, 2008, and bearing interest at
    6.0% per annum. The note requires monthly installments of
    principal and interest of $0.3 through January 16, 2008                                                                                                                 |  |      | 12    |  |      |  | 15    | 

F-21



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##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated
Financial Statements  (Continued)

(amounts in thousands, except share and per share data)

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |      |        |   |      |   |        |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  | 2004 |        |   | 2003 |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |      |        |   |      |  
|Note payable dated June 16,
    2003, due October 31, 2005, and bearing interest at
    7.75% per annum. The note requires monthly installments of
    principal and interest of $106 through September 30, 2005.
    The note is secured by the accounts receivable of one customer                                                                                                                                                                                                                                                                                         |  |      | 922    |   |      |   | 2,072  |  
|Note payable dated
    September 26, 2003, due April 30, 2005, and bearing
    interest at 7.75% per annum. This note was restructured and
    paid in full during 2004                                                                                                                                                                                                                                                                                                                                                                                                      |  |      |       |   |      |   | 2,446  |  
|Note payable dated December 1,
    2003, due July 1, 2005, and bearing interest at
    6.0% per annum. The note requires monthly installments of
    principal and interest of $87 through June 1, 2005. The
    note is secured by property and equipment                                                                                                                                                                                                                                                                                                                   |  |      | 515    |   |      |   | 1,500  |  
|Note payable dated
    December 30, 2003, due January 2, 2007, and bearing
    interest at 5.5% per annum. The note requires monthly
    installments of principal of $69 plus accrued interest through
    December 1, 2006. The note is secured by property and
    equipment                                                                                                                                                                                                                                                                                              |  |      | 1,667  |   |      |   | 2,500  |  
|State of Maryland loan-to-grant
    dated May  10, 2001, due January 1, 2004, and
    bearing interest at 5% per annum. The loan became a grant
    in $100 increments plus a pro rata share of the accrued
    interest, based on employment levels at annual milestones. At
    the time of the loan, $100 was immediately converted to a grant.
    In February 2002 and 2003, $100 of the principal and the pro
    rata share of the interest was forgiven. The remaining balance
    of $100 outstanding as of December 31, 2003 was forgiven on
    January 26, 2004. |  |      |       |   |      |   | 100    |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |      |        |   |      |  
|Total                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |      | 7,835  |   |      |   | 12,040 |  
|Less: current portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |      | (6,993 | ) |      |   | (5,698 | )
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |      |        |   |      |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  | $    | 842    |   |      | $ | 6,342  |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |      |        |   |      |  



|     |       |   |       |       | 
|---- | ----- | - | ----- | ----- | 
|2005 |       | $ | 6,993 |      
|2006 |       |   | 837   |      
|2007 |       |   | 5     |      
|     |       |   |      
|     | Total |   | $     | 7,835 | 
|     |       |   |      

F-22



---



##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated
Financial Statements  (Continued)

(amounts in thousands, except share and per share data)



15.
    Capital LeasesWe lease certain equipment under capital leases. Property and
equipment included the following amounts for capital leases at
December 31:

|                               |  |      |        |   |      |   |        |  
|------------------------------ |  | ---- | ------ | - | ---- | - | ------ | -
|                               |  | 2004 |        |   | 2003 |  
|                               |  |      |        |   |      |  
|Computer equipment             |  | $    | 10,823 |   |      | $ | 5,724  |  
|Computer software              |  |      | 1,798  |   |      |   | 857    |  
|Furniture and fixtures         |  |      | 1,002  |   |      |   | 775    |  
|Leasehold improvements         |  |      | 109    |   |      |   | 102    |  
|                               |  |      |        |   |      |  
|                               |  |      | 13,732 |   |      |   | 7,458  |  
|Less: accumulated amortization |  |      | (8,430 | ) |      |   | (4,901 | )
|                               |  |      |        |   |      |  
|                               |  | $    | 5,302  |   |      | $ | 2,557  |  
|                               |  |      |        |   |      |  





|                                                                                      |                              |   |        |       | 
|------------------------------------------------------------------------------------- | ---------------------------- | - | ------ | ----- | 
|2005                                                                                  |                              | $ | 2,997  |      
|2006                                                                                  |                              |   | 1,923  |      
|2007                                                                                  |                              |   | 1,943  |      
|                                                                                      |                              |   |       
|                                                                                      | Total minimum lease payments |   |        | 6,863 | 
|Less: amounts representing interest                                                   |                              |   | (1,306 | )    
|                                                                                      |                              |   |       
|Present value of net minimum lease
    payments (including current portion of $2,765) |                              | $ | 5,557  |      
|                                                                                      |                              |   |       



|    |             
|--- | ------------
|16. | Common Stock





|    |                                    
|--- | -----------------------------------
|17. | Fair Value of Financial Instruments





Cash and cash equivalents:


Long-term debt:


F-23



---



##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated
Financial Statements  (Continued)

(amounts in thousands, except share and per share data)



18.
    Income TaxesSignificant components of the benefit for income taxes
attributable to loss before income taxes for the years ended
December 31 are as follows:

|          |                 |       |   |      |   |      |   |   |   |  |   |   |   | 
|--------- | --------------- | ----- | - | ---- | - | ---- | - | - | - |  | - | - | - | 
|          |                 | 2004  |   | 2003 |   | 2002
|          |                 |       |   |      |   |     
|Current:  |                 |       |   |      |   |      |   |   |   |  |   |  
|          | State and local |       | $ |     |   |      | $ |  |   |  | $ |  |  
|          | Federal         |       |   |     |   |      |   |  |   |  |   |  |  
|          |                 |       |   |      |   |      |   |   |  
|Deferred: |                 |       |   |      |   |      |   |   |   |  |   |  
|          | State and local |       |   |     |   |      |   |  |   |  |   |  |  
|          | Federal         |       |   |     |   |      |   |  |   |  |   |  |  
|          |                 |       |   |      |   |      |   |   |  
|          |                 | Total |   | $    |  |      |   | $ |  |  |   | $ |  | 
|          |                 |       |   |      |   |      |   |   |  



|                                                                         |                                            |                        |                                |        |        |        |         |        |        |        |  
|------------------------------------------------------------------------ | ------------------------------------------ | ---------------------- | ------------------------------ | ------ | ------ | ------ | ------- | ------ | ------ | ------ | -
|                                                                         |                                            | 2004                   |                                |        | 2003   |       
|                                                                         |                                            |                        |                                |        |        |       
|Deferred tax assets:                                                     |                                            |                        |                                |        |        |        |         |       
|                                                                         | Reserves and accrued expenses              |                        | $                              | 1,062  |        |        | $       | 765    |       
|                                                                         | Depreciation and amortization              |                        |                                | 1,454  |        |        |         | 986    |       
|                                                                         | Deferred revenue                           |                        |                                | 205    |        |        |         | 34     |       
|                                                                         | Charitable contributions                   |                        |                                | 111    |        |        |         | 116    |       
|                                                                         | Stock options                              |                        |                                | 439    |        |        |         |       |       
|                                                                         | Capitalized software development
    costs |                        |                                | 325    |        |        |         |       |       
|                                                                         | Research and development tax credit        |                        |                                | 2,694  |        |        |         |       |       
|                                                                         | Foreign operating loss carryforward        |                        |                                | 5,154  |        |        |         |       |       
|                                                                         | Net operating loss carry forward           |                        |                                | 32,864 |        |        |         | 32,018 |       
|                                                                         |                                            |                        |                                |        |        |       
|                                                                         |                                            |                        | Total deferred tax assets      |        |        | 44,308 |         |        |        | 33,919 |  
|                                                                         |                                            |                        |                                |        |        |       
|Deferred tax liabilities:                                                |                                            |                        |                                |        |        |        |         |       
|                                                                         | Capitalized software development
    costs |                        |                                |       |        |        |         | (200   | )     
|                                                                         | Other                                      |                        |                                | (4     | )      |        |         |       |       
|                                                                         |                                            |                        |                                |        |        |       
|                                                                         |                                            |                        | Total deferred tax liabilities |        |        | (4     | )       |        |        | (200   | )
|                                                                         |                                            |                        |                                |        |        |       
|                                                                         |                                            | Net deferred tax asset |                                |        | 44,304 |        |         |        | 33,719 |       
|Valuation allowance for net
    deferred tax asset                       |                                            |                        | (44,304                        | )      |        |        | (33,719 | )     
|                                                                         |                                            |                        |                                |        |        |       
|Net deferred tax asset recognized
    in the consolidated balance sheets |                                            | $                      |                               |        |        | $      |        |       
|                                                                         |                                            |                        |                                |        |        |       



F-24



---



##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated
Financial Statements  (Continued)

(amounts in thousands, except share and per share data)

losses or whether these net operating loss carryforwards will
expire prior to use as a result of these limitations. We have
state net operating loss carryforwards available, the
utilization of which will be limited in a manner similar to the
federal net operating loss carryforwards. We have established a
full valuation allowance with respect to these federal and state
loss carryforwards and other net deferred tax assets due to
uncertainties surrounding their realization.

The reconciliation of the reported income tax benefit to the
amount that would result by applying the U.S. federal
statutory rate of 34% to net loss for the year ended
December 31 is as follows:

|                                     |       |      |        |   |      |   |        |      |  |   |        |   | 
|------------------------------------ | ----- | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - | 
|                                     |       | 2004 |        |   | 2003 |   |        | 2002 | 
|                                     |       |      |        |   |      |   |        |      | 
|Income tax benefit at statutory rate |       | $    | (6,306 | ) |      | $ | (4,585 | )    |  | $ | (6,065 | )
|State tax benefit                    |       |      | (219   | ) |      |   | (556   | )    |  |   | (631   | )
|Change in State tax rate             |       |      | 1,597  |   |      |   | (414   | )    |  |   |       |  
|Research and development tax credit  |       |      | (2,694 | ) |      |   |        |      |  |   |        |  
|Foreign rates other than 34%         |       |      | 41     |   |      |   |        |      |  |   |        |  
|Non-deductible items                 |       |      | 3,223  |   |      |   | 430    |      |  |   | 703    |  
|Other                                |       |      | (337   | ) |      |   | (159   | )    |  |   | (109   | )
|Change in valuation allowance        |       |      | 4,695  |   |      |   | 5,284  |      |  |   | 6,102  |  
|                                     |       |      |        |   |      |   |        |      | 
|                                     | Total |      | $      |  |      |   | $      |     |  |   | $      |  | 
|                                     |       |      |        |   |      |   |        |      | 



|    |                         
|--- | ------------------------
|19. | Stock Compensation Plans

Stock Options.


|                                                                                         |                             |           |           |          |          |   |      |           |          |   |           |       |  |           |      |      |          |   |           |       |  |   |      |      | 
|---------------------------------------------------------------------------------------- | --------------------------- | --------- | --------- | -------- | -------- | - | ---- | --------- | -------- | - | --------- | ----- |  | --------- | ---- | ---- | -------- | - | --------- | ----- |  | - | ---- | ---- | 
|                                                                                         |                             | 2004      |           |          | 2003     |   |      | 2002      |         
|                                                                                         |                             |           |           |          |          |   |      |           |         
|                                                                                         |                             |           |           | Weighted |          |   |      |           | Weighted |   |           |       |  | Weighted  |     
|                                                                                         |                             |           |           | Average  |          |   |      |           | Average  |   |           |       |  | Average   |     
|                                                                                         |                             | Number of |           |          | Exercise |   |      | Number of |          |   | Exercise  |       |  | Number of |      |      | Exercise |  
|                                                                                         |                             | Options   |           |          | Price    |   |      | Options   |          |   | Price     |       |  | Options   |      |      | Price    |  
|                                                                                         |                             |           |           |          |          |   |      |           |          |   |           |       |  |           |      |      |          |  
|Outstanding, beginning of year                                                           |                             |           | 6,148     |          |          | $ | 2.95 |           |          |   | 6,838     |       |  | $         | 2.95 |      |          |   | 6,545     |       |  | $ | 3.36 |     
|Granted                                                                                  |                             |           | 3,800     |          |          |   | 6.00 |           |          |   | 1,240     |       |  |           | 2.05 |      |          |   | 1,854     |       |  |   | 2.45 |     
|Exercised                                                                                |                             |           | (535      | )        |          |   | 1.97 |           |          |   | (735      | )     |  |           | 1.26 |      |          |   | (416      | )     |  |   | 0.89 |     
|Forfeited                                                                                |                             |           | (763      | )        |          |   | 3.88 |           |          |   | (1,195    | )     |  |           | 2.83 |      |          |   | (1,145    | )     |  |   | 5.23 |     
|                                                                                         |                             |           |           |          |          |   |      |           |          |   |           |       |  |           |      |      |          |  
|Outstanding, end of year                                                                 |                             |           | 8,650     |          |          | $ | 4.25 |           |          |   | 6,148     |       |  | $         | 2.95 |      |          |   | 6,838     |       |  | $ | 2.95 |     
|                                                                                         |                             |           |           |          |          |   |      |           |          |   |           |       |  |           |      |      |          |  
|                                                                                         | Exercisable, at end of year |           |           | 3,382    |          |   | $    | 3.25      |          |   |           | 2,736 |  |           | $    | 3.05 |          |   |           | 2,442 |  |   | $    | 2.64 | 
|                                                                                         |                             |           |           |          |          |   |      |           |          |   |           |       |  |           |      |      |          |  
|Estimated weighted-average grant-
    date fair value of options granted during the year |                             | $         | 4.98      |          |          |   |      |           |          | $ | 1.72      |       |  |           |      |      |          | $ | 2.15      |       |  |   |      |     
|                                                                                         |                             |           |           |          |          |   |      |           |          |   |           |       |  |           |      |      |          |  
|Weighted-average remaining
    contractual life of options outstanding at end of year    |                             |           | 7.5 years |          |          |   |      |           |          |   | 7.7 years |       |  |           |      |      |          |   | 7.6 years |       |  |   |      |     
|                                                                                         |                             |           |           |          |          |   |      |           |          |   |           |       |  |           |      |      |          |  

F-25



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##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated
Financial Statements  (Continued)

(amounts in thousands, except share and per share data)

Exercise prices for options outstanding at December 31,
2004 ranged from $0.01 to $26.05 as follows (all share amounts
in thousands):

|                |  |             |       |                  |             |                  |                  |                     |  |  |             |                  |  |             |       |  |  |   |       | 
|--------------- |  | ----------- | ----- | ---------------- | ----------- | ---------------- | ---------------- | ------------------- |  |  | ----------- | ---------------- |  | ----------- | ----- |  |  | - | ----- | 
|                |  |             |       |                  |             | Weighted-Average |                  |                     |  |  |            
|                |  |             |       | Weighted-Average |             |                  | Remaining        |                     |  |  |             | Weighted-Average | 
|                |  |             |       | Exercise Prices  |             |                  | Contractual Life |                     |  |  |             | Exercise Prices  | 
|                |  | Options     |       |                  | of Options  |                  |                  | of Options          |  |  | Options     |                  |  | of Options  |      
|Exercise Prices |  | Outstanding |       |                  | Outstanding |                  |                  | Outstanding (years) |  |  | Exercisable |                  |  | Exercisable |      
|                |  |             |       |                  |             |                  |                  |                     |  |  |             |                  |  |             |      
|$ 0.01  $2.61  |  |             | 1,964 |                  |             | $                | 1.66             |                     |  |  | 6.58        |                  |  |             | 1,038 |  |  | $ | 1.39  | 
|$ 2.61  $5.21  |  |             | 3,687 |                  |             | $                | 3.51             |                     |  |  | 7.16        |                  |  |             | 1,799 |  |  | $ | 3.17  | 
|$ 5.21  $7.82  |  |             | 2,941 |                  |             | $                | 6.76             |                     |  |  | 8.46        |                  |  |             | 487   |  |  | $ | 6.51  | 
|$ 7.82  $10.42 |  |             | 27    |                  |             | $                | 8.42             |                     |  |  | 8.35        |                  |  |             | 27    |  |  | $ | 8.42  | 
|$10.42  $26.05 |  |             | 31    |                  |             | $                | 14.06            |                     |  |  | 5.56        |                  |  |             | 31    |  |  | $ | 14.06 | 



Restricted Stock Grants.


Employee Stock Purchase Plan.




|                             |                                            |                |       |       | 
|---------------------------- | ------------------------------------------ | -------------- | ----- | ----- | 
|                             |                                            | (in thousands) |      
|Stock compensation plan      |                                            |                | 6,298 |      
|Warrants                     |                                            |                | 341   |      
|Employee stock purchase plan |                                            |                | 289   |      
|                             |                                            |                |      
|                             | Total shares restricted for future
    use |                |       | 6,928 | 
|                             |                                            |                |      

F-26



---



##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated
Financial Statements  (Continued)

(amounts in thousands, except share and per share data)



20.
    Operating LeasesWe lease certain office space and equipment under non-cancelable
operating leases that expire on various dates through 2010.
Future minimum payments under non-cancelable operating leases
with initial terms of one year or more consisted of the
following at December 31, 2004:

|                   |  |   |        | 
|------------------ |  | - | ------ | 
|2005               |  | $ | 4,012  | 
|2006               |  |   | 4,021  | 
|2007               |  |   | 3,881  | 
|2008               |  |   | 2,784  | 
|2009               |  |   | 2,432  | 
|2010 and following |  |   | 1,261  | 
|                   |  |   |       
|                   |  | $ | 18,391 | 
|                   |  |   |       





|    |                
|--- | ---------------
|21. | Retirement Plan





|    |                                                  
|--- | -------------------------------------------------
|22. | Concentrations of Credit Risk and Major Customers



|                 |  |         |                         |                         |      |  |     |      |  |  |      |   |  |  |    |  
|---------------- |  | ------- | ----------------------- | ----------------------- | ---- |  | --- | ---- |  |  | ---- | - |  |  | -- | -
|                 |  |         |                         | % of Total Revenues For |     
|                 |  |         |                         | the Year Ended          |     
|                 |  |         |                         | December 31,            |     
|                 |  |         |                         |                         |     
|Customer         |  | Segment |                         |                         | 2004 |  |     | 2003 |  |  | 2002 |  
|                 |  |         |                         |                         |      |  |     |      |  |  |      |  
|U.S. Government  |  |         | Government              |                         |      |  | 15  | %    |  |  | 32   | % |  |  | 40 | %
|Verizon Wireless |  |         | Commercial Applications |                         |      |  | 13  | %    |  |  | 17   | % |  |  | 15 | %
|Hutchison 3G     |  |         | Commercial Applications |                         |      |  | <10 | %    |  |  | <10  | % |  |  | 10 | %

|                |  |                         |     |   |                         |  |     |            |  |  |             |   |  |  |     |  
|--------------- |  | ----------------------- | --- | - | ----------------------- |  | --- | ---------- |  |  | ----------- | - |  |  | --- | -
|                |  | As of December 31, 2004 |     |   | As of December 31, 2003 | 
|                |  |                         |     |   |                         | 
|                |  | Accounts                |     |   | Unbilled                |  |     | Accounts   |  |  | Unbilled    |  
|Customer        |  | Receivable              |     |   | Receivables             |  |     | Receivable |  |  | Receivables |  
|                |  |                         |     |   |                         |  |     |            |  |  |             |  
|U.S. Government |  |                         | 13  | % |                         |  | 44  | %          |  |  | 19          | % |  |  | 32  | %
|Customer A      |  |                         | 11  | % |                         |  | <10 | %          |  |  | 30          | % |  |  | <10 | %
|Customer B      |  |                         | <10 | % |                         |  | <10 | %          |  |  | <10         | % |  |  | 28  | %
|Customer C      |  |                         | 10  | % |                         |  | <10 | %          |  |  | 11          | % |  |  | 12  | %
|Customer D      |  |                         | 12  | % |                         |  | <10 | %          |  |  | <10         | % |  |  | <10 | %

F-27



---



##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated
Financial Statements  (Continued)

(amounts in thousands, except share and per share data)



23.
    Business and Geographic Segment InformationIn the fourth quarter of 2004, we realigned our segments to
better manage the business subsequent to the acquisitions
described in Notes 2 and 3. Our two operating segments are
now (i) our Commercial Applications Segment, which consists
of the previous Network Software and Service Bureau segments,
along with the newly acquired businesses and (ii) our
Government segment which consists of the previous Network
Solutions segment.

Management evaluates performance based on gross profit. We do
not maintain information regarding segment assets. Accordingly,
asset information by reportable segment is not presented.

For the years ended December 31, 2004, 2003 and 2002,
respectively, our total revenues include approximately $12,689,
$3,559 and $8,746 of revenues generated from customers outside
of the United States.

The following table sets forth results for our reportable
segments as they have been realigned as of December 31,
2004. All revenues reported below are from external customers.
As required, we have restated prior period segment information
for comparative purposes. A reconciliation of segment gross
profit to net loss for the respective periods is also included
below:

|                                 |                                                        |                         |                    |        |        |         |       |        |        |        |      |        |        |         |   |        |        |        |   |        |        |        |      |        |        |        |   |        |        |        |   |        |        |        |   |        |        |        | 
|-------------------------------- | ------------------------------------------------------ | ----------------------- | ------------------ | ------ | ------ | ------- | ----- | ------ | ------ | ------ | ---- | ------ | ------ | ------- | - | ------ | ------ | ------ | - | ------ | ------ | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ | - | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                 |                                                        | Year Ended December 31, |                   
|                                 |                                                        |                         |                   
|                                 |                                                        | 2004                    |                    |        | 2003   |         |       | 2002   |       
|                                 |                                                        |                         |                    |        |        |         |       |        |       
|                                 |                                                        | Comm.                   |                    |        |        |         | Comm. |        |        |        |      | Comm.  |        |         |  
|                                 |                                                        | Apps                    |                    |        | Gvmt   |         |       | Total  |        |        | Apps |        |        | Gvmt    |   |        | Total  |        |   | Apps   |        |        | Gvmt |        |        | Total  |  
|                                 |                                                        |                         |                    |        |        |         |       |        |        |        |      |        |        |         |   |        |        |        |   |        |        |        |      |        |        |        |  
|Revenue                          |                                                        |                         |                    |        |        |         |       |        |        |        |      |        |        |         |   |        |        |        |   |        |        |        |      |        |        |        |   |        |        |        |   |        |        |        |   |       
|                                 | Hosted subscriber and maintenance                      |                         | $                  | 82,793 |        |         | $     |       |        |        | $    | 82,793 |        |         | $ | 37,656 |        |        | $ |       |        |        | $    | 37,656 |        |        | $ | 26,936 |        |        | $ |       |        |        | $ | 26,936 |       
|                                 | Systems                                                |                         |                    | 20,537 |        |         |       | 23,617 |        |        |      | 44,154 |        |         |   | 11,102 |        |        |   | 29,384 |        |        |      | 40,486 |        |        |   | 24,072 |        |        |   | 32,217 |        |        |   | 56,289 |       
|                                 | Services                                               |                         |                    | 365    |        |         |       | 15,613 |        |        |      | 15,978 |        |         |   |       |        |        |   | 13,923 |        |        |      | 13,923 |        |        |   |       |        |        |   | 8,820  |        |        |   | 8,820  |       
|                                 |                                                        |                         |                    |        |        |         |       |        |        |        |      |        |        |         |   |        |        |        |   |        |        |        |      |        |        |        |  
|                                 |                                                        |                         | Total revenue      |        |        | 103,695 |       |        |        | 39,230 |      |        |        | 142,925 |   |        |        | 48,758 |   |        |        | 43,307 |      |        |        | 92,065 |   |        |        | 51,008 |   |        |        | 41,037 |   |        |        | 92,045 | 
|                                 |                                                        |                         |                    |        |        |         |       |        |        |        |      |        |        |         |   |        |        |        |   |        |        |        |      |        |        |        |  
|Operating costs and
    expenses |                                                        |                         |                    |        |        |         |       |        |        |        |      |        |        |         |   |        |        |        |   |        |        |        |      |        |        |        |   |        |        |        |   |        |        |        |   |       
|                                 | Direct cost of hosted, subscriber,
    and maintenance |                         |                    | 51,197 |        |         |       |       |        |        |      | 51,197 |        |         |   | 18,082 |        |        |   |       |        |        |      | 18,082 |        |        |   | 15,741 |        |        |   |       |        |        |   | 15,741 |       
|                                 | Direct cost of systems                                 |                         |                    | 11,233 |        |         |       | 15,388 |        |        |      | 26,621 |        |         |   | 13,643 |        |        |   | 18,656 |        |        |      | 32,299 |        |        |   | 15,670 |        |        |   | 24,627 |        |        |   | 40,297 |       
|                                 | Direct cost of services                                |                         |                    | 188    |        |         |       | 9,481  |        |        |      | 9,669  |        |         |   |       |        |        |   | 9,835  |        |        |      | 9,835  |        |        |   |       |        |        |   | 5,744  |        |        |   | 5,744  |       
|                                 |                                                        |                         |                    |        |        |         |       |        |        |        |      |        |        |         |   |        |        |        |   |        |        |        |      |        |        |        |  
|                                 |                                                        |                         | Total Direct Costs |        |        | 62,618  |       |        |        | 24,869 |      |        |        | 87,487  |   |        |        | 31,725 |   |        |        | 28,491 |      |        |        | 60,216 |   |        |        | 31,411 |   |        |        | 30,371 |   |        |        | 61,782 | 
|                                 |                                                        |                         |                    |        |        |         |       |        |        |        |      |        |        |         |   |        |        |        |   |        |        |        |      |        |        |        |  
|                                 | Hosted, subscriber, and maintenance
    gross profit   |                         |                    | 31,596 |        |         |       |       |        |        |      | 31,596 |        |         |   | 19,574 |        |        |   |       |        |        |      | 19,574 |        |        |   | 11,195 |        |        |   |       |        |        |   | 11,195 |       
|                                 | Systems gross profit                                   |                         |                    | 9,304  |        |         |       | 8,229  |        |        |      | 17,533 |        |         |   | (2,541 | )      |        |   | 10,728 |        |        |      | 8,187  |        |        |   | 8,402  |        |        |   | 7,590  |        |        |   | 15,992 |       
|                                 | Services gross profit                                  |                         |                    | 177    |        |         |       | 6,132  |        |        |      | 6,309  |        |         |   |       |        |        |   | 4,088  |        |        |      | 4,088  |        |        |   |       |        |        |   | 3,076  |        |        |   | 3,076  |       
|                                 |                                                        |                         |                    |        |        |         |       |        |        |        |      |        |        |         |   |        |        |        |   |        |        |        |      |        |        |        |  
|                                 |                                                        | Total Gross Profit      |                    | $      | 41,077 |         |       | $      | 14,361 |        |      | $      | 55,438 |         |   | $      | 17,033 |        |   | $      | 14,816 |        |      | $      | 31,849 |        |   | $      | 19,597 |        |   | $      | 10,666 |        |   | $      | 30,263 |       
|                                 |                                                        |                         |                    |        |        |         |       |        |        |        |      |        |        |         |   |        |        |        |   |        |        |        |      |        |        |        |  

F-28



---



##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated
Financial Statements  (Continued)

(amounts in thousands, except share and per share data)

|                           |                                                             |                         |         |         |      |   |         |         |   |   |         |         |  
|-------------------------- | ----------------------------------------------------------- | ----------------------- | ------- | ------- | ---- | - | ------- | ------- | - | - | ------- | ------- | -
|                           |                                                             | Year Ended December 31, |        
|                           |                                                             |                         |        
|                           |                                                             | 2004                    |         |         | 2003 |   |         | 2002    |  
|                           |                                                             |                         |         |         |      |   |         |         |  
|Total segment gross profit |                                                             | $                       | 55,438  |         |      | $ | 31,849  |         |   | $ | 30,263  |        
|                           | Research and development expense                            |                         |         | (19,598 | )    |   |         | (16,932 | ) |   |         | (17,047 | )
|                           | Sales and marketing expense                                 |                         |         | (12,982 | )    |   |         | (8,917  | ) |   |         | (10,029 | )
|                           | General and administrative expense                          |                         |         | (19,108 | )    |   |         | (11,251 | ) |   |         | (12,235 | )
|                           | Non-cash stock compensation expense                         |                         |         | (1,195  | )    |   |         | (1,501  | ) |   |         | (1,554  | )
|                           | Depreciation and amortization of
    property and equipment |                         |         | (7,795  | )    |   |         | (6,612  | ) |   |         | (6,156  | )
|                           | Amortization of acquired intangible
    assets              |                         |         | (2,165  | )    |   |         | (531    | ) |   |         | (553    | )
|                           | Interest expense                                            |                         |         | (3,196  | )    |   |         | (1,088  | ) |   |         | (897    | )
|                           | Debt conversion expense                                     |                         |         | (7,886  | )    |   |         |        |   |   |         |        |  
|                           | Other (expense) income, net                                 |                         |         | (61     | )    |   |         | 1,497   |   |   |         | 370     |  
|                           |                                                             |                         |         |         |      |   |         |         |  
|Net Loss                   |                                                             | $                       | (18,548 | )       |      | $ | (13,486 | )       |   | $ | (17,838 | )      
|                           |                                                             |                         |         |         |      |   |         |         |  



|    |                                            
|--- | -------------------------------------------
|24. | Quarterly Financial Information (Unaudited)



|                                               |  |                    |        |   |         |   |        |              |  |   |             |   |  |   |         |  
|---------------------------------------------- |  | ------------------ | ------ | - | ------- | - | ------ | ------------ |  | - | ----------- | - |  | - | ------- | -
|                                               |  | 2004               |       
|                                               |  |                    |       
|                                               |  | Three Months Ended |       
|                                               |  |                    |       
|                                               |  | (unaudited)        |       
|                                               |  | March 31           |        |   | June 30 |   |        | September 30 |  |   | December 31 |  
|                                               |  |                    |        |   |         |   |        |              |  |   |             |  
|Revenue                                        |  | $                  | 32,757 |   |         | $ | 40,447 |              |  | $ | 38,037      |   |  | $ | 31,684  |  
|Gross profit                                   |  | $                  | 12,800 |   |         | $ | 17,241 |              |  | $ | 13,134      |   |  | $ | 12,263  |  
|Net (loss) income                              |  | $                  | (3,446 | ) |         | $ | 863    |              |  | $ | (3,245      | ) |  | $ | (12,720 | )
|(Loss) Earnings per common
    share  basic   |  | $                  | (0.10  | ) |         | $ | 0.03   |              |  | $ | (0.10       | ) |  | $ | (0.36   | )
|(Loss) Earnings per common
    share  diluted |  | $                  | (0.10  | ) |         | $ | 0.02   |              |  | $ | (0.10       | ) |  | $ | (0.36   | )

|                                               |  |                    |        |   |         |   |         |              |  |   |             |  |  |   |        | 
|---------------------------------------------- |  | ------------------ | ------ | - | ------- | - | ------- | ------------ |  | - | ----------- |  |  | - | ------ | 
|                                               |  | 2003               |       
|                                               |  |                    |       
|                                               |  | Three Months Ended |       
|                                               |  |                    |       
|                                               |  | (unaudited)        |       
|                                               |  | March 31           |        |   | June 30 |   |         | September 30 |  |   | December 31 | 
|                                               |  |                    |        |   |         |   |         |              |  |   |             | 
|Revenue                                        |  | $                  | 19,292 |   |         | $ | 20,080  |              |  | $ | 28,247      |  |  | $ | 24,446 | 
|Gross profit                                   |  | $                  | 7,211  |   |         | $ | 501     |              |  | $ | 11,699      |  |  | $ | 12,438 | 
|Net (loss) income                              |  | $                  | (4,048 | ) |         | $ | (11,392 | )            |  | $ | 506         |  |  | $ | 1,448  | 
|(Loss) Earnings per common
    share  basic   |  | $                  | (0.14  | ) |         | $ | (0.38   | )            |  | $ | 0.02        |  |  | $ | 0.05   | 
|(Loss) Earnings per common
    share  diluted |  | $                  | (0.14  | ) |         | $ | (0.38   | )            |  | $ | 0.02        |  |  | $ | 0.04   | 

F-29



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##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated
Financial Statements  (Continued)

(amounts in thousands, except share and per share data)



25.
    Commitments and ContingenciesIn November 2001, a shareholder class action lawsuit was filed
against us, certain of our current officers and a director, and
several investment banks that were the underwriters of our
initial public offering (the Underwriters):
Highstein v. Telecommunication Systems, Inc.,
et al., United States District Court for the Southern
District of New York, Civil Action No. 01-CV-9500. The
plaintiffs seek an unspecified amount of damages. The lawsuit
purports to be a class action suit filed on behalf of purchasers
of our common stock during the period August 8, 2000
through December 6, 2000. The plaintiffs allege that the
Underwriters agreed to allocate common stock offered for sale in
our initial public offering to certain purchasers in exchange
for excessive and undisclosed commissions and agreements by
those purchasers to make additional purchases of common stock in
the aftermarket at pre-determined prices. The plaintiffs allege
that all of the defendants violated Sections 11, 12 and 15
of the Securities Act of 1933, as amended, and that the
underwriters violated Section 10(b) of the Securities
Exchange Act of 1934, as amended, and Rule 10b-5
promulgated thereunder. The claims against us of violation of
Rule 10b-5 have been dismissed with the plaintiffs having
the right to re-plead. We will continue to defend the lawsuit
vigorously. On February 15, 2005, the Honorable Judge Shira
A. Scheindlin, U.S.D.J. entered an order preliminarily approving
a settlement proposal which we believe will result in a
resolution that will not materially impact our consolidated
results of operations, financial position, or cash flows. We
intend to continue to defend the lawsuit until the settlement
has received final approval or the matter is resolved otherwise.
More than 300 other companies have been named in nearly
identical lawsuits that have been filed by some of the same law
firms that represent the plaintiffs in the lawsuit against us,
and we believe that the majority of those companies will
participate in the same settlement if approved.

Research In Motion Limited (RIM) which supplies our
Commercial Applications segment with hardware and wireless
services that it in turn packages with other services and
resells, is engaged in legal proceedings with NTP Inc. which
alleges that certain RIM products infringed on patents held by
NTP Inc. This creates uncertainty regarding RIMs ability
to continue to supply our enterprise customers with services.
RIMs inability to supply services to our enterprise
customers could cause a loss of revenue and increase our net
losses. Although we cannot currently predict the ultimate
outcome of this matter, we do not expect the resolution will
have a material adverse impact on our consolidated results of
operations, financial position, or cash flows.

We are subject to certain litigation, claims and assessments
which occur in the normal course of business. Based on
consultation with our legal counsel, management is of the
opinion that such matters, when resolved, will not have a
material impact on our consolidated results of operations,
financial position or cash flows.

F-30



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##### Table of Contents

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.



TeleCommunication Systems, Inc.

By:
    /s/Maurice B. ToséMaurice B. ToséChief Executive Officer, President andChairman of the BoardPursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated. The undersigned hereby constitute and appoint
Maurice B. Tosé, Thomas M. Brandt, Jr. and Bruce A.
White, and each of them, their true and lawful agents and
attorneys-in-fact with full power and authority in said agents
and attorneys-in-fact, and in any one or more of them, to sign
for the undersigned and in their respective names as directors
and officers of TeleCommunication Systems, any amendment or
supplement hereto. The undersigned hereby confirm all acts taken
by such agents and attorneys-in-fact, and any one or more of
them, as herein authorized

|                                                           |  |                                                                                                |  |               
|---------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------- |  | --------------
|Name                                                       |  | Title                                                                                          |  | Date          
|                                                           |  |                                                                                                |  |               
|/s/
    Maurice B. ToséMaurice
    B. Tosé                 |  | Chief Executive Officer, President
    and Chairman of the Board (Principal Executive Officer) |  | March 10, 2005
|                                                          
|/s/
    Thomas M.
    Brandt, Jr.Thomas
    M. Brandt, Jr. |  | Chief Financial Officer and Senior
    Vice President (Principal Financial Officer)            |  | March 10, 2005
|                                                          
|/s/
    Clyde A. HeintzelmanClyde
    A. Heintzelman       |  | Director                                                                                       |  | March 10, 2005
|                                                          
|/s/
    Richard A. KozakRichard
    A. Kozak               |  | Director                                                                                       |  | March 10, 2005
|                                                          
|/s/
    Weldon H. LathamWeldon
    H. Latham               |  | Director                                                                                       |  | March 10, 2005
|                                                          
|/s/
    Byron F. MarchantByron
    F. Marchant             |  | Director                                                                                       |  | March 10, 2005

33



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##### Table of Contents

EXHIBIT INDEX

|        |       |   |             |                                                                                                                                                                                                                                                                                                          
|------- | ----- | - | ----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |   |            
|Numbers |       |   | Description
|        |       |   |            
|        | 4.1   |   |             | Amended and Restated Articles of
    Incorporation. (Incorporated by reference to the companys
    Quarterly Report on Form 10-Q for the quarter ended
    June 30, 2004)                                                                                                                               
|        | 4.2   |   |             | Second Amended and Restated Bylaws.
    (Incorporated by reference to the companys Quarterly
    Report on Form 10-Q for the quarter ended June 30,
    2004)                                                                                                                                           
|        | 4.3   |   |             | Form of Class A Common Stock
    certificate. (Incorporated by reference to the companys
    Registration Statement on Form S-1 (No. 333-35522))                                                                                                                                                        
|        | 4.5   |   |             | Warrants to Purchase Common Stock
    issued pursuant to the Securities Purchase Agreement for each of
    the investors party to the Securities Purchase Agreement dated
    January 13, 2004. (Incorporated by reference to the
    companys Current Report on Form 8-K filed on
    January 23, 2004)
|        | 10.1  |   |             | West Garrett Office Building Full
    service Lease Agreement dated October 1, 1997 by and
    between the company and West Garrett Joint Venture.
    (Incorporated by reference to the companys Registration
    Statement on Form S-1 (No. 333-35522))                                               
|        | 10.2 |   |             | Form of Indemnification Agreement.
    (Incorporated by reference to the companys Registration
    Statement on Form S-1 (No. 333-35522))                                                                                                                                                               
|        | 10.3 |   |             | Fourth Amended and Restated 1997
    Stock Incentive Plan. (Incorporated by reference to
    Appendix A to the companys definitive proxy statement
    for its 2004 Annual Meeting of stockholders as filed with the
    SEC on June 17, 2004 (No. 000-30821))                                          
|        | 10.4 |   |             | Employee Stock Purchase Plan.
    (Incorporated by reference to the companys Registration
    Statement on Form S-1 (No. 333-35522))                                                                                                                                                                    
|        | 10.5 |   |             | Optionee Agreement dated
    October 1, 1997 by and between the company and Richard A.
    Young. (Incorporated by reference to the companys
    Registration Statement on Form S-1 (No. 333-35522))                                                                                                    
|        | 10.6 |   |             | Optionee Agreement dated
    July 29, 1998 by and between the company and Richard A.
    Young. (Incorporated by reference to the companys
    Registration Statement on Form S-1 (No. 333-35522))                                                                                                      
|        | 10.7 |   |             | Optionee Agreement dated
    October 1, 1997 by and between the company and Thomas M.
    Brandt, Jr. (Incorporated by reference to the
    companys Registration Statement on Form S-1
    (No. 333-35522))                                                                                            
|        | 10.8 |   |             | Optionee Agreement dated
    July 29, 1998 by and between the company and Thomas M.
    Brandt, Jr. (Incorporated by reference to the
    companys Registration Statement on Form S-1
    (No. 333-35522))                                                                                              
|        | 10.9 |   |             | Optionee Agreement dated
    April 1, 1999 by and between the company and Thomas M.
    Brandt, Jr. (Incorporated by reference to the
    companys Registration Statement on Form S-1
    (No. 333-35522))                                                                                              
|        | 10.10 |  |             | 401(k) and Profit Sharing Plan of
    the company dated January 1, 1999. (Incorporated by
    reference to the companys Registration Statement on
    Form S-4 (No. 333-51656))                                                                                                                         
|        | 10.11 |  |             | Employment Agreement dated
    February 1, 2001 by and between the company and Richard A.
    Young. (Incorporated by reference to the companys
    Quarterly Report on Form 10-Q for the quarter ended
    September 30, 2001)                                                                         
|        | 10.12 |  |             | Employment Agreement dated
    February 1, 2001 by and between the company and Thomas M.
    Brandt. (Incorporated by reference to the companys
    Quarterly Report on Form 10-Q for the quarter ended
    September 30, 2001)                                                                         
|        | 10.13 |  |             | Employment Agreement dated
    February 1, 2001 by and between the company and Drew A.
    Morin. (Incorporated by reference to the companys
    Quarterly Report on Form 10-Q for the quarter ended
    September 30, 2001)                                                                            
|        | 10.14 |  |             | Employment Agreement dated
    February 1, 2001 by and between the company and Timothy J.
    Lorello. (Incorporated by reference to the companys
    Quarterly Report on Form 10-Q for the quarter ended
    September 30, 2001)                                                                       
|        | 10.15 |  |             | Services Integration Agreement
    dated January 31, 2002 by and between the company and
    Hutchison 3G. (Incorporated by reference to the companys
    Annual Report on Form 10-K for the year ended
    December 31, 2001)                                                                          

34



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##### Table of Contents



|        |       |   |             |                                                                                                                                                                                                                                                            
|------- | ----- | - | ----------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |   |            
|Numbers |       |   | Description
|        |       |   |            
|        | 10.16 |   |             | Deed of Lease by and between
    Annapolis Partner, LLC and the company. (Incorporated by
    reference to the companys Annual Report on Form 10-K
    for the year ended December 31, 2002)                                                              
|        | 10.17 |  |             | Restricted stock award certificate
    to Mr. Thomas M. Brandt, Jr. (Incorporated by
    reference to the companys Quarterly Report on
    Form 10-Q for the quarter ended September 30, 2003)                                                            
|        | 10.18 |  |             | Restricted stock award certificate
    to Mr. Thomas M. Brandt, Jr. (Incorporated by
    reference to the companys Quarterly Report on
    Form 10-Q for the quarter ended September 30, 2003)                                                            
|        | 10.19 |  |             | Restricted stock award certificate
    to Mr. Clyde A. Heintzelman. (Incorporated by reference to
    the companys Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2003)                                                            
|        | 10.20 |  |             | Restricted stock award certificate
    to Mr. Richard A. Kozak. (Incorporated by reference to the
    companys Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2003)                                                                
|        | 10.21 |  |             | Restricted stock award certificate
    to Mr. Weldon H. Latham. (Incorporated by reference to the
    companys Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2003)                                                                
|        | 10.22 |  |             | Restricted stock award certificate
    to Mr. Timothy J. Lorello. (Incorporated by reference to
    the companys Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2003)                                                              
|        | 10.23 |  |             | Restricted stock award certificate
    to Mr. Timothy J. Lorello. (Incorporated by reference to
    the companys Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2003)                                                              
|        | 10.24 |  |             | Restricted stock award certificate
    to Mr. Bryon F. Marchant. (Incorporated by reference to the
    companys Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2003)                                                               
|        | 10.25 |  |             | Restricted stock award certificate
    to Mr. Drew A. Morin. (Incorporated by reference to the
    companys Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2003)                                                                   
|        | 10.26 |  |             | Restricted stock award certificate
    to Mr. Drew A. Morin. (Incorporated by reference to the
    companys Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2003)                                                                   
|        | 10.27 |  |             | Restricted stock award certificate
    to Mr. Maurice B. Tosé. (Incorporated by reference to
    the companys Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2003)                                                                 
|        | 10.28 |  |             | Restricted stock award certificate
    to Mr. Maurice B. Tosé. (Incorporated by reference to
    the companys Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2003)                                                                 
|        | 10.29 |  |             | Restricted stock award certificate
    to Mr. Kevin M. Webb. (Incorporated by reference to the
    companys Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2003)                                                                   
|        | 10.30 |  |             | Restricted stock award certificate
    to Mr. Kevin M. Webb. (Incorporated by reference to the
    companys Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2003)                                                                   
|        | 10.31 |  |             | Restricted stock award certificate
    to Mr. Richard A. Young. (Incorporated by reference to the
    companys Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2003)                                                                
|        | 10.32 |  |             | Restricted stock award certificate
    to Mr. Richard A. Young. (Incorporated by reference to the
    companys Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2003)                                                                
|        | 10.33 |   |             | Registration Rights Agreement dated
    as of December 18, 2003 by and among the company and the
    investors party to the 2003 SPA. (Incorporated by reference to
    Exhibit 10 to the companys Current Report on
    Form 8-K dated December 18, 2003)
|        | 10.34 |   |             | Trademark License Agreement by and
    among Aether, TSYS and the company dated as of January 13,
    2004. (Incorporated by reference to the companys Current
    Report on Form 8-K filed on January 23, 2004)                                          
|        | 10.35 |   |             | Registration Rights Agreement by
    and between the company and Aether dated as of January 13,
    2004. (Incorporated by reference to the companys Current
    Report on Form 8-K filed on January 23, 2004)                                            
|        | 10.36 |  |             | Amended and Restated Loan and
    Security Agreement by and between the company and Silicon Valley
    Bank. (Incorporated by reference to the companys Quarterly
    Report on Form 10-Q for the quarter ended
    September 30, 2004)                   
|        | 12.1  |   |             | Supplemental Financial Statement
    Schedule II                                                                                                                                                                                                           
|        | 21.1  |   |             | Subsidiaries of the Registrant                                                                                                                                                                                                                             
|        | 23.1  |   |             | Consent of Ernst & Young
    LLP                                                                                                                                                                                                                           
|        | 31.1  |   |             | Certification pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                             
|        | 31.2  |   |             | Certification pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                             
|        | 32.1  |   |             | Certification pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                             

35



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##### Table of Contents



|        |       |  |             |                                                                                                                               
|------- | ----- |  | ----------- | ------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |            
|Numbers |       |  | Description
|        |       |  |            
|        | 32.2  |  |             | Certification pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002
|        | 99.01 |  |             | Risk Factors Affecting Our Business
    and Future Results                                                                    




|  |                                                                                                                                                                                                                                                                             
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Management contract, compensatory plans or arrangement required
    to be filed as an exhibit pursuant to Item 15(a)(3) of
    Form 10-K.                                                                                                                                   
| 
| | Confidential treatment has been requested for certain portions
    of this Exhibit pursuant to Rule 24b-2 of the Securities
    Exchange Act of 1934, as amended, which portions have been
    omitted and filed separately with the Securities and Exchange
    Commission.

36