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________________________________________________________________________________


SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549




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FORM 10-K

|                                            |  |                                                                                                 
|------------------------------------------- |  | ------------------------------------------------------------------------------------------------
|(Mark One)                                  |  |                                                                                                 
|                                           
|x                                           |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF
    THE SECURITIES EXCHANGE ACT OF 1934    
|                                           
|For the year ended December 31, 2003
    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.

(Exact name of registrant as specified in its
charter)


|                                                                           |  |                                               
|-------------------------------------------------------------------------- |  | ----------------------------------------------
|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

(Registrants telephone number, including
area code)


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

Securities registered pursuant to
Section 12(g) of the Act: Class A Common Stock, Par
Value $0.01 per share

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

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

Indicate by check
mark whether the registrant is an accelerated filer, as defined
by Securities Exchange Act Rule 12
b-2: Yes o No x

As of June 30,
2003, the aggregate market value of the Class A Common
Stock held by non-affiliates, as reported on the NASDAQ National
Market, was approximately $36,176,088.*

As of
January 31, 2004 there were 23,833,724 shares of
Class A Common Stock and 9,232,918 shares of Class B
Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None.

* Excludes 3,507,613 shares of Class A
Common Stock deemed to be held by officers and directors and
stockholders whose ownership exceeds ten percent of the shares
outstanding at June 30, 2003. Exclusion of shares held by
any person should not be construed to indicate that such person
possesses the power, direct or indirect, to direct or cause the
direction of the management or policies of the registrant, or
that such person is controlled by or under common control with
the registrant.



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TABLE OF CONTENTS

|              |  |                                                                                                    |    |             |    | 
|------------- |  | -------------------------------------------------------------------------------------------------- | -- | ----------- | -- | 
|              |  |                                                                                                    |    | Page Number
|              |  |                                                                                                    |    |            
|Part I        |  |                                                                                                    |    |             |    | 
|Item 1        |  | Business                                                                                           |    |             | 2  | 
|Item 2        |  | Properties                                                                                         |    |             | 11 | 
|Item 3        |  | Legal Proceedings                                                                                  |    |             | 11 | 
|Item 4        |  | Submission of Matters to a Vote of Security
    Holders                                            |    |             | 12 | 
|Part II       |  |                                                                                                    |    |             |    | 
|Item 5        |  | Market for Registrants Common Equity and
    Related Shareholder Matters                          |    |             | 13 | 
|Item 6        |  | Selected Financial Data                                                                            |    |             | 15 | 
|Item 7        |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations          |    |             | 16 | 
|Item 7A       |  | Qualitative and Quantitative Disclosure About
    Market Risk                                      |    |             | 27 | 
|Item 8        |  | Financial Statements and Supplementary Data                                                        |    |             | 28 | 
|Item 9        |  | Changes In and Disagreements With Accountants on
    Accounting and Financial Disclosure           |    |             | 28 | 
|Item 9A       |  | Controls and Procedures                                                                            |    |             | 28 | 
|Part III      |  |                                                                                                    |    |             |    | 
|Item 10       |  | Directors and Executive Officers of the Registrant                                                 |    |             | 29 | 
|Item 11       |  | Executive Compensation                                                                             |    |             | 31 | 
|Item 12       |  | Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters |    |             | 33 | 
|Item 13       |  | Certain Relationships and Related Transactions                                                     |    |             | 35 | 
|Item 14       |  | Principal Accountant Fees and Services                                                             |    |             | 36 | 
|Part IV       |  |                                                                                                    |    |             |    | 
|Item 15       |  | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K                               |    |             | 37 | 
|Signatures    |  |                                                                                                    | 38 |            
|Exhibit Index |  |                                                                                                    | 39 |            

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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 report 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
foreseeable future; 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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Item 1. Business

Overview

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

We are a Maryland corporation founded in 1987.
Our headquarters are located at 275 West Street, Annapolis,
Maryland 21401. Our telephone number is (410) 263-7616 and
our Web site address is www.telecomsys.com.The
information contained on our Web site does not constitute part
of this report. The terms TCS, we,
us and our as used in this report 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 consummated the purchase, with an effective date of
January 1, 2004, of the Enterprise Mobility Solutions
business unit of Aether Systems, Inc. Prior to the January 2004
acquisition of the Enterprise Mobility Solutions Division of
Aether Systems, Inc., we managed our business in three operating
segments: Network Software, Service Bureau and Network
Solutions. Subsequent to the acquisition, we realigned our
segments to better manage the business we now operate. Our
operating segments now include (i) our Wireless Carrier
Segment, which consists principally of the previous Network
Software and Service Bureau segments, (ii) our Government
segment, which consists principally of the previous Network
Solutions segment, and (iii) our Enterprise segment, which
comprises the operations we acquired from Aether Systems, Inc.
The following Business Overview describes TCS after the
realignment of our segments in January 2004, unless the
information specifically relates to historical information, in
which case the description presents our segments prior to
January 2004.

Wireless Carrier
Segment:Our carrier software system
products enable wireless carriers to deliver short text
messages, location information, internet content, alerts and
privacy information and other enhanced communication services to
and from wireless phones. We earn network Wireless Carrier
segment 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.
In 1996, we entered into a development agreement with Lucent
Technologies to develop and co-own Short Message Service Center
application software for wireless carrier customers, and we have
subsequently developed proprietary carrier software
applications. As of December 31, 2003, we had deployed 80
software systems for our customers in wireless carrier networks
around the world, including those of Verizon Wireless, Vodafone,
T-Mobile, Telefonica, Alltel, and the
3TM-brand third generation networks of
Hutchison Whampoa.

As a service bureau we allow customers to acquire
use of our software functionality through network connections to
and from our facilities, paying us monthly based on service
coverage volume, generally measured by the number of
subscribers, cell sites, or call center circuits, or by message
volume. We provide enhanced 9-1-1 (E9-1-1) services and hosted
inter-carrier text message distribution services on a service
bureau basis via our carrier-grade network operations centers.
As of December 31, 2003, our wireless E9-1-1 service is
used by 26 U.S. carrier networks. During 2003 we received TL
9000 certification of our service bureau network operating
center. TL 9000 is the telecommunication industrys quality
system standard that expands the requirements of the
International Standards Organizations (ISO) 9000
quality management standard in use by industries worldwide. The
TL 9000 standard was developed and is administered by the
Quality Excellence for Suppliers of Telecommunications (QuEST)
Forum. In 2002, we received ISO 9001 certification through an
audit by an independent third party in accordance with the
standard, verifying that we have an effective, documented
quality management system in place for both our Wireless Carrier
and our Government segments.

Government Segment:We design, furnish, install and operate wireless and data
network communication systems, including our SwiftLink®
compact deployable systems, and high speed, satellite, internet
protocol solutions. We also own and operate VSAT 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. More than 400 of our
SwiftLink® deployable communication systems are in use for
security, defense, and law enforcement around the world.

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Enterprise Segment:As described above, effective January 1, 2004 we acquired
the assets of the Enterprise Mobility Solutions business of
Aether Systems, Inc. This business segment now serves
approximately 1,200 large enterprise customers and 60,000
wireless data users. Using its proprietary Fusion
behind-the-enterprise-firewall platform uniting messaging,
synchronization and web technologies, the segments
flagship 20/20Delivery application provides 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. As a leading reseller of Research
in Motions Blackberry devices and service and as a
provider of real-time financial market data to wireless device
users, this segment also generates recurring revenue under
annual subscriber contracts.

We continue to protect our intellectual property
rights, and currently have 11 U.S. patents regarding wireless
messaging and location applications, and over 70 U.S. patent
applications pending.

Enabling Convergent Technologies®,
Swiftlink®, XYPOINT®, Wireless Internet Gateway,
Voyager, Attaché, 20/20 Delivery,
Fusion, FX Alert and MarketClip 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 EMC,
the number of worldwide cellular subscribers has grown from
88 million subscribers in 1995 to over 1.3 billion
subscribers at year-end 2003. Wireless growth is expected to
continue to increase around the world for all regions 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 such as China and Brazil
report that they have more wireless connections than landline
connections.

Cellular Network Improvements to 2.5G and
Third Generation
Capabilities.Cellular and
PCS 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. We
assist both mobile operators and enterprises to take advantage
of the capabilities of high-speed networks through applications
that utilize high-speed data functionality such as mobile
location 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 Wireless Communications
Technology for Defense, Intelligence and Security.Wireless communications in
emergencies is of paramount importance, as emergency personnel
need instant access to be able to communicate and share
information across agencies and departments. The White House has
identified over 2 million First Responders in the United
States that are Americas frontline soldiers in times of
crises and emergencies. First Responders include over one
million firefighters, approximately 850,000 law enforcement
personnel, and over 155,000 emergency medical technicians. The
fiscal year 2004 Homeland Security Budget authorizes over three
billion dollars for technology initiatives that include
solutions for interoperability among First Responders. We
believe that our expertise in the areas of wireless enhanced
9-1-1,

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location and messaging services, and secure
satellite communications can be leveraged to provide the needed
wireless infrastructure for Americas First Responders 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.


Location-based Wireless
Services.A driver of
wireless communications growth is the delivery of timely, highly
specialized, interactive and location-specific information.
According to a March 2003 report from Frost and Sullivan, a
provider of technology market research, U.S. consumer and
enterprise users of location-based services will increase from
300,000 in 2003 to over 30 million by 2007. Wireless users
benefit from the ability to receive highly customized
location-specific information in response to their queries or
via targeted opt-in advertising content delivered to the
wireless devices 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 networks. Our Enterprise segment also
provides location solutions to enterprises through our
Fusion Platform.

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 a cell phone is the
availability of enhanced 911 (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. Additionally, the FCC has mandated schedules for
conversion of wireless subscriber handsets to models capable of
providing geographic location information such as GPS (Global
Positioning Systems). As of October 2003, about 65% of U.S.
jurisdictions had implemented Phase I service, and only 18% had
implemented Phase II, according to the National Emergency Number
Association. We are under long-term contracts, usually three to
five years, with 26 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. In
October 2002, In-Stat/MDR, a high technology research firm,
estimated that the worldwide wireless Internet market will grow
from 74 million wireless Internet subscribers at the end of
2001, to more than 320 million subscribers by the end of
2006. 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 had sent over 400 million text messages
per month in the third quarter of 2003, while Cingular announced
that it had delivered over 1 billion SMS messages in the
fourth quarter of 2003. We provide solutions for mobile
operators to receive and route e-mail and SMS messages through
our Short Message Service Center and through our Wireless
Internet Gateway. In addition, our Enterprise segment delivers
secure corporate intranet data to and from customers
mobile field forces through our 20/20 Delivery product and
our other enterprise software applications.

Business Strategy

We plan to continue to develop and sell network
and client software and network solutions which we will deliver
using software, integrated system project, and service
bureau/hosted software business models. Our development
investment is focused on the delivery of internet content,
proprietary third party content, short

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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 large 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 Wireless Carrier
    segment products and services. We have historically leveraged
    our strategic relationships with original equipment
    manufacturers to market our Wireless Carrier 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 44 wireless carrier networks in 13 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 Segment Customer
    Base.We now serve over 1,200
    enterprises and 60,000 subscribers through our Enterprise
    segment. We intend to expand our enterprise base by expanding
    our own sales and marketing initiatives and expanding our
    offerings to the Enterprise segment, 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
    network solutions expertise to meet the growing demand for
    sophisticated wireless applications. As of January 1, 2004,
    our staff included 274 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 Voyager architecture integrates
    our presence, privacy, location, call control and messaging
    technology into an efficient and highly reliable software and
    service offering. Voyagers benefits to our carrier
    customers include reduced costs and economies of scale,
    increased reliability, more efficient deployments, compatibility
    with our existing products and a migration path to third
    generation services. Our Fusion 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 our integrated
    package of products and services for wireless carriers and
    enterprises.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

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Product and Service
Offerings

Licensed Software-based
Systems:We design and develop
network software for wireless carriers and enterprises that
provides the delivery of secure and personalized content,
services and transactions to various wireless devices. In
addition, we design and develop custom network software for a
variety of telecommunications and information management
systems. Our Voyager architecture is tailored to mobile
operator environments and our Fusion platform enables
enterprise networks wireless functionality including secure
behind-the-firewall deployments. Our software uses
universal industry standards. We specifically design our
software for easy implementation, customization and integration
with existing networks in order to accommodate future expansion.
Carrier network software that we currently offer includes
Xypoint® Location Platform, Message Notification Center,
Wireless Internet Gateway, Alerts and Notifications and Message
Portals and Short Message Service Center. Enterprise software
that we currently offer includes Fusion Platform, 20/20
Delivery and Attaché.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Xypoint® Location
    Platform.Our Xypoint®
    Location Platform software interacts with the wireless network
    to extract location information concerning a particular user.
    This location information can be imprecise or precise. Imprecise
    location provides the cell site and sector that is currently
    supplying mobile service to the end user. Our precise location
    technology interacts with network triangulation software added
    to cell towers and switches in the network or can work with
    systems that interrogate a Geographic Position System
    (GPS) chip added to the end users handset. The
    location information our software provides is used by
    applications to support a variety of services, including E9-1-1,
    driving directions, identification of locations near the end
    user (such as gas stations, restaurants, or hotels), and
    locating other network subscribers near the end users
    current position. Our platform also provides very important
    privacy controls so that the end user controls which
    applications have access to the end users location.
|
| | Wireless Internet Gateway, Alerts and
    Notifications, and Message Portal.Our Wireless Internet Gateway
    provides a portal for two-way data communication between the
    Internet and wireless networks. The Wireless Internet Gateway
    allows end 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 Internet Gateway allows
    additional wireless applications to be added as desired. The
    alerts and notifications capability acquired from Otelnet
    interoperates in a major North American wireless carrier with
    our Internet gateway technology, and is now offered as part of
    our complete portal solution.                                                                                                                                                                                                                                                                
|
| | Our Message Portal software combines the
    capabilities of the Wireless Internet Gateway and supports
    registered and unregistered users, 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 end users mobile devices.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | 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 Internet
    Gateway software to enable transmission of short messages
    between the Internet and wireless devices.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | FusionPlatform.The Fusion platform that we
    acquired from Aether 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.
    Fusion can operate behind the enterprise
    firewall to allow secure corporate communications to
    mobile field workers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | 20/20
    Delivery. The 20/20
    Delivery application software that we acquired from Aether
    is a mobile asset management and logistics solution that enables
    visibility into the supply chain by providing real-time                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

6



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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | vehicle monitoring, driver communication and
    package and delivery information.20/20 Delivery is
    built on our Fusion platform.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | Attaché.
    Our Attaché software that we acquired from Aether is
    a mobile office solution that extends collaborative applications
    such as e-mail and personal information management.
    Attaché is built on our Fusion platform.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | Custom Software Applications.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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | Implementation, Operation and Maintenance
    Services.We provide
    implementation, operation and maintenance services in support of
    our network software. Our engineers install software packages
    into new and existing networks. This typically involves the
    staging of equipment, redesign of network connections,
    modification of software code and on-site installation and
    testing support. We also 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.

Service Bureau and Subscriber Services:We own and lease network operation
centers that host software for which customers make recurring
monthly usage payments. Our service bureau segment offerings
include E9-1-1, Text Message Distribution Center (MDC), FX
Alert , MarketClip. and other custom software
applications. We also provide implementation, operation and
maintenance services to support these applications. We also
provide Blackberry by Aether® service and are one of
the largest value added resellers of Blackberry service in
the United States.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, 2003,
    we provide E9-1-1 services to 26 wireless carriers, including
    Verizon, Cingular and US Cellular. A related hosted software
    service is Qualcomms Snaptrack PDE software 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.
|
| | Text Message Distribution Center.Our wireless Message Distribution
    Center acts as a clearinghouse that formats and delivers
    messages to almost all North American carrier networks and
    multiple device types. It includes support for the features and
    services available on our Wireless Internet Gateway product and
    the software programs that can be run on it. The Message
    Distribution Center allows enterprises to deliver information to
    a wide variety of wireless devices and carrier networks being
    used by their employees and customers. Further, the Message
    Distribution Centers store and forward
    capability allows wireless carriers to prioritize message
    delivery and optimize the capacity available on their networks.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | FX
    Alertand
    MarketClip.FX Alert and MarketClip
    products acquired from Aether provide real time financial market
    data over various wireless devices and networks. FX Alert
    and MarketClip 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

7



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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Blackberryby Aether®. Our Blackberry by
    Aether® 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.

Network Solutions:Since 1987, our Network Solutions
group has designed and installed complex information processing
and communication systems for corporate and government
enterprise networks. We use a cooperative team approach designed
to leverage our diverse technical skills in communications
engineering, information systems, software engineering and
telephony. We believe our over 15 years of experience
meeting high reliability and security requirements
differentiates us from other providers of such solutions. Our
network solutions primarily include the following types of
projects:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | SwiftLink®
    Portable Deployable Data Systems.We designed and
    produce SwiftLink®, lightweight, secure communication
    systems, which can be immediately deployed in remote areas where
    other means of reliable communications do not exist.
    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.
|
| | 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 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.                                                                                                                                                                                                                              
|
| | Network Design, Installation and Operation.We design, install and operate
    networks that integrate computing and communications, including
    systems that provide communications via both satellite and
    terrestrial links. We can provide complete network installation
    services from cabling infrastructure to complex communications
    system components. We also provide ongoing network operation and
    management support services.                                                                                                                                                                                                                                                                           

Customers

Wireless Carrier
Segment.The primary customers
for our Wireless Carrier segment are wireless telecommunications
carriers in the United States and foreign countries, either
directly or through our channel partners. We provide licensed
based software and hosted service bureau offerings in our
Wireless Carrier segment. We have multi-year service bureau
contracts with 26 U.S. wireless carriers for E9-1-1 service.
Significant Wireless Carrier segment customers include US
Cellular Corporation, Cingular Wireless, and Verizon Wireless.

Enterprise
Segment.Beginning in January
2004 as a result of the acquisition of the Enterprise Mobility
Solutions business unit of Aether, we have hundreds of
commercial customers. Major commercial subscriber contracts are
with Johnson & Johnson, Corporate Express, Goldman Sachs,
Bank of America, and Merrill Lynch.

Government
Segment.Our major Government
segment customers include the U.S. Departments of Defense,
Justice, and State, the General Services Administration, the
City of Baltimore, Computer Sciences Corporation, and Northrop
Grumman. Our Government segment projects typically run from one
to twelve months and involve three to ten personnel.

Backlog.As of
January 1, 2004, we had unfilled orders, or backlog, of
approximately $92.8 million, of which $2.1 million was
in our network software segment, $62.4 million in our
service bureau segment and $15.6 million in our network
solutions business, plus $12.7 million from our acquired
assets effective January 1, 2004. Approximately
$57.9 million of January 1, 2004 backlog is expected
to be realized in 2004.

8



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Total backlog as of January 31, 2003 was
$78.4 million. Backlog for our service bureau 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 targeting
customers for our Wireless Carrier segment, our Enterprise
segment, and our Government segment. We have also historically
leveraged our relationship with original equipment manufacturers
to market our network software products to wireless carrier
customers. 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 federal, state and local government
contracts.

We will continue to leverage our relationships
with industry leaders and to expand and diversify our own sales
and marketing initiatives to increase our sales to wireless
carriers, enterprises and government. Our marketing efforts also
include advertising, public relations, speaking engagements and
attending and sponsoring industry conferences.

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 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:



| |   |                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Wireless Carrier
    Segment.Intrado Inc., LogicaCMG
    plc; Comverse, Inc.; Openwave Systems, Inc.; SchlumbergerSema,
    unit of Schlumberger Ltd; Ericsson Inc.; Motorola, Inc.; Nortel
    Networks Corporation, InfoSpace, Inc.; InphoMatch, Inc.
|
| |  | Enterprise
    Segment.HillCast Technologies,
    Inc.; Semotus Solutions Inc.; IBM; Gearworks, Inc.; Extended
    Systems, Inc.                                                                                                                       
|
| |  | 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 to provide Phase II compliant E9-1-1 services.
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.

9



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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, 2004, our staff included 274 engineers 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, including our Voyager architecture, Fusion
Platform, Attaché and 20/20 Delivery
applications, Xypoint® Location Platform, Wireless Internet
Gateway, Short Message Service Center, and E9-1-1, including
Position Determining Entity applications. Our research and
development expenditures, which exclude Enterprise Division
investments prior to January 1, 2004, including capitalized
costs, for the years ended December 31, 2003, 2002, and
2001 were approximately $14 million, $22 million, and
$23 million.

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. Through this organization, we are establishing a
de-facto standard for interfaces into short messaging service
centers from the Internet, wireless gateways and Wireless
Application Protocol servers.

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

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 eleven U.S. issued patents and
two foreign 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 70 additional U.S. patent applications and 14
international 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. With regard to certain
Prepaid Wireless software, we have agreed with Lucent that we
will each have an equal title interest in patent applications
relating to joint inventions. 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.

10



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Employees

As of January 1, 2004, we had 572 employees,
566 full-time and 6 part-time, of which 274 were engineers who
specialize in the development and support of our products and
services. We believe relations with our employees are good. None
of our employees are represented by a union.

Geographical
Information

During the fiscal years ended December 31,
2003, 2002 and 2001, our total revenues generated from products
and services in the U.S. were $88.5 million,
$83.3 million and $69.5 million, respectively, and our
total revenues generated from products and services outside of
the U.S. were $3.6 million, $8.7 million and
$0.1 million, respectively. 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. Properties

Our principal executive office is located in
Annapolis, Maryland in a 33,948 square foot facility under a
lease expiring in March 2005. We have a second 31,371 square
foot facility in Annapolis, Maryland under lease, expiring in
April 2005. The Annapolis facilities are utilized for the
executive and administrative offices, as well as portions of our
Wireless Carrier and Government segments. Our Southeast Regional
office, which is utilized by a portion of our Government
segment, is located in Tampa, Florida in a 7,376 square foot
facility under a lease expiring in December 2005. We are
consolidating our offices in Seattle, Washington, which house a
portion of our Wireless Carrier segment, and signed a new lease
that expires in September 2010 for approximately 50,000 square
feet. We also have a hosting facility in Phoenix, Arizona in a
1,387 square foot office under a lease that expires in February
2006, which is utilized by our Wireless Carrier segment. In
conjunction with our acquisition of the Enterprise Mobility
Solutions division of Aether Systems, Inc., we assumed the lease
for a 49,600 square foot facility in Owings Mills, Maryland,
which expires January 31, 2005, and an aggregate of
approximately 5,500 square feet of leased office space in
London, Madrid, Amsterdam, and Stockholm.

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.

Because the leases for substantially all of our
Annapolis, Maryland office facilities, including our principal
executive office, will expire in early 2005, we have begun
planning for facilities needs thereafter. In February 2003, we
signed a lease, which is subject to several contingencies and
rights of termination, for a facility at a planned new real
estate development in Annapolis, Maryland. Our Board of
Directors will evaluate this opportunity along with alternatives
that are or may become available in the relevant time period and
there is no assurance that we will enter into a definitive lease
at this new development site. For more information see
Item 13 Managements Discussion and Analysis of
Financial Condition and Results of Operations  Related
Party Transactions.

Item 3. Legal
Proceedings

In 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,

11



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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 intend to
vigorously defend the lawsuit. We believe that 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.


Research In Motion Limited (RIM)
which supplies our Enterprise 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 segment with services.
RIMs inability to supply services to our Enterprise
segment 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 Holders

None.

12



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Part II

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

Our 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
|                                            |  |      |      |    
|2004                                        |  |      |      |     |  |   |      | 
|First Quarter 2004 (as of February 2, 2004) |  | $    | 8.39 |     |  | $ | 4.80 | 
|                                           
|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 | 
|                                           
|2002                                        |  |      |      |     |  |   |      | 
|First Quarter 2002                          |  | $    | 5.74 |     |  | $ | 2.47 | 
|Second Quarter 2002                         |  | $    | 3.17 |     |  | $ | 1.60 | 
|Third Quarter 2002                          |  | $    | 1.78 |     |  | $ | 1.00 | 
|Fourth Quarter 2002                         |  | $    | 2.45 |     |  | $ | 1.03 | 

As of February 2, 2004, there were
approximately 448 holders of record of our Class A Common
Stock, and there were 2 holders of record of our Class B
Common Stock.

Dividend Policy

We have never declared or paid cash dividends on
our Class A Common Stock or Class B Common Stock. We
currently intend to retain any future earnings to fund the
development, growth and operation of our business. Additionally,
under the terms of our line of credit with Silicon Valley Bank,
their prior written consent is required to pay cash dividends on
our Class A Common Stock or Class B Common Stock.
Therefore, we do not currently anticipate paying any cash
dividends on our Class A Common Stock or Class B
Common Stock in the foreseeable future.

Change in Securities and Use of
Proceeds

On January 13, 2004, we consummated the
purchase, with an effective date of January 1, 2004, of the
Enterprise Mobility Solutions Division of Aether Systems, Inc.
Consideration for the acquisition was valued at approximately
$20 million, consisting of $18 million in cash,
$1 million in the form of a note payable and 204,020 newly
issued shares of Class A Common Stock. Concurrent with the
acquisition, we closed on $21 million of financing with two
accredited institutional investors, which includes 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, 1,364,288 newly issued
shares of Class A Common Stock and warrants to purchase
341,072 shares of Class A Common Stock at a strike price of
$6.50 expiring in January 2007. The debentures provide for a
conversion price of $5.38 per share, subject to adjustment. Both
conversion of the debentures and exercise of the warrants are
subject to certain limitations, including the approval by our
shareholders of our issuance of any securities that would
require such approval as required by applicable law and the
rules and regulations of the Nasdaq National Market. Our
shareholders will be asked to approve the issuance of any
securities requiring such approval at the annual meeting of our
shareholders that is currently scheduled for June 10, 2004.
Our president and chief executive officer, Maurice B. Tosé,
has entered into a voting agreement with us dated as of
December 18, 2003, whereby he has agreed to vote all of his
shares of our capital stock (a) for approval of our
issuance of all of such securities in accordance with and as
required by applicable law and the rules and regulations of the
Nasdaq National Market and (b) against any proposal or any
other corporate action or agreement that would result in a
breach of any covenant, representation or warranty or any other
obligation or agreement of ours

13



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under the securities purchase agreement entered
into for the financing of the acquisition of Aethers
Enterprise Mobility Solutions Division unit or which could
result in any of the conditions to our obligations under that
agreement not being fulfilled.


All of the securities issued by us in connection
with the acquisition and the related financing were issued
without registration in reliance on Section 4(2) of the
Securities Act of 1933, as amended. The shares of our
Class A Common Stock that were issued in the above
transaction and that may be issued in the future upon conversion
of the debentures or upon exercise of the warrants will be
registered under the Securities Act of 1933, as amended, which
we expect to effect within 100 days of the closing date.
The investor has the right to impose a penalty of approximately
$14,000 per day for every day beyond the 100-day period.

14



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Item 6. Selected Financial
Data

The table that follows presents portions of our
consolidated financial statements and is not complete. 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, 2003, 2002 and 2001 and the balance
sheet data as of December 31, 2003 and 2002 from our
consolidated financial statements which have been audited by
Ernst & Young LLP, independent auditors, and which are
included beginning on page F-2. We have derived the
statement of operations data for the years ended
December 31, 2000 and 1999 and the balance sheet data as of
December 31, 2001, 2000 and 1999, from our audited
financial statements which are not included in this
Form 10-K. 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.

The information set forth in the table below does
not reflect our recent acquisition of Enterprise Mobility
Solutions business unit in January 2004. Financial
information for that unit and pro forma financial information
will be filed through an amendment to our Current Report on
Form 8-K dated as of January 13, 2004

|                                                             |                                                             |                                       |                                    |        |       |         |         |        |        |         |         |        |        |         |        |        |        |        |        |        |       |        | 
|------------------------------------------------------------ | ----------------------------------------------------------- | ------------------------------------- | ---------------------------------- | ------ | ----- | ------- | ------- | ------ | ------ | ------- | ------- | ------ | ------ | ------- | ------ | ------ | ------ | ------ | ------ | ------ | ----- | ------ | 
|                                                             |                                                             |                                      
|                                                             |                                                             | Year Ended December 31,              
|                                                             |                                                             |                                      
|                                                             |                                                             | 2003                                  |                                    | 2002   |       | 2001*   |         | 2000   |        | 1999   
|                                                             |                                                             |                                       |                                    |        |       |         |         |        |        |        
|                                                             |                                                             |                                      
|                                                             |                                                             | (in thousands, except per share data)
|Statement of Operations Data:                                |                                                             |                                       |                                    |        |       |         |         |        |        |         |         |        |        |         |        |        |        |        |        |       
|Revenue                                                      |                                                             |                                       |                                    |        |       |         |         |        |        |         |         |        |        |         |        |        |        |        |        |       
|                                                             | Network software                                            |                                       |                                    |        |       |         |         |        |        |         |         |        |        |         |        |        |        |        |        |        |      
|                                                             |                                                             | Network software licenses             |                                    | $      | 9,164 |         |         | $      | 16,552 |         |         | $      | 9,059  |         |        | $      | 9,546  |        |        | $      | 3,975 |       
|                                                             |                                                             | Network software services             |                                    |        | 5,513 |         |         |        | 10,576 |         |         |        | 11,424 |         |        |        | 12,457 |        |        |        | 7,345 |       
|                                                             |                                                             |                                       |                                    |        |       |         |         |        |        |         |         |        |        |         |        |        |        |        |        |       
|                                                             | Network software total                                      |                                       |                                    | 14,677 |       |         |         | 27,128 |        |         |         | 20,483 |        |         |        | 22,003 |        |        |        | 11,320 |      
|                                                             | Service bureau                                              |                                       |                                    | 34,081 |       |         |         | 23,881 |        |         |         | 16,775 |        |         |        |       |        |        |        |       |      
|                                                             | Network solutions                                           |                                       |                                    | 43,307 |       |         |         | 41,036 |        |         |         | 32,294 |        |         |        | 36,060 |        |        |        | 34,440 |      
|                                                             |                                                             |                                       |                                    |        |       |         |         |        |        |         |         |        |        |         |        |        |        |        |        |       
|                                                             |                                                             |                                       | Total revenue                      |        |       | 92,065  |         |        |        | 92,045  |         |        |        | 69,552  |        |        |        | 58,063 |        |        |       | 45,760 | 
|Operating costs and expenses:                                |                                                             |                                       |                                    |        |       |         |         |        |        |         |         |        |        |         |        |        |        |        |        |       
|                                                             | Direct cost of network software                             |                                       |                                    | 6,458  |       |         |         | 13,112 |        |         |         | 9,507  |        |         |        | 10,061 |        |        |        | 4,993  |      
|                                                             | Direct cost of service bureau                               |                                       |                                    | 16,231 |       |         |         | 13,468 |        |         |         | 6,289  |        |         |        |       |        |        |        |       |      
|                                                             | Direct cost of network solutions                            |                                       |                                    | 28,492 |       |         |         | 30,371 |        |         |         | 24,280 |        |         |        | 26,692 |        |        |        | 26,889 |      
|                                                             | Research and development                                    |                                       |                                    | 16,932 |       |         |         | 17,047 |        |         |         | 18,083 |        |         |        | 5,272  |        |        |        | 1,098  |      
|                                                             | Sales and marketing                                         |                                       |                                    | 8,917  |       |         |         | 10,029 |        |         |         | 13,826 |        |         |        | 6,930  |        |        |        | 2,285  |      
|                                                             | General and administrative                                  |                                       |                                    | 11,251 |       |         |         | 12,235 |        |         |         | 14,325 |        |         |        | 11,007 |        |        |        | 5,329  |      
|                                                             | Non-cash stock compensation expense                         |                                       |                                    | 1,501  |       |         |         | 1,554  |        |         |         | 2,587  |        |         |        | 1,711  |        |        |        |       |      
|                                                             | Depreciation and amortization of property and
    equipment |                                       |                                    | 6,612  |       |         |         | 6,156  |        |         |         | 4,550  |        |         |        | 2,388  |        |        |        | 916    |      
|                                                             | Amortization of software development costs                  |                                       |                                    | 9,035  |       |         |         | 4,831  |        |         |         | 4,946  |        |         |        | 2,892  |        |        |        | 1,401  |      
|                                                             | Amortization of goodwill and other intangible
    assets    |                                       |                                    | 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 |        |       | 105,960 |         |        |        | 109,356 |         |        |        | 160,319 |        |        |        | 66,953 |        |        |       | 42,911 | 
|                                                             |                                                             |                                       |                                    |        |       |         |         |        |        |         |         |        |        |         |        |        |        |        |        |       
|(Loss)/income from operations                                |                                                             |                                       | (13,895                            | )      |       |         | (17,311 | )      |        |         | (90,767 | )      |        |         | (8,890 | )      |        |        | 2,849  |       
|Interest expense                                             |                                                             |                                       | (1,088                             | )      |       |         | (897    | )      |        |         | (684    | )      |        |         | (1,394 | )      |        |        | (1,741 | )     
|Other income, net                                            |                                                             |                                       | 1,497                              |        |       |         | 370     |        |        |         | 1,968   |        |        |         | 1,912  |        |        |        |       |       
|                                                             |                                                             |                                       |                                    |        |       |         |         |        |        |         |         |        |        |         |        |        |        |        |        |       
|(Loss)/income before income taxes and
    extraordinary item |                                                             |                                       | (13,486                            | )      |       |         | (17,838 | )      |        |         | (89,483 | )      |        |         | (8,372 | )      |        |        | 1,108  |       
|Income tax benefit (expense)                                 |                                                             |                                       |                                   |        |       |         |        |        |        |         |        |        |        |         | 2,601  |        |        |        | (2,408 | )     
|                                                             |                                                             |                                       |                                    |        |       |         |         |        |        |         |         |        |        |         |        |        |        |        |        |       
|Loss before extraordinary item                               |                                                             | $                                     | (13,486                            | )      |       | $       | (17,838 | )      |        | $       | (89,483 | )      |        | $       | (5,771 | )      |        | $      | (1,300 | )     
|                                                             |                                                             |                                       |                                    |        |       |         |         |        |        |         |         |        |        |         |        |        |        |        |        |       
|Net loss attributable to common stockholders                 |                                                             | $                                     | (13,486                            | )      |       | $       | (17,838 | )      |        | $       | (89,483 | )      |        | $       | (6,530 | )      |        | $      | (1,300 | )     
|                                                             |                                                             |                                       |                                    |        |       |         |         |        |        |         |         |        |        |         |        |        |        |        |        |       
|Loss per common share, basic and diluted                     |                                                             | $                                     | (0.45                              | )      |       | $       | (0.61   | )      |        | $       | (3.16   | )      |        | $       | (0.39  | )      |        | $      | (0.12  | )     
|                                                             |                                                             |                                       |                                    |        |       |         |         |        |        |         |         |        |        |         |        |        |        |        |        |       
|Basic and diluted shares used in computation                 |                                                             |                                       | 29,796                             |        |       |         | 29,149  |        |        |         | 28,297  |        |        |         | 16,948 |        |        |        | 10,788 |       

|                                     |  |                    |        |      |  |       |        |      |  |      |        |  |  |   |         |  |  |   |        |  
|------------------------------------ |  | ------------------ | ------ | ---- |  | ----- | ------ | ---- |  | ---- | ------ |  |  | - | ------- |  |  | - | ------ | -
|                                     |  |                   
|                                     |  | As of December 31,
|                                     |  |                   
|                                     |  | 2003               |        | 2002 |  | 2001* |        | 2000 |  | 1999
|                                     |  |                    |        |      |  |       |        |      |  |     
|                                     |  |                   
|                                     |  | (in thousands)    
|Balance Sheet Data:                  |  |                    |        |      |  |       |        |      |  |      |        |  |  |   |         |  |  |   |        |  
|Cash and cash equivalents            |  | $                  | 18,785 |      |  | $     | 27,402 |      |  | $    | 42,928 |  |  | $ | 66,117  |  |  | $ | 3,257  |  
|Working capital                      |  |                    | 28,538 |      |  |       | 31,690 |      |  |      | 46,138 |  |  |   | 72,442  |  |  |   | 4,229  |  
|Total assets                         |  |                    | 65,280 |      |  |       | 81,425 |      |  |      | 89,596 |  |  |   | 100,350 |  |  |   | 27,762 |  
|Capital leases and long-term debt    |  |                    | 14,598 |      |  |       | 10,313 |      |  |      | 4,825  |  |  |   | 1,102   |  |  |   | 6,672  |  
|Total liabilities                    |  |                    | 28,429 |      |  |       | 33,789 |      |  |      | 26,735 |  |  |   | 16,201  |  |  |   | 22,351 |  
|Series A preferred stock             |  |                    |       |      |  |       |       |      |  |      |       |  |  |   |        |  |  |   | 9,520  |  
|Total stockholders equity (deficit) |  |                    | 36,851 |      |  |       | 47,636 |      |  |      | 62,861 |  |  |   | 84,149  |  |  |   | (4,199 | )




|  |                                                                                                                                                                                                      
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | In January 2001, we acquired Xypoint Corporation.
    See the footnote Acquisitions and Subsequent Events
    included in the audited financial statements for a discussion of
    the acquisition.

15



---



##### 



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

Critical Accounting Policies and
Estimates

Managements Discussion and Analysis of
Financial Condition and Results of Operations discusses 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, including
those related to intangible assets and contingencies and
litigation. 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, contracts accounted
for using the percentage of completion method, and capitalized
software. 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

As discussed above, on January 13, 2004, we
consummated the purchase of the Enterprise Mobility Solutions
business unit of Aether Systems, Inc. This unit brings to TCS a
substantial base of 1,200 enterprise customers, more than 60,000
wireless data subscribers, applications for logistics, financial
services and the mobile office, and 112 employees.

Prior to the January 2004 acquisition, we managed
our business in three operating segments: Network Software,
Service Bureau and Network Solutions. Subsequent to the
acquisition, we realigned our operating segments to better
manage the business we now operate. Our operating segments now
include (i) our Wireless Carrier segment, which consists
principally of the previous Network Software and Service Bureau
segments, (ii) our Government segment, which consists
principally of the previous Network Solutions segment, and
(iii) our Enterprise segment, which comprises the
operations we acquired from Aether Systems, Inc. The information
in this section is historical in nature and is presented based
on the operating segments through which we managed our business
prior to this acquisition.

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 software license
    fees relating to our products and monthly recurring service fees
    related to our service bureau segment. We manage our business
    across three segments: network software, service bureau and
    network solutions. Our network software segment consists of the
    development and licensing of software products and of related
    services. Our service bureau segment includes our E9-1-1 and
    hosted software application offerings. Our network solutions
    segment includes the design, development and deployment of
    information processing and communication systems and related
    services.
|
| |  | Cost of revenue.We
    strive to control our cost of revenue required to deliver and
    support our products and services while maintaining and
    delivering the quality of service expected by our customers. The
    major items impacting our cost of revenue are compensation and
    benefits as well as third-party hardware and software and
    overhead expenses. Hardware and third-party software costs are
    primarily associated with the delivery of product within our
    network solutions segment while also, to a lesser extent, may be
    attributed to the delivery of services within our network
    software segment. These costs                                                 

16



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##### 



| |  |                                                                                                                                                                                                   
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | tend to fluctuate as a result of the relative
    volume, mix of projects, level of service support required and
    the complexity of customized products and services delivered in
    a period.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Operating expenses.Operating expenses are substantially
    driven by compensation and benefits, travel costs, professional
    fees, facility costs, specific marketing and sales-related
    expenses as well as certain non-cash expenses such as non-cash
    stock compensation expenses, depreciation and amortization of
    property and equipment, of software development costs, and of
    acquired intangible assets. Operating expenses are incurred in
    connection with the development and marketing of new software
    applications as well as general corporate overhead expenses.



| |   |                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Liquidity and cash
    flows.The primary driver of our cash
    flows is our net income. Important sources of our liquidity have
    been cash raised at the time of our initial public offering in
    2000, our January 2004 private investment in public equity
    financing, and borrowing and lease financings secured for the
    purchase of equipment.
|
| |  | Balance sheet.We
    view cash, working capital, 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 relative
revenue and direct cost for each segment of our business:

Network Software Revenue and Related Direct
Cost:

The following table sets forth, for the periods
indicated, year-over-year comparison of the key components of
network software revenue and related direct cost.

|                                  |                           |      |      |      |  |               |      |      |  |               |       |      |   |   |     |     |    |   |      |      |  |   |     |      |   |  |    |    |   
|--------------------------------- | ------------------------- | ---- | ---- | ---- |  | ------------- | ---- | ---- |  | ------------- | ----- | ---- | - | - | --- | --- | -- | - | ---- | ---- |  | - | --- | ---- | - |  | -- | -- | --
|                                  |                           |      |      |      |  |               |      |      |  |              
|                                  |                           |      |      |      |  | 2003 vs. 2002 |      |      |  | 2002 vs. 2001
|                                  |                           |      |      |      |  |               |      |      |  |              
|($ in millions)                   |                           | 2003 |      | 2002 |  | $             |      | %    |  | 2001          |       | $    |   | %
|                                  |                           |      |      |      |  |               |      |      |  |               |       |      |   |  
|Network software segment revenue: |                           |      |      |      |  |               |      |      |  |               |       |      |   |   |     |     |    |   |      |      |  |   |     |      |   |  |    |   
|                                  | Network software licenses |      | $    | 9.2  |  |               | $    | 16.6 |  |               | $     | (7.4 | ) |   |     | (45 | %) |   | $    | 9.1  |  |   | $   | 7.5  |   |  |    | 83 | % 
|                                  | Network software services |      |      | 5.5  |  |               |      | 10.6 |  |               |       | (5.1 | ) |   |     | (48 | %) |   |      | 11.4 |  |   |     | (0.8 | ) |  |    | (7 | %)
|                                  |                           |      |      |      |  |               |      |      |  |               |       |      |   |   |     |     |    |   |      |      |  |   |     |      |   |  |    |   
|Network software total revenue    |                           |      | 14.7 |      |  |               | 27.1 |      |  |               | (12.5 | )    |   |   | (46 | %)  |    |   | 20.5 |      |  |   | 6.6 |      |   |  | 32 | % 
|Direct cost of network software   |                           |      | 6.5  |      |  |               | 13.1 |      |  |               | (6.7  | )    |   |   | (51 | %)  |    |   | 9.5  |      |  |   | 3.6 |      |   |  | 38 | % 
|                                  |                           |      |      |      |  |               |      |      |  |               |       |      |   |   |     |     |    |   |      |      |  |   |     |      |   |  |    |   
|Segment gross profit*             |                           | $    | 8.2  |      |  | $             | 14.0 |      |  | $             | (5.8  | )    |   |   | (41 | %)  |    | $ | 11.1 |      |  | $ | 3.0 |      |   |  | 28 | % 
|                                  |                           |      |      |      |  |               |      |      |  |               |       |      |   |   |     |     |    |   |      |      |  |   |     |      |   |  |    |   
|Percent of revenue                |                           |      | 56   | %    |  |               | 52   | %    |  |               |       |      |   |   |     |     |    |   | 54   | %    |  |   |     |      |   |  |    |   




|  |                                                                                                     
|- | ----------------------------------------------------------------------------------------------------
|* | See discussion of segment reporting in Note 19
    to the accompanying audited financial statements.

We market our network software products and
services by responding to requests for proposals, through our
direct sales force and through channel partners. We generate
network software revenue from licensing of our software
products, and providing related maintenance and deployment
services. We also sell custom software applications. The
Wireless Internet Gateway (WIG), TCS Xypoint®Location
Platform products, Short Message Service Center (SMSC), as well
as alerting and message notification applications are the
principal generators of software license fees.

We sell our software products directly to
wireless carriers. Initial licensing fees are a function of the
number of subscribers or other measure of usage of our software
in the network where our software is deployed. As a
carriers subscriber base or usage increases, the carrier
must purchase additional capacity under its license agreement
and we receive additional revenue. 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 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

17



---



##### 



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.


We have also historically sold some of our
network software products 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. In 2003,
software license revenue declined from $16.6 million to
$9.2 million, primarily because new business was not booked
to replace revenue generated in 2002 from a large contract to
deliver a location platform for multiple carrier networks in
Europe and the Pacific. For 2002, license revenue increased 83%
from 2001s $9.1 million primarily because of that
large project.

Our network software service revenue arises from
annual maintenance fees for our packaged and custom software
products and fees from custom development and implementation of
software products. Maintenance fees on packaged software 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. We also occasionally sell computer
equipment as part of our packaged software sales.

In 2003, 64% of service revenues related to
maintenance fees, while 34% related to installation fees
associated with the delivery of related software applications
and the remaining 2% related to third-party hardware and
software delivered as part of our packaged software sales. In
2002, 29% of service revenue is related to maintenance fees,
while 26% of service revenue is associated with delivered
third-party hardware and software delivered as part of our
packaged software sales, 8% of service revenue is associated
with installation fees, while 36% relates to custom software
applications for government agencies which, in late 2002, we
decided to no longer pursue. In 2001, 15% of service revenue is
related to maintenance fees, while 2% of service revenue is
associated with delivered third-party hardware and software
delivered as part of our packaged software sales, 10% of service
revenue is associated with installation fees, 4% related to
other software services while 68% relates to custom software
applications for government agencies.

The direct cost of our network software revenue
consists primarily of compensation, benefits, purchased
equipment, third-party software, travel expenses and consulting
fees incurred when providing our services. In 2003, such costs
primarily included compensation, benefits, travel and consulting
fees. In 2002, such costs primarily included compensation,
benefits, travel expenses and consulting fees while 25% of such
costs related to the cost of purchased equipment and third-party
software delivered as part of our packaged software sales in
that year. In 2001, such costs primarily included compensation,
benefits, travel expenses and consulting fees.

18



---



##### 



Service Bureau Revenue and Related Direct
Cost:

The following table sets forth, for the periods
indicated, a year-over-year comparison of the key components of
service bureau revenue and related direct cost:

|                               |  |      |       |      |  |               |       |   |  |               |      |   |  |   |    |   |  |   |       |   |  |   |      |   |  |  |     |   
|------------------------------ |  | ---- | ----- | ---- |  | ------------- | ----- | - |  | ------------- | ---- | - |  | - | -- | - |  | - | ----- | - |  | - | ---- | - |  |  | --- | --
|                               |  |      |       |      |  |               |       |   |  |              
|                               |  |      |       |      |  | 2003 vs. 2002 |       |   |  | 2002 vs. 2001
|                               |  |      |       |      |  |               |       |   |  |              
|($ in millions)                |  | 2003 |       | 2002 |  | $             |       | % |  | 2001          |      | $ |  | %
|                               |  |      |       |      |  |               |       |   |  |               |      |   |  |  
|Service bureau revenue         |  | $    | 34.1  |      |  | $             | 23.9  |   |  | $             | 10.2 |   |  |   | 43 | % |  | $ | 16.8  |   |  | $ | 7.1  |   |  |  | 42  | % 
|Direct cost of service bureau  |  |      | 16.2  |      |  |               | 13.5  |   |  |               | 2.8  |   |  |   | 21 | % |  |   | 6.3   |   |  |   | 7.2  |   |  |  | 114 | % 
|                               |  |      |       |      |  |               |       |   |  |               |      |   |  |   |    |   |  |   |       |   |  |   |      |   |  |  |     |   
|Segment gross profit*          |  | $    | 17.9  |      |  | $             | 10.4  |   |  | $             | 7.4  |   |  |   | 71 | % |  | $ | 10.5  |   |  | $ | (0.1 | ) |  |  | (1  | %)
|                               |  |      |       |      |  |               |       |   |  |               |      |   |  |   |    |   |  |   |       |   |  |   |      |   |  |  |     |   
|Percent of revenues            |  |      | 52    | %    |  |               | 44    | % |  |               |      |   |  |   |    |   |  |   | 63    | % |  |   |      |   |  |  |     |   
|Average number of PSAPs served |  |      | 3,548 |      |  |               | 2,355 |   |  |               |      |   |  |   | 50 | % |  |   | 1,347 |   |  |   |      |   |  |  | 75  | % 




|  |                                                                                                     
|- | ----------------------------------------------------------------------------------------------------
|* | See discussion of segment reporting in Note 19
    to the accompanying audited financial statements.

Our service bureau offerings include our E9-1-1,
hosted Position Determining Entity (PDE) and Text Message
Distribution Center (MDC) applications. Revenue from our
service bureau offerings primarily consists of monthly recurring
service fees and is recognized in the month earned. E9-1-1 and
PDE service fees are primarily dependent on the number of
subscribers the carrier covers, Public Service Answering Points
(PSAPs) served or cell sites that provide E9-1-1 services for
the carrier. As the carriers number of subscribers, PSAPs,
or cell sites increases, the monthly recurring service fees
increase. Message Distribution Center revenue is priced based on
message volume. In 2003, we expedited the deployment of PSAPs
related to all our customers resulting in an increase in the
average number of PSAPs served by approximately 1,200 or 50%.
Additionally, in 2003 we signed additional wireless carriers to
the E9-1-1 service and deployed hosted PDE and MDC applications
to two additional carriers, each of which continue to increase
in volume each month. In 2002, the FCC mandate resulted in
significant response by wireless carriers and we added
additional wireless carriers and experienced a 75% increase in
volume. However, such volume was somewhat offset by lower
average per unit pricing under new long-term contracts which
took effect in the first quarter of 2002. In 2001, service
bureau revenue resulted from lower volume as the business was
working with carriers to develop their deployment strategy in
response to the FCC mandate.

The direct cost of our service bureau revenue
consists primarily of compensation, benefits, travel expenses,
and consulting fees incurred when providing our services, as
well as the equipment maintenance and circuit costs of our
network operations centers circuits utilized for connectivity to
carrier customers and local governments Public Safety
Answering Points. In 2003, we increased headcount by 47% to
support this business while incurring costs related to temporary
contract staff to support our rapid deployment effort. This
increase in headcount during 2003 was partially offset by a
reduction in circuit costs that resulted from renegotiating
several contracts during the year. In 2002, we increased
headcount 21% and increased infrastructure costs to support this
business from the levels in 2001.

19



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##### 



Network Solutions Revenue and Related Direct
Cost:

The following table sets forth, for the periods
indicated, the year-over-year comparison of the key components
of our network solutions revenue and related direct cost:

|                                 |  |      |      |      |  |               |      |   |  |               |      |   |  |   |    |    |  |   |      |   |  |   |     |  |  |  |    |  
|-------------------------------- |  | ---- | ---- | ---- |  | ------------- | ---- | - |  | ------------- | ---- | - |  | - | -- | -- |  | - | ---- | - |  | - | --- |  |  |  | -- | -
|                                 |  |      |      |      |  |               |      |   |  |              
|                                 |  |      |      |      |  | 2003 vs. 2002 |      |   |  | 2002 vs. 2001
|                                 |  |      |      |      |  |               |      |   |  |              
|($ in millions)                  |  | 2003 |      | 2002 |  | $             |      | % |  | 2001          |      | $ |  | %
|                                 |  |      |      |      |  |               |      |   |  |               |      |   |  |  
|Network solutions revenue        |  | $    | 43.3 |      |  | $             | 41.0 |   |  | $             | 2.3  |   |  |   | 6  | %  |  | $ | 32.3 |   |  | $ | 8.7 |  |  |  | 27 | %
|Direct cost of network solutions |  |      | 28.5 |      |  |               | 30.4 |   |  |               | (1.9 | ) |  |   | (6 | %) |  |   | 24.3 |   |  |   | 6.1 |  |  |  | 25 | %
|                                 |  |      |      |      |  |               |      |   |  |               |      |   |  |   |    |    |  |   |      |   |  |   |     |  |  |  |    |  
|Segment gross profit*            |  | $    | 14.8 |      |  | $             | 10.7 |   |  | $             | 4.2  |   |  |   | 39 | %  |  | $ | 8.0  |   |  | $ | 2.7 |  |  |  | 33 | %
|                                 |  |      |      |      |  |               |      |   |  |               |      |   |  |   |    |    |  |   |      |   |  |   |     |  |  |  |    |  
|Percent of revenues              |  |      | 34   | %    |  |               | 26   | % |  |               |      |   |  |   |    |    |  |   | 25   | % |  |   |     |  |  |  |    |  




|  |                                                                                                     
|- | ----------------------------------------------------------------------------------------------------
|* | See discussion of segment reporting in Note 19
    to the accompanying audited financial statements.

We generate network solutions revenue from the
design, development, assembly and deployment of information
processing and communication systems, primarily for government
enterprises. Representative examples of recent network solutions
projects include delivery of our SwiftLink® product, a
lightweight, secure, deployable communications systems to the
U.S. Departments of State, Justice, and Defense and information
services systems to local government agencies. SwiftLink®
provides secure voice, video and data communications, supports a
worldwide network during trips abroad and throughout the United
States and provides full network functionality and Internet
Protocol telephony capability using landlines and
satellite-based technologies. Our Network Solutions segment also
operates teleport facilities in Baltimore, MD and Manassas, VA,
which support the integration of satellite communications and
terrestrial wireless broadband with U.S. broadband networks.
Through our teleport facilities we offer data connectivity via
satellite to and from North and South America, as well as Africa
and Europe. We generally provide network solutions under
long-term contracts. We recognize revenue under long-term
contracts as billable costs are incurred and for fixed-price
contracts using the percentage-of-completion 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.

In 2003, approximately 46% of network solutions
revenue resulted from the sale of SwiftLink® and related
deployable communications systems, an increase of 17% over the
amount in 2002. In 2003, we also designed, tested and delivered
products to government customers related to other
satellite-based communication systems and information processing
systems for local government agencies. In 2002, 36% of our
revenue for this segment resulted from the sale of
SwiftLink® and related deployable communication systems,
while the remaining amount related to the design and development
of other communication systems, and the design, testing and
delivery of products for several government agencies. In 2001,
33% of revenue was associated with deployable communications and
integration projects including a large contract related to an
African project while the remainder related to the design,
testing and delivery of information processing systems and other
products for several government agencies.

The direct cost of our network solutions revenue
consists of compensation, benefits, travel, satellite
space segment and airtime and approximately 50% of
costs are related to purchased equipment components, which we
purchase as needed for customer contracts, and the costs of
third-party contractors that we engage.

Major Customers

For the year ended December 31, 2003,
customers that accounted for 10% or more of total revenue were
Verizon Wireless and various U.S. Government agencies. The loss
of either of these customers would have a material adverse
impact on our business. For the year ended December 31,
2002 customers that accounted for 10% or more of total revenue
were Hutchison 3G, Verizon Wireless and various U.S. Government
agencies.

20



---



##### 



Lucent Technologies and various U.S. Government
agencies accounted for 10% or more of total revenue for the year
ended December 31, 2001.


Revenue Backlog

Total company backlog at January 1, 2004 was
$92.8 million, of which $2.1 million related to our
network software segment, $62.4 million related to our
service bureau segment and $15.6 million related to our
network solutions segment plus $12.7 million from our
acquired assets effective January 1, 2004. 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 service bureau
segment. Total company backlog at January 31, 2003 was
$78.4 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.

Operating Expenses:

Research and Development Expense.

The following table sets forth, for the periods
indicated, a year-over-year comparison of our research and
development expense:

|                                 |  |      |      |      |  |               |      |   |  |               |      |   |  |   |    |    |  |   |      |   |  |   |      |   |  |  |    |   
|-------------------------------- |  | ---- | ---- | ---- |  | ------------- | ---- | - |  | ------------- | ---- | - |  | - | -- | -- |  | - | ---- | - |  | - | ---- | - |  |  | -- | --
|                                 |  |      |      |      |  |               |      |   |  |              
|                                 |  |      |      |      |  | 2003 vs. 2002 |      |   |  | 2002 vs. 2001
|                                 |  |      |      |      |  |               |      |   |  |              
|($ in millions)                  |  | 2003 |      | 2002 |  | $             |      | % |  | 2001          |      | $ |  | %
|                                 |  |      |      |      |  |               |      |   |  |               |      |   |  |  
|Research and development expense |  | $    | 16.9 |      |  | $             | 17.0 |   |  | $             | (0.1 | ) |  |   | (1 | %) |  | $ | 18.1 |   |  | $ | (1.1 | ) |  |  | (6 | %)
|Percent of revenue               |  |      | 18   | %    |  |               | 19   | % |  |               |      |   |  |   |    |    |  |   | 26   | % |  |   |      |   |  |  |    |   

Our research and development expense consists of
compensation, benefits, travel costs, and a proportionate share
of facilities and corporate overhead. The costs of developing
software products are expensed prior to establishing
technological feasibility. 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
feasibility for enhancements to an existing product is
established when a detail program design is completed. We incur
research and development costs to enhance existing packaged
software products as well as to create new software products
including software hosted in our service bureau network
operations center. These costs primarily include compensation
and benefits as well as costs associated with using third-party
laboratory and testing resources. We expense research and
development costs as they are incurred unless technological
feasibility has been reached and marketability is certain.

In 2003, the expenses we incurred related to
software applications which are being marketed to new and
existing customers on a global basis. In 2003, the research and
development was mostly focused on expanded functionality of our
location platform software while in 2002 and in 2001, such
expenditures were primarily incurred in the development of our
Wireless Internet Gateway and E9-1-1 applications. Management
continually assesses our spending on research and development to
ensure resources are focused on products that are expected to
achieve the highest level of success. We do not expect research
and development expense to increase significantly in 2004 but
may increase as a result of our acquisition of the Enterprise
Division.

Sales and Marketing Expense:

The following table sets forth, for the periods
indicated, a year-over-year comparison of our sales and
marketing expenses:

|                            |  |      |     |      |  |               |      |   |  |               |      |   |  |   |     |    |  |   |      |   |  |   |      |   |  |  |     |   
|--------------------------- |  | ---- | --- | ---- |  | ------------- | ---- | - |  | ------------- | ---- | - |  | - | --- | -- |  | - | ---- | - |  | - | ---- | - |  |  | --- | --
|                            |  |      |     |      |  |               |      |   |  |              
|                            |  |      |     |      |  | 2003 vs. 2002 |      |   |  | 2002 vs. 2001
|                            |  |      |     |      |  |               |      |   |  |              
|($ in millions)             |  | 2003 |     | 2002 |  | $             |      | % |  | 2001          |      | $ |  | %
|                            |  |      |     |      |  |               |      |   |  |               |      |   |  |  
|Sales and marketing expense |  | $    | 8.9 |      |  | $             | 10.0 |   |  | $             | (1.1 | ) |  |   | (11 | %) |  | $ | 13.8 |   |  | $ | (3.8 | ) |  |  | (28 | %)
|Percent of total revenue    |  |      | 10  | %    |  |               | 11   | % |  |               |      |   |  |   |     |    |  |   | 20   | % |  |   |      |   |  |  |     |   

21



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##### 



Our sales and marketing expenses include
compensation and benefits, trade show expenses, travel costs,
advertising and public relations costs as well as a
proportionate share of facility-related costs which are expensed
as incurred. Our marketing efforts also include speaking
engagements and attending and sponsoring industry conferences.
We sell our network software products and services through our
direct sales force and through indirect channels. We have also
historically leveraged our relationship with original equipment
manufacturers to market our network software products to
wireless carrier customers. We sell our network solutions
primarily through direct sales professionals. Costs incurred for
sales and marketing have declined in 2003 from 2002 largely due
to reduced headcount and the alignment of resources with
products and services to more effectively target certain
markets. In 2002 such costs were lower than 2001, reflecting
savings achieved by consolidating efforts for all three business
segments. We expect our sales and marketing expense to increase
in 2004 as a result of our acquisition of the Enterprise
Division. 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, for the periods
indicated, a year-over-year comparison of our general and
administrative expense:

|                                   |  |      |      |      |  |               |      |   |  |               |      |   |  |   |    |    |  |   |      |   |  |   |      |   |  |  |     |   
|---------------------------------- |  | ---- | ---- | ---- |  | ------------- | ---- | - |  | ------------- | ---- | - |  | - | -- | -- |  | - | ---- | - |  | - | ---- | - |  |  | --- | --
|                                   |  |      |      |      |  |               |      |   |  |              
|                                   |  |      |      |      |  | 2003 vs. 2002 |      |   |  | 2002 vs. 2001
|                                   |  |      |      |      |  |               |      |   |  |              
|($ in millions)                    |  | 2003 |      | 2002 |  | $             |      | % |  | 2001          |      | $ |  | %
|                                   |  |      |      |      |  |               |      |   |  |               |      |   |  |  
|General and administrative expense |  | $    | 11.3 |      |  | $             | 12.2 |   |  | $             | (1.0 | ) |  |   | (8 | %) |  | $ | 14.3 |   |  | $ | (2.1 | ) |  |  | (15 | %)
|Percent of total revenue           |  |      | 12   | %    |  |               | 13   | % |  |               |      |   |  |   |    |    |  |   | 21   | % |  |   |      |   |  |  |     |   

General and administrative expense consists
primarily of compensation costs and other costs associated with
management, finance, human resources and internal information
systems. These costs include compensation, benefits, travel, and
a proportionate share of rent, utilities and other facilities
costs which are expensed as incurred. In 2003 such costs were
lower than in 2002 largely due to savings realized through
reduced headcount and reduced professional fees. In 2002 such
expenditures were lower than in 2001 reflecting savings achieved
in combining systems and processes of acquired companies into
our central operations as well as reduced headcount. We expect
general and administrative expense to increase modestly during
2004 as a result of our acquisition of the Enterprise Division.

Non-Cash Stock Compensation Expense:

The following table sets forth, for the periods
indicated, a year-over-year comparison of our non-cash stock
compensation expense:

|                                    |  |      |     |      |  |               |     |   |  |               |      |   |  |   |    |    |  |   |     |  |  |   |      |   |  |  |     |   
|----------------------------------- |  | ---- | --- | ---- |  | ------------- | --- | - |  | ------------- | ---- | - |  | - | -- | -- |  | - | --- |  |  | - | ---- | - |  |  | --- | --
|                                    |  |      |     |      |  |               |     |   |  |              
|                                    |  |      |     |      |  | 2003 vs. 2002 |     |   |  | 2002 vs. 2001
|                                    |  |      |     |      |  |               |     |   |  |              
|($ in millions)                     |  | 2003 |     | 2002 |  | $             |     | % |  | 2001          |      | $ |  | %
|                                    |  |      |     |      |  |               |     |   |  |               |      |   |  |  
|Non-cash stock compensation expense |  | $    | 1.5 |      |  | $             | 1.6 |   |  | $             | (0.1 | ) |  |   | (3 | %) |  | $ | 2.6 |  |  | $ | (1.0 | ) |  |  | (40 | %)

During the second and third quarters of 2000, we
granted options to purchase 885,983 shares of Class A
Common Stock to employees and directors at an exercise price
less than the fair market value of our Class A Common Stock
at the date of grant. Net loss attributable to common
stockholders, as reported, includes $1,010, $1,554, and $2,587
of non-cash stock compensation expense related to these grants
for the years ended December 31, 2003, 2002, 2001,
respectively. We expect to record future stock compensation
expense of $805 as a result of option grants that will be
recognized over the remaining vesting period of two years.

In the second quarter of 2003, we issued
restricted stock to directors and certain key executives. The
restrictions expire at the end of one year for directors and in
annual increments over three years for executives, and are based
on continued employment. Net loss for the year ended
December 31, 2003, as reported, includes $491 of non-cash
stock compensation expense related to such stock grants. We
expect to record future stock compensation expense of $1,399 as
a result of these restricted stock grants that will be
recognized over the remaining vesting period for directors and
executives.

22



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##### 



Depreciation and Amortization of Property and
Equipment:

The following table sets forth, for the periods
indicated, a year-over-year comparison of our depreciation and
amortization of property and equipment:

|                                                            |  |      |      |      |  |               |      |   |  |               |     |   |  |   |    |   |  |   |      |  |  |   |     |  |  |  |    |  
|----------------------------------------------------------- |  | ---- | ---- | ---- |  | ------------- | ---- | - |  | ------------- | --- | - |  | - | -- | - |  | - | ---- |  |  | - | --- |  |  |  | -- | -
|                                                            |  |      |      |      |  |               |      |   |  |              
|                                                            |  |      |      |      |  | 2003 vs. 2002 |      |   |  | 2002 vs. 2001
|                                                            |  |      |      |      |  |               |      |   |  |              
|($ in millions)                                             |  | 2003 |      | 2002 |  | $             |      | % |  | 2001          |     | $ |  | %
|                                                            |  |      |      |      |  |               |      |   |  |               |     |   |  |  
|Depreciation and amortization of property and
    equipment |  | $    | 6.6  |      |  | $             | 6.2  |   |  | $             | 0.4 |   |  |   | 7  | % |  | $ | 4.6  |  |  | $ | 1.6 |  |  |  | 35 | %
|Average gross cost of property and equipment                |  | $    | 29.2 |      |  | $             | 23.1 |   |  | $             | 6.1 |   |  |   | 26 | % |  | $ | 14.3 |  |  | $ | 8.8 |  |  |  | 61 | %

Depreciation and amortization expense (other than
amortization of software development costs) represents the
period costs associated with our investment in computers,
telephony equipment, software, furniture and fixtures, and
leasehold improvements. We compute depreciation and amortization
using the straight-line method over the estimated useful lives
of the assets. In 2003 expense was slightly higher than 2002 and
2002 was higher than 2001 reflecting the level of capital
expenditures made each year primarily to support our network
operations centers and our development efforts.

Amortization of Software Development
Costs:

The following table sets forth, for the periods
indicated, a year-over-year comparison of our amortization of
software development costs:

|                                                                                   |                                    |      |     |      |  |               |     |   |  |               |     |   |  |   |    |   |  |   |     |   |  |   |      |   |  |  |    |    | 
|---------------------------------------------------------------------------------- | ---------------------------------- | ---- | --- | ---- |  | ------------- | --- | - |  | ------------- | --- | - |  | - | -- | - |  | - | --- | - |  | - | ---- | - |  |  | -- | -- | 
|                                                                                   |                                    |      |     |      |  |               |     |   |  |              
|                                                                                   |                                    |      |     |      |  | 2003 vs. 2002 |     |   |  | 2002 vs. 2001
|                                                                                   |                                    |      |     |      |  |               |     |   |  |              
|($ in millions)                                                                    |                                    | 2003 |     | 2002 |  | $             |     | % |  | 2001          |     | $ |  | %
|                                                                                   |                                    |      |     |      |  |               |     |   |  |               |     |   |  |  
|Amortization of software development costs                                         |                                    | $    | 9.0 |      |  | $             | 4.8 |   |  | $             | 4.2 |   |  |   | 87 | % |  | $ | 4.9 |   |  | $ | (0.1 | ) |  |  | (2 | %)
|                                                                                   | Amount of accelerated amortization |      |     | 7.0  |  |               |     |  |  |               |     |   |  |   |    |   |  |   |     |  |  |   |      |   |  |  |    |    | 
|Percent of network software license revenue
    excluding accelerated amortization |                                    |      | 22  | %    |  |               | 29  | % |  |               |     |   |  |   |    |   |  |   | 55  | % |  |   |      |   |  |  |    |   

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. We calculate
amortization of software development costs on a
product-by-product basis using the straight-line method over the
remaining estimated economic life of the product, which is never
greater than three years. We also compute amortization using the
ratio that current revenue for the product bears to the total of
current and anticipated future revenue for that product. If this
revenue curve method results in amortization greater than the
amount computed using the straight-line method, we record
amortization at that greater amount. Amortization as a
percentage of software license fees is generally a higher
percentage in the early stages of a products life cycle.
Our policies to determine when to capitalize software
development costs and how much to amortize in a given period
requires 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. In 2003 these expenses were
higher than in 2002 primarily due to accelerated amortization of
software development costs of $7.0 million recorded in
June. The accelerated amortization was considered necessary
based on the assessment of the remaining value of recorded costs
relative to the amount of recoverability based on decreased
levels of marketability of several products.

Amortization of Goodwill and Other Intangible
Assets:The goodwill and other
intangible assets associated with our acquisitions were being
amortized over their useful lives. The valuation conducted in
2001 resulted in an impairment charge against the value of such
goodwill and intangible assets, thereby reducing the amount of
the expense related to the remaining value. The cost of the
Xypoint trade name continued to be amortized in 2002 and 2003
based on its estimated useful life of three years using the
straight-line method and was fully amortized by
December 31, 2003.

23



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##### 



Interest Expense:

The following table sets forth, for the periods
indicated, a year-over-year comparison of our components of
interest expense:

|                                                           |  |      |     |      |  |               |      |   |  |               |      |   |  |   |     |    |  |   |     |  |  |   |     |  |  |  |    |  
|---------------------------------------------------------- |  | ---- | --- | ---- |  | ------------- | ---- | - |  | ------------- | ---- | - |  | - | --- | -- |  | - | --- |  |  | - | --- |  |  |  | -- | -
|                                                           |  |      |     |      |  |               |      |   |  |              
|                                                           |  |      |     |      |  | 2003 vs. 2002 |      |   |  | 2002 vs. 2001
|                                                           |  |      |     |      |  |               |      |   |  |              
|($ in millions)                                            |  | 2003 |     | 2002 |  | $             |      | % |  | 2001          |      | $ |  | %
|                                                           |  |      |     |      |  |               |      |   |  |               |      |   |  |  
|Interest expense incurred on capital lease
    obligations |  | $    | 0.4 |      |  | $             | 0.9  |   |  | $             | (0.4 | ) |  |   | (53 | %) |  | $ | 0.7 |  |  | $ | 0.2 |  |  |  | 31 | %
|Interest expense incurred on notes payable                 |  |      | 0.5 |      |  |               | 0.1  |   |  |               | 0.4  |   |  |   | NM  |    |  |   |    |  |  |   |    |  |  |  |   |  
|Amortization of deferred commitment fees                   |  |      | 0.2 |      |  |               | 0.2  |   |  |               | (0.1 | ) |  |   | (27 | %) |  |   |    |  |  |   |    |  |  |  |   |  
|Capitalized interest                                       |  |      |    |      |  |               | (0.3 | ) |  |               | (0.3 | ) |  |   | NM  |    |  |   |    |  |  |   |    |  |  |  |   |  
|                                                           |  |      |     |      |  |               |      |   |  |               |      |   |  |   |     |    |  |   |     |  |  |   |     |  |  |  |    |  
|Total Interest Expense                                     |  | $    | 1.1 |      |  | $             | 0.9  |   |  | $             | 0.2  |   |  |   | 21  | %  |  | $ | 0.7 |  |  | $ | 0.2 |  |  |  | 31 | %

Interest expense is incurred under capital lease
obligations and notes payable. Our capital lease obligations
include interest at various amounts depending on the lease
arrangement. The balance of our total capital lease obligations
decreased from 2002 to 2003 and, therefore, the related interest
expense was also lower. Conversely, interest under the terms of
our notes payable are primarily at stated interest rates of
7.75% and the amount of borrowing under notes payable has
increased in the same time period. Because interest rates under
the terms of our notes payable are somewhat lower than those
under capital leases, total interest expense incurred has
decreased. Deferred financing fees relate to the up-front
payment of fees that were incurred to secure our notes payable
and our revolving line of credit facility with Silicon Valley
Bank and are being amortized over the term of the note or in the
case of the line of credit, the life of the facility which
expires April 2006. In 2002, interest expense was reduced by the
amount of interest that was capitalized relating to the
capitalization of software development costs.

Other Income, net:

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

|                                                                    |  |      |      |      |  |               |      |   |  |               |       |   |  |   |     |    |  |   |      |   |  |   |       |   |  |  |     |   
|------------------------------------------------------------------- |  | ---- | ---- | ---- |  | ------------- | ---- | - |  | ------------- | ----- | - |  | - | --- | -- |  | - | ---- | - |  | - | ----- | - |  |  | --- | --
|                                                                    |  |      |      |      |  |               |      |   |  |              
|                                                                    |  |      |      |      |  | 2003 vs. 2002 |      |   |  | 2002 vs. 2001
|                                                                    |  |      |      |      |  |               |      |   |  |              
|($ in millions)                                                     |  | 2003 |      | 2002 |  | $             |      | % |  | 2001          |       | $ |  | %
|                                                                    |  |      |      |      |  |               |      |   |  |               |       |   |  |  
|Foreign currency translation/transaction gain                       |  | $    | 0.5  |      |  | $             | 0.4  |   |  | $             | 0.2   |   |  |   | 42  | %  |  | $ |     |   |  | $ |      |   |  |  |    |   
|Foreign currency forward contract loss                              |  |      |     |      |  |               | (0.3 | ) |  |               | 0.3   |   |  |   | 100 | %  |  |   |     |   |  |   | (0.3  | ) |  |  |    |   
|Proceeds from insurance recovery of a theft claim                   |  |      | 0.7  |      |  |               |     |   |  |               | 0.7   |   |  |   |    |    |  |   |     |   |  |   |      |   |  |  |    |   
|Investment income                                                   |  |      | 0.1  |      |  |               | 0.3  |   |  |               | (0.3  | ) |  |   | (68 | %) |  |   | 1.9  |   |  |   | (1.6  | ) |  |  | (83 | %)
|Gain on forgiveness of loan and miscellaneous
    other income, net |  |      | 0.2  |      |  |               |     |   |  |               | 0.2   |   |  |   |    |    |  |   | 0.1  |   |  |   | (0.1  | ) |  |  | 100 | % 
|                                                                    |  |      |      |      |  |               |      |   |  |               |       |   |  |   |     |    |  |   |      |   |  |   |       |   |  |  |     |   
|Total other income, net                                             |  | $    | 1.5  |      |  | $             | 0.4  |   |  | $             | 1.1   |   |  |   | NM  |    |  | $ | 2.0  |   |  | $ | (1.6  | ) |  |  | (82 | %)
|                                                                    |  |      |      |      |  |               |      |   |  |               |       |   |  |   |     |    |  |   |      |   |  |   |       |   |  |  |     |   
|Revenues billed in foreign currency                                 |  | $    | 3.6  |      |  | $             | 8.8  |   |  | $             | (5.2  | ) |  |   | (59 | %) |  | $ | 0.1  |   |  | $ | 8.7   |   |  |  |    |   
|Average interest rate earned on investments                         |  |      | 1    | %    |  |               | 1    | % |  |               |       |   |  |   |     |    |  |   | 4    | % |  |   |       |   |  |  |     |   
|Average cash balance                                                |  | $    | 19.8 |      |  | $             | 30.9 |   |  | $             | (11.1 | ) |  |   | (36 | %) |  | $ | 54.5 |   |  | $ | (23.6 | ) |  |  | (43 | %)

Other income consists of investment income earned
on cash equivalents, foreign currency translation/transaction
gain or loss, and other income related to recording our
derivative investment activities. Investment income is a
function of our cash balances available for short-term
investment as well as interest rates. We record the effect of
foreign currency translation on our receivables that are stated
in foreign currency. Additionally, in 2003 we recorded a gain
resulting from insurance proceeds of $0.7 million related
to the recovery from a theft claim.

Income Taxes:

Because we have incurred net losses since 1999,
no provision for federal or state income taxes has been made for
the years ended December 31, 2003, 2002 and 2001.

24



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##### 



Net Loss:

The following table sets forth, for the period
indicated, a year-over-year comparison of our net loss:

|                |  |      |       |      |  |               |       |   |  |               |     |   |  |   |    |   |  |   |       |   |  |   |      |  |  |  |    |  
|--------------- |  | ---- | ----- | ---- |  | ------------- | ----- | - |  | ------------- | --- | - |  | - | -- | - |  | - | ----- | - |  | - | ---- |  |  |  | -- | -
|                |  |      |       |      |  |               |       |   |  |              
|                |  |      |       |      |  | 2003 vs. 2002 |       |   |  | 2002 vs. 2001
|                |  |      |       |      |  |               |       |   |  |              
|($ in millions) |  | 2003 |       | 2002 |  | $             |       | % |  | 2001          |     | $ |  | %
|                |  |      |       |      |  |               |       |   |  |               |     |   |  |  
|Net loss        |  | $    | (13.5 | )    |  | $             | (17.8 | ) |  | $             | 4.4 |   |  |   | 24 | % |  | $ | (89.5 | ) |  | $ | 71.6 |  |  |  | 80 | %

Net loss has declined primarily due to the
significant increases in gross profit from growing revenue and
our measures taken to control operating expenses.

Liquidity and Capital Resources

The following table sets forth, for the periods
indicated, a year-over-year comparison of key components of our
liquidity and capital resources:

|                                                                                            |                      |                                       |      |      |      |               |      |       |      |               |      |      |       |   |     |     |    |  |       |       |     |  |       |     |       |   |     |    |   | 
|------------------------------------------------------------------------------------------- | -------------------- | ------------------------------------- | ---- | ---- | ---- | ------------- | ---- | ----- | ---- | ------------- | ---- | ---- | ----- | - | --- | --- | -- |  | ----- | ----- | --- |  | ----- | --- | ----- | - | --- | -- | - | 
|                                                                                            |                      |                                       |      |      |      |               |      |       |      |              
|                                                                                            |                      |                                       |      |      |      | 2003 vs. 2002 |      |       |      | 2002 vs. 2001
|                                                                                            |                      |                                       |      |      |      |               |      |       |      |              
|($ in millions)                                                                             |                      | 2003                                  |      | 2002 |      | $             |      | %     |      | 2001          |      | $    |       | %
|                                                                                            |                      |                                       |      |      |      |               |      |       |      |               |      |      |       |  
|Net cash provided by (used in):                                                             |                      |                                       |      |      |      |               |      |       |      |               |      |      |       |   |     |     |    |  |       |       |     |  |       |     |       |   |     |   
|                                                                                            | Operating activities |                                       | $    | (4.1 | )    |               | $    | (10.9 | )    |               | $    | 6.8  |       |   |     | 63  | %  |  | $     | (11.7 | )   |  | $     | 0.9 |       |   |     | 7  | %
|                                                                                            | Investing activities |                                       |      | (9.4 | )    |               |      | (6.7  | )    |               |      | (2.8 | )     |   |     | (42 | %) |  |       | (13.1 | )   |  |       | 6.4 |       |   |     | 49 | %
|                                                                                            | Financing activities |                                       |      | 4.9  |      |               |      | 2.0   |      |               |      | 2.9  |       |   |     | 144 | %  |  |       | 1.6   |     |  |       | 0.4 |       |   |     | 25 | %
|Adjusted operating income/(loss), excluding
    non-cash charges (see reconciliation below) |                      |                                       | 4.2  |      |      |               | (4.7 | )     |      |               | 8.9  |      |       |   | 189 | %   |    |  | (15.5 | )     |     |  | 10.8  |     |       |   | 69  | % 
|Purchases of property and equipment                                                         |                      |                                       | (6.0 | )    |      |               | (4.9 | )     |      |               | (1.0 | )    |       |   | (21 | %)  |    |  | (6.1  | )     |     |  | 1.2   |     |       |   | 19  | % 
|Capitalized software development costs                                                      |                      |                                       | (1.9 | )    |      |               | (4.8 | )     |      |               | 2.9  |      |       |   | 61  | %   |    |  | (3.6  | )     |     |  | (1.2  | )   |       |   | (33 | %)
|Payments under lease obligations                                                            |                      |                                       | (3.1 | )    |      |               | (3.7 | )     |      |               | 0.6  |      |       |   | 16  | %   |    |  | (2.6  | )     |     |  | (1.1  | )   |       |   | (40 | %)
|Payments of long-term debt                                                                  |                      |                                       | (2.4 | )    |      |               | (0.2 | )     |      |               | (2.2 | )    |       |   | NM  |     |    |  |      |       |     |  | (0.2  | )   |       |   |    |   
|Proceeds from long-term debt                                                                |                      |                                       | 9.3  |      |      |               | 5.3  |       |      |               | 4.0  |      |       |   | 76  | %   |    |  | 0.3   |       |     |  | 5.0   |     |       |   | NM  |   
|Cash and cash equivalents                                                                   |                      |                                       | 18.8 |      |      |               | 27.4 |       |      |               | (8.6 | )    |       |   | (31 | %)  |    |  | 42.9  |       |     |  | (15.5 | )   |       |   | (36 | %)
|Changes in:                                                                                 |                      |                                       |      |      |      |               |      |       |      |               |      |      |       |   |     |     |    |  |       |       |     |  |       |     |       |   |     |   
|                                                                                            |                      | Accounts receivable                   |      |      | 2.3  |               |      |       | (8.7 | )             |      |      | 11.0  |   |     |     |    |  |       |       | 0.1 |  |       |     | (8.8  | ) |     |    |   | 
|                                                                                            |                      | Unbilled receivables, net             |      |      | (1.5 | )             |      |       | (2.0 | )             |      |      | 0.5   |   |     |     |    |  |       |       | 1.4 |  |       |     | (3.4  | ) |     |    |   | 
|                                                                                            |                      | Other current assets                  |      |      | (0.7 | )             |      |       |     |               |      |      | (0.7  | ) |     |     |    |  |       |       |    |  |       |     |      |   |     |    |   | 
|                                                                                            |                      | Accounts payable and accrued expenses |      |      | (7.5 | )             |      |       | 3.9  |               |      |      | (11.3 | ) |     |     |    |  |       |       | 2.0 |  |       |     | 1.7   |   |     |    |   | 
|                                                                                            |                      | Deferred revenue                      |      |      | (1.2 | )             |      |       | 0.6  |               |      |      | (1.7  | ) |     |     |    |  |       |       | 0.1 |  |       |     | 0.4   |   |     |    |   | 
|                                                                                            |                      | Working capital                       |      | $    | (8.6 | )             |      | $     | (6.2 | )             |      | $    | (2.9  | ) |     |     |    |  |       | $     | 3.7 |  |       | $   | (10.0 | ) |     |    |   | 
|                                                                                            |                      |                                       |      |      |      |               |      |       |      |               |      |      |       |   |     |     |    |  |       |       |     |  |       |     |       |   |     |   
|Days revenues outstanding in accounts receivable
    including unbilled receivables         |                      |                                       | 107  |      |      |               | 99   |       |      |               |      |      |       |   |     |     |    |  | 99    |       |     |  |       |     |       |   |     |   

We have funded our operations and capital
expenditures primarily using revenue from our operations as well
as the net proceeds from our initial public offering in August
2000, which generated cash of approximately $83.2 million,
leasing, long-term debt, and the private placement of our
securities in connection with our recent acquisition (as
described below).

We currently believe that we have sufficient
capital resources to meet our anticipated working capital and
capital expenditures needs for the foreseeable future. We may
consider raising capital in the public markets as a means to
meet our debt obligations or repay the amount of debt secured
under the terms of the convertible subordinated debentures.
While unanticipated events and opportunities may make it
necessary for us to return to the capital markets, establish new
credit facilities or raise capital in private transactions in
order to meet our capital requirements, we do not anticipate
having to do so in the foreseeable future and we can offer no
assurances that we will be able to access the capital markets on
terms acceptable to us or at all.

Operating cash flows improved in 2003 primarily
as a result of improvements in gross profit and reduction of
operating expenses. Management believes that an important
measure of cash flow from operating results is a measure of
adjusted operating income/(loss), excluding non-cash charges.
Adjusted operating income/(loss),

25



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##### 



excluding non-cash charges is a non-GAAP
financial measure which indicates the amount of cash generated
from/(used in) the operations of the business. The following
table sets forth the calculation of adjusted operating
income/(loss), excluding non-cash charges from our Consolidated
Statements of Operations:


|                                                                 |                                                               |      |       |      |  |      |       |     |  |   |       |      | 
|---------------------------------------------------------------- | ------------------------------------------------------------- | ---- | ----- | ---- |  | ---- | ----- | --- |  | - | ----- | ---- | 
|($ in millions)                                                  |                                                               | 2003 |       | 2002 |  | 2001
|                                                                 |                                                               |      |       |      |  |     
|Net loss                                                         |                                                               | $    | (13.5 | )    |  | $    | (17.8 | )   |  | $ | (89.5 | )   
|Non-cash charges included in net loss                            |                                                               |      |       |      |  |      |       |     |  |   |       |     
|                                                                 | Non-cash stock compensation expense                           |      |       | 1.5  |  |      |       | 1.6 |  |   |       | 2.6  | 
|                                                                 | Depreciation and amortization of property and
    equipment   |      |       | 6.6  |  |      |       | 6.2 |  |   |       | 4.6  | 
|                                                                 | Amortization of software development costs                    |      |       | 9.1  |  |      |       | 4.8 |  |   |       | 4.9  | 
|                                                                 | Amortization of goodwill and other intangible
    assets      |      |       | 0.5  |  |      |       | 0.5 |  |   |       | 9.2  | 
|                                                                 | Write-off of acquired in-process research and
    development |      |       |     |  |      |       |    |  |   |       | 9.7  | 
|                                                                 | Impairment of goodwill and other intangible assets            |      |       |     |  |      |       |    |  |   |       | 43.0 | 
|                                                                 |                                                               |      |       |      |  |      |       |     |  |   |       |     
|Adjusted operating income/(loss), excluding
    non-cash charges |                                                               | $    | 4.2   |      |  | $    | (4.7  | )   |  | $ | (15.5 | )   
|                                                                 |                                                               |      |       |      |  |      |       |     |  |   |       |     

The change in adjusted operating income(loss)
improved in 2003 by $8.9 million, lowering the need for net
cash expenditures. Accounts payable and accrued expenses were
$7.5 million lower in 2003 than in 2002 primarily related
to the required timing of payments to vendors and the status of
certain long-term projects that remain open at the end of the
period.

Net cash used in investing activities increased
in 2003 from 2002 while 2002 was lower than in 2001. In 2003,
the total cash used for the purchase of property and equipment
and development of our software products was $7.8 million while
they were $9.7 million in both 2002 and 2001. The decline
in 2003 is primarily due to completion of certain software
development projects that were under development in prior years.
Property and equipment purchases include equipment and software
costs required for our network operations center, our software
development efforts, and our corporate administrative support.
Additionally, in 2003, such costs included the purchase of a
seven-acre teleport facility in Virginia.

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.

In July 2003, we amended our agreement with
Silicon Valley Bank for a $15.0 million line of credit. 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 1.25% for equipment
loans and an interest rate of prime plus 1.0% for all other
loans, with a minimum prime rate of 4.25% (borrowing rates of
5.5% and 5.25%, respectively, at December 31, 2003). As
part of this agreement, we can borrow up to $2.5 million
under the terms of an equipment loan secured by purchased
equipment for a term of up to three years. The equipment loan
was drawn at December 31, 2003. The line of credit will
expire in April 2006. As of December 31, 2003, we had
$6.5 million available and unused under the revolving line
of credit and as of February 14, 2004, there were no other
borrowings outstanding under the line of credit.

On January 13, 2004, we consummated the
purchase, with an effective date of January 1, 2004, of the
Enterprise Mobility Solutions Division of Aether Systems, Inc.
Consideration for the acquisition was valued at approximately
$20 million, consisting of $18 million in cash,
$1 million in the form of a note payable and 204,020 newly
issued shares of Class A Common Stock. Concurrent with the
acquisition, we closed on $21 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 was used to fund the purchase of the
acquired assets.

26



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##### 



Off-Balance Sheet Arrangements

We are not a party to any off-balance sheet
arrangements.

Commitments

As of December 31, 2003, 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, 2003 our commitments
consisted of the following:

|                          |  |      |      |           |  |           |      |        |  |       |     |  |  |   |     |  |  |   |      | 
|------------------------- |  | ---- | ---- | --------- |  | --------- | ---- | ------ |  | ----- | --- |  |  | - | --- |  |  | - | ---- | 
|($ in millions)           |  | 2004 |      | 2005-2006 |  | 2007-2008 |      | Beyond |  | Total
|                          |  |      |      |           |  |           |      |        |  |      
|Notes payable             |  | $    | 5.7  |           |  | $         | 6.3  |        |  | $     |    |  |  | $ |    |  |  | $ | 12.0 | 
|Capital lease obligations |  |      | 2.2  |           |  |           | 0.4  |        |  |       |    |  |  |   |    |  |  |   | 2.6  | 
|Operating leases          |  |      | 2.8  |           |  |           | 3.5  |        |  |       | 2.8 |  |  |   | 2.4 |  |  |   | 11.5 | 
|                          |  |      |      |           |  |           |      |        |  |       |     |  |  |   |     |  |  |   |      | 
|                          |  | $    | 10.7 |           |  | $         | 10.2 |        |  | $     | 2.8 |  |  | $ | 2.4 |  |  | $ | 26.1 | 
|                          |  |      |      |           |  |           |      |        |  |       |     |  |  |   |     |  |  |   |      | 

Related Party Transactions

During 2001 and 2000, we made loans to six senior
executives totaling $4.9 million, all of which were fully repaid
with interest by December 31, 2003.

In February 2003, we entered into a lease with
Annapolis Partners LLC to explore the opportunity of relocating
our Annapolis offices to a planned new real estate development.
Our President and Chief Executive Officer owns a controlling
voting and economic interest in Annapolis Partners LLC and he
also serves as a member. The financial and many other terms of
the lease have not yet been established. The lease is subject to
several contingencies and rights of termination. For example,
the lease can be terminated at the sole discretion of our Board
of Directors if the terms and conditions of the development are
unacceptable to us, including without limitation the
circumstances that market conditions make the lease not
favorable to us or the overall cost is not in the best interest
to us or our shareholders, or any legal or regulatory
restrictions apply. Our Board of Directors will evaluate this
opportunity along with alternatives that are or may become
available in the relevant time periods and there is no assurance
that we will enter into a definitive lease at this new
development site.

Item 7A. Qualitative and Quantitative
Disclosures about Market Risk

Interest Rate Risk

We have limited exposure to financial market
risks, including changes in interest rates. In May 2002, we
entered into an agreement with Silicon Valley Bank for a
$15 million line of credit. The agreement was amended in
July 2003, extending the agreement to April 2006. We can borrow
an amount aggregating up to 80% of receivables less than
90 days old. The line of credit is secured by accounts
receivable and bears an interest rate of prime plus 1.25% for
equipment loans and an interest rate of prime plus 1.0% for all
other loans, with a minimum prime rate of 4.25% (borrowing rates
of 5.5% and 5.25%, respectively, at December 31, 2003). As
of December 31, 2003, we had $6.5 million available and
unused under the line of credit. As of February 14, 2004,
$2.4 million was outstanding under the terms of an
equipment loan which was secured by purchased equipment, bearing
interest at 5.5% and payable monthly through December 2006.

During 2003, we borrowed approximately
$9.3 million primarily to fund equipment purchases. The
borrowings bear interest at a weighted-average interest rate of
6.9%.

At December 31, 2003, we had cash and cash
equivalents of $18.8 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 2003 by
approximately $0.2 million, resulting in no significant
impact on our consolidated financial position, results of
operations or cash flows.

27



---



##### 



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. Under the terms of this contract, we will be paid in
British Pounds Sterling which exposes us to foreign currency
exchange risk.

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.

As of December 31, 2003, all of the option
contracts had expired. The expense recognized for settled
options in 2003 was $17,000.

As of December 31, 2003 we had approximately
$1.3 million in accounts receivable and $2.4 million
in unbilled receivables that are exposed to foreign currency
exchange risk. We recorded transaction gains of $545,000 on
foreign currency denominated receivables for the year ended
December 31, 2003.

Item 8. Financial Statements
and Supplementary Data

The financial statements listed in Item 15
are included in this report beginning on page F-1.

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

None.

Item 9A. Controls and
Procedures

As of the end of the period ending
December 31, 2003, 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 pursuant to
Rule 13a-15(e) under the Securities Exchange Act of 1934,
as amended. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective in timely
alerting them to material information relating to us required to
be included in our periodic SEC filings. There have been no
significant changes in our internal controls or in other factors
which could significantly affect internal controls subsequent to
the date we carried out our evaluation.

28



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##### 



Part III



|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

The following table sets forth for each of our
directors that persons age and the position currently held
by such person. All director terms expire in June 2004.

|                           |  |     |    |          |  |                                                                 
|-------------------------- |  | --- | -- | -------- |  | ----------------------------------------------------------------
|Name                       |  | Age |    | Position
|                           |  |     |    |         
|Maurice B. Tosé            |  |     | 47 |          |  | President, Chief Executive Officer and Chairman
    of the Board
|Richard A. Young           |  |     | 57 |          |  | Executive Vice President and Chief Operating
    Officer        
|Thomas M. Brandt, Jr.      |  |     | 52 |          |  | Senior Vice President and Chief Financial Officer               
|Drew A. Morin              |  |     | 43 |          |  | Senior Vice President and Chief Technology Officer              
|Timothy J. Lorello         |  |     | 46 |          |  | Senior Vice President and Chief Marketing Officer               
|Kevin M. Webb              |  |     | 47 |          |  | Senior Vice President Sales and Global Alliances                
|Clyde A. Heintzelman(1)(2) |  |     | 65 |          |  | Director                                                        
|Richard A. Kozak(1)(3)     |  |     | 58 |          |  | Director                                                        
|Weldon H. Latham(2)        |  |     | 57 |          |  | Director                                                        
|Byron F. Marchant(1)(3)    |  |     | 46 |          |  | Director                                                        



| |  | 
| |  | 
| |  | 

| |     |                                      | 
| | --- | ------------------------------------ | 
| | (1) | Member of the audit committee        | 
|
| | (2) | Member of the compensation committee | 
|
| | (3) | Member of the nominating committee   | 

Maurice B. Toséhas served as TCS Chief
Executive Officer and Chairman of the Board since December 1999.
He has been its President since he founded TCS in 1987. From
1986 to 1987, Mr. Tosé was Director of U.S. Department
of Defense Programs for Techmatics, Inc., a systems integration
company. Mr. Tosé was a member of the United States
Navy for eight years. Currently, he is a Commander in the U.S.
Naval Reserves. During his military career, Mr. Tosé
held various technical management positions on ships at sea as
well as staff positions at the U.S. Naval Academy and the U.S.
Secretary of Defense. Mr. Tosé holds a B.S. degree in
Operations Analysis from the U.S. Naval Academy.

Richard A. Younghas served as our Executive Vice
President and Chief Operating Officer since 1998 and has served
TCS in various other capacities since 1992. From 1989 to 1992,
Mr. Young was a Senior Manager for ICF Information
Technology, Inc., a custom applications software company. From
1968 to 1989, Mr. Young served as a member of the United
States Navy where he obtained the position of Director of the
Information Systems Department for the Naval Recruiting Command.
Mr. Young holds a B.S. degree in Engineering from the U.S.
Naval Academy and holds a M.S. degree in Information Technology
from the Naval Postgraduate School.

Thomas M. Brandt, Jr.has served as our Senior Vice
President and Chief Financial Officer since joining TCS in early
1997. Prior to joining us, Mr. Brandt was Senior Vice
President and the Chief Financial Officer of Digex, Inc., an
Internet service provider. Previously, he worked for Price
Waterhouse, LLC for twelve years, primarily as an auditor.
Mr. Brandt is a certified public accountant. He holds a
B.A. in Management Science and Economics from Duke University
and an M.B.A. from the Wharton School of Business of the
University of Pennsylvania.

Drew A. Morinhas served as our Senior Vice
President and Chief Technology Officer since 1995 and has served
TCS in various other capacities since 1988. Prior to joining
TCS, Mr. Morin worked for five years at BDM Corporation, a
systems integration company where he designed, developed and
implemented

29



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##### 



communication systems. Mr. Morin holds a
B.S. degree in Systems Engineering from the University of
Virginia and a M.S. degree in Systems Engineering from George
Mason University.


Timothy J. Lorellohas served as our Senior Vice
President and Chief Marketing Officer since 2001. He served as
our Senior Vice President  Network Intelligence from
1998 to 2001, and was our Director of Network Intelligence from
1995 to 1998. From 1983 to 1995, Mr. Lorello worked for
AT&T/ Bell Labs Network Systems, now known as Lucent
Technologies, Inc., where he provided marketing and services to
the cellular, PCS, independent and broad band intelligent
network industry segments. Mr. Lorello holds a B.S. degree
in Physics from the University of Chicago and a M.S. degree in
Electrical Engineering from Northwestern University.

Kevin M. Webbhas served as our Senior Vice
President, Sales and Global Alliances since 2001. He was Area
and Group Vice President for Oracle Corporation from 1996 to
2001. Previously, he served in a number of sales and marketing
roles at Tandem Computers, Inc. from 1987 to 1996, from Alliance
Branch Manager to Business Unit Manager to Regional Director.
From 1982 to 1987, Mr. Webb served in sales positions with
Wang Laboratories, Inc. He holds a BA degree from Brown
University and an M.B.A. from the New York University Stern
School of Business.

Clyde A. Heintzelmanjoined the Board of Directors in
December 1999. Mr. Heintzelman was the Chairman of the
Board of Optelecom, Inc. from February 2000 to June 2003, also
serving as the interim President and Chief Executive Officer
during 2002. Prior to joining Optelecom, Mr. Heintzelman
was the President of Net2000 Communications, from November 1999
to May 2001. From December 1998 to November 1999,
Mr. Heintzelman was the President and Chief Executive
Officer of SAVVIS Communications Corporation, a networking and
Internet solutions company. From 1995 to 1998,
Mr. Heintzelman was the President and Chief Operating
Officer of Digex, Inc. Prior to joining Digex, Inc.,
Mr. Heintzelman was a General Manager for Bell Atlantic.
Mr. Heintzelman also serves on the Board of Directors of
SAVVIS Communications Corporation. Mr. Heintzelman holds a
B.A. degree in Marketing from the University of Delaware.

Richard A. Kozakjoined the Board of Directors in
December 1999. He is currently Chairman of R&D2 LLC, a
company engaged in helping early stage companies commercialize
their intellectual property assets. In 1998, Mr. Kozak
founded and has been the Chief Executive Officer and Chairman of
the Board of Directors of 1eEurope, Ltd., formerly Galileo
Communications, Ltd., a portfolio of companies focused on
providing integrated e-business solutions to mid and large-size
companies throughout Europe. From 1993 to 1997, Mr. Kozak
was the President and Chief Executive Officer and member of the
Board of Directors of American Communications Services, Inc.,
now known as e.spire Communications, Inc., which he co-founded
in 1993. Prior to forming American Communications Services,
Inc., Mr. Kozak was the President of the Southern Division
of MFS Communications, which was acquired by MCI WorldCom. From
1986 through 1989, Mr. Kozak was Vice President and General
Manager of Global Messaging Services for GTE Telenet, now part
of Sprint International. He holds a B.S. degree in Engineering
from Brown University and an M.B.A. in Finance from The George
Washington University School of Government and Business
Administration. He is a member of the board of advisors for the
Dingman School of Entrepreneurship at the University of
Maryland, and the Chesapeake Innovation Center in Annapolis,
Maryland.

Weldon H. Lathamjoined the Board of Directors in
December 1999. Mr. Latham has been a senior partner at the
law firm of Holland & Knight since August 2000. From 1992 to
2000, Mr. Latham was a partner at the law firm of Shaw
Pittman Potts & Trowbridge. From 1986 to 1992,
Mr. Latham was a managing partner of the Virginia office of
the law firm Reed, Smith, Shaw and McClay. From 1981-1986,
Mr. Latham was the Vice President and General Counsel of
Sterling Systems Inc., a software company that was acquired by
Planning Research Corporation (PRC). Mr. Latham was
appointed Executive Assistant and Counsel to the PRC Chairman
and CEO. From 1979 to 1981, Mr. Latham served as General
Deputy Assistant Secretary, U.S. Department of Housing and Urban
Development and previously served as Assistant General Counsel,
Executive Office of the President (OMB) from 1973 to 1976.
Mr. Latham holds a B.A. degree in Business Administration
from Howard University, a J.D. degree from Georgetown University
Law Center, and an executive management certificate from the
Amos Tuck Business School at Dartmouth College.

Byron F. Marchantjoined the Board of Directors in
December 1999. Mr. Marchant has been the Executive Vice
President, General Counsel and Chief Administrative Officer of
Black Entertainment Television,

30



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##### 



Inc. (BET) since 1997. Prior to joining BET,
Mr. Marchant was a partner in the law firm Patton Boggs,
LLP. From 1995 to 1996, Mr. Marchant was TCS Senior
Vice President and General Counsel. Additional positions that
Mr. Marchant has held include Senior Legal Advisor to an
FCC Commissioner and an attorney with the law firm
Sidley & Austin. Mr. Marchant also serves on the
Board of Directors of Public Education Network, Cable Positive,
DC Chamber of Commerce and BET.com, LLC. the Executive Committee
of the Federal Communications Bar Association Foundation, and
the Northern Virginia Business Roundtable. The Governor of
Virginia appointed Mr. Marchant to the Board of Visitors of
George Mason University for a four-year term that began in the
Fall of 2003. Mr. Marchant holds a B.S. degree from the
U.S. Naval Academy and a J.D. degree from the University of
Virginia Law School.


Section 16(a) Beneficial Ownership
Reporting Compliance

Section 16(a) of the Securities Exchange Act
of 1934, as amended, requires that our directors and executive
officers, and persons that beneficially own more than 10% of our
Class A Common Stock, file with the SEC initial reports of
ownership and reports of changes in ownership of our
Class A Common Stock and other equity securities. Copies of
these reports must be filed with us. Based solely on our review
of the copies of these reports filed with us, and written
representations that no other reports were required, to our
knowledge, all reports required by Section 16(a) were filed
in 2003 except for one Form 4 report each for
Maurice B. Tosé and Richard Kozak, both of which were
filed less than three days late.



|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The following table shows all compensation earned
in each of the last three years by our Chief Executive Officer
and our four other most highly paid executive officers whose
annual salary and bonus exceeded $100,000 in the fiscal year
ended December 31, 2003.

Summary Compensation Table

|                            |                                      |      |      |                        |  |                 |          |            |  |           |         |           |  |                 |        |        |  |  |         |         |  |  |         |   |  |   |        |        | 
|--------------------------- | ------------------------------------ | ---- | ---- | ---------------------- |  | --------------- | -------- | ---------- |  | --------- | ------- | --------- |  | --------------- | ------ | ------ |  |  | ------- | ------- |  |  | ------- | - |  | - | ------ | ------ | 
|                            |                                      |      |      |                        |  |                 |          |            |  |           |         |          
|                            |                                      |      |      |                        |  |                 |          |            |  | Long-Term |         |          
|                            |                                      |      |      |                        |  | Compensation(2) |          |           
|                            |                                      |      |      | Annual Compensation(1) |  |                 |          |           
|                            |                                      |      |      |                        |  | Securities      |          | Restricted |  |          
|                            |                                      |      |      | Base                   |  |                 |          | Underlying |  | Share     |         | All Other
|Name and Principal Position |                                      | Year |      | Salary                 |  | Bonus(2)        |          | Other(3)   |  | Options   |         | Grants    |  | Compensation(4)
|                            |                                      |      |      |                        |  |                 |          |            |  |           |         |           |  |                
|Maurice B. Tosé             |                                      |      | 2003 |                        |  |                 | $377,326 |            |  | $         | 188,663 |           |  | $               | 25,972 |        |  |  |        |         |  |  |        |   |  | $ | 11,656 |       
|Chief Executive Officer,    |                                      |      | 2002 |                        |  |                 | 369,005  |            |  |           | 160,000 |           |  |                 | 28,399 |        |  |  | 135,000 |         |  |  | 318,000 |   |  |   | 13,445 |       
|                            | President, and Chairman of the Board |      |      | 2001                   |  |                 |          | 342,210    |  |           |         | 113,412   |  |                 |        | 26,345 |  |  |         | 455,000 |  |  |         |  |  |   |        | 14,392 | 
|Richard A. Young            |                                      |      | 2003 |                        |  |                 | $258,251 |            |  | $         | 142,000 |           |  | $               | 17,822 |        |  |  |        |         |  |  |        |   |  | $ | 11,754 |       
|Executive Vice President,   |                                      |      | 2002 |                        |  |                 | 251,922  |            |  |           | 110,000 |           |  |                 | 21,807 |        |  |  | 75,000  |         |  |  | 194,250 |   |  |   | 12,138 |       
|                            | Chief Operating Officer              |      |      | 2001                   |  |                 |          | 240,636    |  |           |         | 25,000    |  |                 |        | 1,745  |  |  |         | 250,000 |  |  |         |  |  |   |        | 12,239 | 
|Thomas M. Brandt, Jr.       |                                      |      | 2003 |                        |  |                 | $215,051 |            |  | $         | 90,000  |           |  | $               | 12,981 |        |  |  |        |         |  |  |        |   |  | $ | 11,703 |       
|Senior Vice President and   |                                      |      | 2002 |                        |  |                 | 205,101  |            |  |           | 100,000 |           |  |                 | 11,833 |        |  |  | 63,000  |         |  |  | 135,000 |   |  |   | 13,713 |       
|                            | Chief Financial Officer              |      |      | 2001                   |  |                 |          | 188,216    |  |           |         | 20,000    |  |                 |        | 10,859 |  |  |         | 125,000 |  |  |         |  |  |   |        | 14,439 | 
|Drew A. Morin               |                                      |      | 2003 |                        |  |                 | $220,101 |            |  | $         | 90,000  |           |  | $               | 11,800 |        |  |  |        |         |  |  |        |   |  | $ | 11,631 |       
|Senior Vice President and   |                                      |      | 2002 |                        |  |                 | 215,201  |            |  |           | 76,980  |           |  |                 | 15,217 |        |  |  | 63,000  |         |  |  | 135,000 |   |  |   | 12,141 |       
|                            | Chief Technical Officer              |      |      | 2001                   |  |                 |          | 180,145    |  |           |         | 20,000    |  |                 |        | 11,353 |  |  |         | 125,000 |  |  |         |  |  |   |        | 13,617 | 
|Timothy J. Lorello          |                                      |      | 2003 |                        |  |                 | $208,052 |            |  | $         | 45,000  |           |  | $               | 5,553  |        |  |  |        |         |  |  |        |   |  | $ | 11,656 |       
|Senior Vice President      |                                      |      | 2002 |                        |  |                 | 205,104  |            |  |           | 52,055  |           |  |                 | 16,763 |        |  |  | 63,000  |         |  |  | 90,000  |   |  |   | 10,416 |       
|                            | Chief Marketing Officer              |      |      | 2001                   |  |                 |          | 180,145    |  |           |         | 20,000    |  |                 |        | 10,393 |  |  |         | 125,000 |  |  |         |  |  |   |        | 9,142  | 



---

|    |                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes perquisites and other personal benefits,
    the aggregate annual amount of which for each named executive
    officer was less than the lesser of $50,000 or 10% of the total
    salary and bonus reported.           
|   
|(2) | Bonuses and long-term compensation are reported
    in the year earned, even if actually paid/granted in a
    subsequent year. Long-term compensation amounts for fiscal year
    2003 performance have not yet been determined.
|   
|(3) | Represents payments made to each of these
    executive officers in lieu of accrued vacation.                                                                                                                                    
|   
|(4) | Represent matching contributions made by us under
    our 401(k) plan and health and life insurance premiums paid by
    us.                                                                                                     

31



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##### 



The following tables provide information about
options granted, exercised and held by the executive officers
named in the Summary Compensation Tables of December 31,
2003. The value of unexercised, in-the-money options at year end
is based on the December 31, 2003 market closing price of
$4.94 per share, less the exercise price per share, multiplied
by the number of shares underlying the options.

Aggregate Option Exercises in 2003 and Option
Values at December 31, 2003

|                      |  |                  |         |             |  |                         |         |                          |  |             |         |               |  |  |         |  |  |   |         |  |  |   |         | 
|--------------------- |  | ---------------- | ------- | ----------- |  | ----------------------- | ------- | ------------------------ |  | ----------- | ------- | ------------- |  |  | ------- |  |  | - | ------- |  |  | - | ------- | 
|                      |  |                  |         |             |  |                         |         |                          |  |            
|                      |  |                  |         |             |  | Number of Securities    |         |                         
|                      |  |                  |         |             |  | Underlying Unexercised  |         | Value of Unexercised In-
|                      |  |                  |         |             |  | Options at December 31, |         | The-Money Options at    
|                      |  | Number of Shares |         |             |  | 2003                    |         | December 31, 2003(2)    
|                      |  | Acquired on      |         | Value       |  |                         |         |                         
|Name                  |  | Exercise         |         | Realized(1) |  | Exercisable             |         | Unexercisable            |  | Exercisable |         | Unexercisable
|                      |  |                  |         |             |  |                         |         |                          |  |             |         |              
|Maurice B. Tosé       |  |                  |        |             |  | $                       |        |                          |  |             | 272,500 |               |  |  | 317,500 |  |  | $ | 512,775 |  |  | $ | 595,575 | 
|Richard A. Young      |  |                  | 46,233  |             |  |                         | 200,838 |                          |  |             | 178,768 |               |  |  | 175,000 |  |  |   | 420,719 |  |  |   | 328,250 | 
|Thomas M. Brandt, Jr. |  |                  |        |             |  |                         |        |                          |  |             | 267,297 |               |  |  | 104,710 |  |  |   | 925,413 |  |  |   | 195,792 | 
|Drew A. Morin         |  |                  |        |             |  |                         |        |                          |  |             | 83,290  |               |  |  | 104,710 |  |  |   | 156,379 |  |  |   | 195,792 | 
|Timothy J. Lorello    |  |                  | 152,800 |             |  |                         | 550,087 |                          |  |             | 83,290  |               |  |  | 104,710 |  |  |   | 156,379 |  |  |   | 195,792 | 



---

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Amounts disclosed in this column do not reflect
    amounts actually received by the named officers but are
    calculated based on the difference between the fair market value
    of our Class A Common Stock on the date of exercise and the
    exercise price of the options. The named officers will receive
    cash only if and when they sell the ordinary shares issued upon
    exercise of the options, and the amount of cash received by such
    individuals is dependent on the price of our Class A Common
    Stock at the time of such sale.
|   
|(2) | Value is based on the difference between the
    option exercise price and the fair market value at
    December 31, 2003 (based upon a last reported sale price of
    $4.94 per share as quoted on the Nasdaq National Market on
    December 31, 2003) multiplied by the number of shares
    underlying the option.                                                                                                                                                                                                                                         

Executive Employment Agreements

We have entered into employment agreements with
Messrs. Young, Brandt, Morin and Lorello which became
effective February 1, 2001, and provide for their
individual annual salaries of $240,636, $188,216, $180,145, and
$180,145, respectively, and gives them the opportunity to
participate in bonus or incentive compensation plans of the
Company, if any. The agreements had an initial term of one year
from the effective date, and automatically extend for additional
one-year increments until terminated by us or the individuals.
Pursuant to the agreements, vesting of any stock options awarded
to the individuals shall be immediately accelerated in the event
of a change of control as defined in the agreements.

The individuals may resign their employment
voluntarily by giving 30 days notice to the Board of
Directors. If we terminate any of the individuals without cause
or if the individual resigns with good reason, he is entitled to
receive from us his earned bonus plus an amount equal to the
greater of the salary he would have received during the balance
of the term of the employment contract, or six months. Under the
agreements, cause means committing an act of gross
negligence or other willful act that materially adversely
affects TCS, acts of dishonesty involving fraud or embezzlement
or being convicted or pleading no contest to a felony involving
theft or moral turpitude. Under the agreements, good
reason includes circumstances that constitute a material
diminution in authority, require the individual to physically
relocate more than 75 miles and any material breach by the
Company of its obligations under the agreement. If we terminate
an individuals employment without cause, or if he resigns
for good reason, within 12 months of a change in control,
he is entitled to receive from us an amount based upon his
annual salary. Mr. Young is entitled to receive two times
his annual salary, and the other individuals are entitled to
receive one times their annual salary.

32



---



##### 



Compensation Committee Interlocks and Insider
Participation in Compensation Decisions

None.

Compensation of Directors

Directors who are not employees of TCS (that is,
each director other than Mr. Tosé) are paid a fee of
$1,500 for each Board meeting and $1,000 for each Committee
meeting in which the director participates in person, and $750
for each Board meeting and $500 for each Committee meeting in
which the director participates by phone. Generally, each
director is granted restricted stock or options to purchase
15,000 shares of Class A Common Stock under our Amended and
Restated 1997 Stock Incentive Plan for each year of service on
the Board. These restricted shares or options vest at the end of
each annual term of service on the Board. In addition,
non-employee directors are reimbursed for expenses incurred in
connection with their activities on our behalf.



|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

Securities Authorized for Issuance Under
Equity Compensation Plans

The following table provides information for all
equity compensation plans as of the fiscal year ended
December 31, 2003, under which the equity securities of the
Company were authorized for issuance:

|                                                               |  |                         |           |                      |  |                         |      |  |  |  |           | 
|-------------------------------------------------------------- |  | ----------------------- | --------- | -------------------- |  | ----------------------- | ---- |  |  |  | --------- | 
|                                                               |  |                         |           |                      |  | Number of securities   
|                                                               |  |                         |           |                      |  | remaining available for
|                                                               |  |                         |           |                      |  | future issuance under  
|                                                               |  | Number of securities to |           | Weighted average     |  | equity compensation    
|                                                               |  | be issued upon exercise |           | exercise price of    |  | plans (excluding       
|                                                               |  | of outstanding options, |           | outstanding options, |  | securities reflected in
|                                                               |  | warrants and rights     |           | warrants and rights  |  | Column (a))            
|                                                               |  |                         |           |                      |  |                        
|Plan Category                                                  |  | (a)                     |           | (b)                  |  | (c)                    
|                                                               |  |                         |           |                      |  |                        
|Equity compensation plans approved by security
    holders     |  |                         | 7,185,731 |                      |  | $                       | 2.95 |  |  |  | 4,591,653 | 
|Equity compensation plans not approved by
    security holders |  |                         | None      |                      |  |                         | N/A  |  |  |  | None      | 
|                                                               |  |                         |           |                      |  |                         |      |  |  |  |           | 
|Total                                                          |  |                         | 7,185,731 |                      |  | $                       | 2.95 |  |  |  | 4,591,653 | 
|                                                               |  |                         |           |                      |  |                         |      |  |  |  |           | 

Beneficial ownership is determined in accordance
with Rule 13d-3 of the Securities Exchange Act of 1934, as
amended. The number of shares beneficially owned by a person
includes shares of Class A Common Stock subject to options
held by that person that are currently exercisable or
exercisable within 60 days of February 17, 2004. The
shares issuable pursuant to these options are deemed outstanding
for computing the percentage ownership of the person holding
these options but are not deemed outstanding for the purposes of
computing the percentage ownership of any other person.

33



---



##### 



The following table lists the number of shares of
Class A Common Stock and Class B Common Stock
beneficially owned by directors and our named executive officers
of the Company as of January 31, 2004.

|                                                                     |  |                     |           |                      |  |          |           |          |  |  |      |   |  |  |     |  
|-------------------------------------------------------------------- |  | ------------------- | --------- | -------------------- |  | -------- | --------- | -------- |  |  | ---- | - |  |  | --- | -
|                                                                     |  |                     |           |                     
|                                                                     |  | Shares Beneficially |           | Percentage of Shares
|                                                                     |  | Owned               |           | Beneficially Owned  
|Name and Address of                                                  |  |                     |           |                     
|Beneficial Owner(1)                                                  |  | A Shares            |           | B Shares(3)          |  | A Shares |           | B Shares
|                                                                     |  |                     |           |                      |  |          |           |         
|Directors and executive
    officers:                                |  |                     |           |                      |  |          |           |          |  |  |      |   |  |  |     |  
|Maurice B. Tosé(2)                                                   |  |                     | 1,249,243 |                      |  |          | 9,248,363 |          |  |  | 5.3  | % |  |  | 100 | %
|Richard A. Young(4)                                                  |  |                     | 570,417   |                      |  |          |          |          |  |  | 2.4  | % |  |  |    |  
|Thomas M. Brandt, Jr.(5)                                             |  |                     | 447,458   |                      |  |          |          |          |  |  | 1.9  | % |  |  |    |  
|Drew A. Morin(6)                                                     |  |                     | 892,254   |                      |  |          |          |          |  |  | 3.8  | % |  |  |    |  
|Timothy J. Lorello(7)                                                |  |                     | 510,356   |                      |  |          |          |          |  |  | 2.1  | % |  |  |    |  
|Kevin M. Webb(8)                                                     |  |                     | 250,000   |                      |  |          |          |          |  |  | 1.0  | % |  |  |    |  
|Clyde A. Heintzelman(9)                                              |  |                     | 78,733    |                      |  |          |          |          |  |  | *    |   |  |  |    |  
|Richard A. Kozak(10)                                                 |  |                     | 75,733    |                      |  |          |          |          |  |  | *    |   |  |  |    |  
|Weldon H. Latham(11)                                                 |  |                     | 78,733    |                      |  |          |          |          |  |  | *    |   |  |  |    |  
|Byron F. Marchant(9)                                                 |  |                     | 78,733    |                      |  |          |          |          |  |  | *    |   |  |  |    |  
|All directors and executive officers as a group
    (10 persons)(15) |  |                     | 4,231,660 |                      |  |          | 9,248,363 |          |  |  | 18.0 | % |  |  | 100 | %
|Five percent holders:                                                |  |                     |           |                      |  |          |           |          |  |  |      |   |  |  |     |  
|Signal Equity Partners, L.P.(12)                                     |  |                     | 1,640,240 |                      |  |          |          |          |  |  | 6.9  | % |  |  |    |  
|Firsthand Capital Management, Inc.(13)                               |  |                     | 1,473,920 |                      |  |          |          |          |  |  | 6.2  | % |  |  |    |  
|The Riverview Group LLC(14)                                          |  |                     | 2,380,989 |                      |  |          |          |          |  |  | 9.9  | % |  |  |    |  



---

| |   |              
| | - | -------------
| | * | Less than 1%.



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Except as set forth herein, the business address
    of the named beneficial owner is c/o TeleCommunication Systems,
    Inc., 275 West Street, Annapolis, Maryland 21401.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | (2) | Includes 317,500 shares of Class A Common
    Stock issuable upon the exercise of stock options exercisable
    within 60 days of February 17, 2004 and 318,000 shares
    of restricted Class A Common Stock. Under the rules of the
    SEC, Mr. Tosé is deemed to beneficially own 223,995
    shares of Class A Common Stock owned by Teresa M.S. Layden,
    Mr. Tosés wife, 173,995 shares of Class A
    Common Stock held in a trust for the benefit of
    Mr. Tosés and Ms. Laydens extended
    family, 215,753 shares of Class B Common Stock held in a
    trust for the benefit of Mr. Tosés and
    Ms. Laydens children, and 21,945 shares of
    Class B Common Stock held by Mr. Tosés
    minor children. Mr. Tosé disclaims beneficial
    ownership of all of these shares.
|
| | (3) | The holders of Class B Common Stock are
    entitled to three votes per share on all matters submitted to a
    vote of the stockholders. Each share of our Class B Common
    Stock is convertible at any time, at the option of the holder,
    into one share of our Class A Common Stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | (4) | Includes 203,768 shares of Class A Common
    Stock issuable upon the exercise of stock options exercisable
    within 60 days of February 17, 2004 and 194,250 shares
    of restricted Class A Common Stock. Under the rules of the
    SEC, Mr. Young is deemed to beneficially own 50,000 shares
    of Class A Common Stock held in a trust for the benefit of
    Mr. Youngs wife and children. Mr. Young
    disclaims beneficial ownership of all of these shares.                                                                                                                                                                                                                                                                                                                           
|
| | (5) | Includes 288,087 shares of Class A Common
    Stock issuable upon the exercise of stock options exercisable
    within 60 days of February 17, 2004 and 135,000 shares
    of restricted Class A Common Stock. Under the rules of the
    SEC, Mr. Brandt is deemed to beneficially own 51,370 shares
    of Class A Common Stock held in a trust for the benefit of
    Mr. Brandts wife. Mr. Brandt disclaims
    beneficial ownership of all the shares in the trust.                                                                                                                                                                                                                                                                                                                             
|
| | (6) | Includes 104,080 shares of Class A Common
    Stock issuable upon the exercise of stock options exercisable
    within 60 days of February 17, 2004 and 135,000 shares
    of restricted Class A Common Stock. Under the rules of the
    SEC, Mr. Morin is deemed to beneficially own 256,854 shares
    of Class A Common                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

34



---



##### 



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     | Stock held in a trust for the benefit of
    Mr. Morins wife and children. Mr. Morin
    disclaims beneficial ownership of all of these shares.                                                                                                                                                                                                                                                                                                                                  
|
| | (7) | Includes 104,080 shares of Class A Common
    Stock issuable upon the exercise of stock options exercisable
    within 60 days of February 17, 2004 and 90,000 shares
    of restricted Class A Common Stock. Under the rules of the
    SEC, Mr. Lorello is deemed to beneficially own 236,849
    shares of Class A Common Stock held in a trust for the
    benefit of Mr. Lorellos wife and children.
    Mr. Lorello disclaims beneficial ownership of all these
    shares.
|
| | (8) | Includes 160,000 shares of Class A Common
    Stock issuable upon the exercise of stock options exercisable
    within 60 days of February 17, 2004 and 90,000 shares
    of restricted Class A Common Stock.                                                                                                                                                                                                                                                                     
|
| | (9) | Consists of 68,733 shares of Class A Common
    Stock issuable upon the exercise of stock options exercisable
    within 60 days of February 17, 2004, and 10,000 shares
    of restricted Class A Common Stock.                                                                                                                                                                                                                                                                  



|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Includes 22,500 shares of Class A Common
    Stock issuable upon the exercise of stock options exercisable
    within 60 days of February 17, 2004, and 10,000 shares
    of restricted Class A Common Stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    
|(11) | Includes 53,322 shares of Class A Common
    Stock issuable upon the exercise of stock options exercisable
    within 60 days of February 17, 2004, and 10,000 shares
    of restricted Class A Common Stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    
|(12) | According to a Form 4 filed with the SEC on
    March 14, 2001, the address of Signal Equity
    Partners, LP is 10 East 53rd Street, New York,
    New York 10022.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    
|(13) | According to a Schedule 13E filed with the
    SEC on February 13, 2003, the address of Firsthand Capital
    Management, Inc. is 125 South Market, Suite 1200, San
    Jose, California 95133.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    
|(14) | According to a Schedule 13G filed with the
    SEC on January 6, 2004, the address of each of The
    Riverview Group LLC, Millennium Holding Group, L.P.,
    Millennium Management, LLC and Mr. Englander is
    c/o Millennium Management, LLC, 666 Fifth Avenue,
    New York, NY 10103. Note: Also according to this
    Schedule 13G, the sole member of Riverview is Millennium
    Holding Group, L.P., a Delaware limited partnership
    (Holding). Millennium Management, LLC, a Delaware
    limited liability company (Millennium Management),
    is the general partner of Holding and consequently has voting
    control and investment discretion over securities owned by
    Holding and by Riverview. Israel A. Englander
    (Mr. Englander) is the sole managing member of
    Millennium Management. As a result, Mr. Englander may be
    considered the beneficial owner of any shares deemed to be
    beneficially owned by Millennium Management. Each of Holding,
    Millennium Management and Mr. Englander disclaims any
    beneficial ownership of the shares owned by Riverview. The
    number of shares of Class A common stock into which the
    warrant and convertible debenture (acquired by Riverview in our
    January 2004 private placement) are exercisable or convertible,
    as applicable, are limited pursuant to the terms of those
    securities to that number of shares of Class A Common Stock
    which would result in Riverview having aggregate beneficial
    ownership of not more than 9.99% of the total issued and
    outstanding shares of Class A Common Stock (the
    Ownership Limitation). Therefore, the percent of
    class beneficially owned by the Reporting Persons is limited to
    9.99%. In accordance with the Ownership Limitation, as of the
    date of this filing, each Reporting Person may be deemed the
    beneficial owner of 2,380,989 shares of Class A common
    stock, based on 23,833,724 shares of Class A common stock
    outstanding as of January 31, 2004. The information in this
    table with respect to Riverview, Holding, Millennium Management
    and Mr. Englander is based on information filed by
    Riverview, Holding, Millennium Management and Mr. Englander
    on a Schedule 13G filed with the SEC on January 6,
    2004 and as otherwise provided by them.
|    
|(15) | Includes an aggregate of 1,359,807 shares of
    Class A Common Stock issuable upon the exercise of stock
    options exercisable within 60 days of February 17,
    2004 and 525,000 shares of restricted Class A Common Stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      



|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

In February 2003, we entered into a lease with
Annapolis Partners LLC to explore the opportunity of relocating
our Annapolis offices to a planned new real estate development.
Our President and Chief Executive Officer owns a controlling
voting and economic interest in Annapolis Partners LLC and he
also serves as a member. The financial and many other terms of
the lease have not yet been established. The lease is subject to
several contingencies and rights of termination. For example,
the lease can be terminated at the sole

35



---



##### 



discretion of our Board of Directors if the terms
and conditions of the development are unacceptable to us,
including without limitation the circumstances that market
conditions make the lease not favorable to us or the overall
cost is not in the best interest to us or our shareholders, or
any legal or regulatory restrictions apply. Our Board of
Directors will evaluate this opportunity along with alternatives
that are or may become available in the relevant time periods
and there is no assurance that we will enter into a definitive
lease at this new development site.




|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

Pre-approval fee levels or budgeted amounts for
all services to be provided by the independent auditors are
established annually by the Audit Committee. Any proposed
services exceeding these levels or amounts require specific
pre-approval by the audit committee, and the audit committee is
mindful of the overall relationship of fees for audit and
non-audit services in determining whether to pre-approve such
fees. For each fiscal year, the audit committee determines the
appropriate ratio between the total amounts for fees of audit,
audit-related and tax services, and the total amount of fees for
services classified as all other services.

All requests or applications for services to be
provided by the independent auditors that do not require
specific approval by the audit committee are submitted to
executive management, and must include a detailed description of
the services to be rendered. Executive management determines
whether such services are included within the list of services
that have received the general pre-approval of the audit
committee, and executive management informs the audit committee
on a timely basis of any such services rendered by the
independent auditors.

Requests or applications to provide services that
do require specific approval by the audit committee are
submitted to the audit committee by both the independent
auditors and executive management, and must include a joint
statement as to whether, in their view, the request or
application is consistent with the SECs rules on auditor
independence.

The audit committee has designated
Mr. Thomas M. Brandt, Jr., Chief Financial Officer, to
monitor the performance of all services provided by the
independent auditors and to determine whether such services are
in compliance with this policy. Mr. Brandt reports to the
audit committee on a periodic basis the results of this
monitoring. Any member of executive management will immediately
report to the chairman of the audit committee any breach of this
policy that comes to the attention of any member of management.

The Audit Committee approved the selection of
Ernst & Young, LLP as our independent auditors for
2003. Fees charged by Ernst & Young, LLP for 2003
were:

|                   |            |      |         |         |  |   |         |         | 
|------------------ | ---------- | ---- | ------- | ------- |  | - | ------- | ------- | 
|                   |            | 2003 |         | 2002   
|                   |            |      |         |        
|Audit Fees         |            | $    | 296,644 |         |  | $ | 282,307 |        
|Audit-Related Fees |            | $    | 6,119   |         |  | $ | 1,372   |        
|Tax Fees           |            | $    | 125,836 |         |  | $ | 144,812 |        
|All Other Fees     |            | $    | 1,500   |         |  | $ | 1,500   |        
|                   |            |      |         |         |  |   |         |        
|                   | Total Fees |      | $       | 430,099 |  |   | $       | 429,991 | 
|                   |            |      |         |         |  |   |         |        

36



---



##### 



Part IV



|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K

Financial Statements

|                                                                                                                          |  |  |     | 
|------------------------------------------------------------------------------------------------------------------------- |  |  | --- | 
|Report of Independent Auditors                                                                                            |  |  | F-1 | 
|Consolidated Balance Sheets as of
    December 31, 2003 and 2002                                                          |  |  | F-2 | 
|Consolidated Statements of Operations for each of
    the three years in the period ended December 31, 2003               |  |  | F-3 | 
|Consolidated Statements of Stockholders
    Equity for each of the three years in the period ended
    December 31, 2003 |  |  | F-4 | 
|Consolidated Statements of Cash Flows for each of
    the three years in the period ended December 31, 2003               |  |  | F-5 | 
|Notes to Consolidated Financial Statements                                                                                |  |  | F-6 | 

Financial Statement Schedules

All financial statement schedules for which
provision is made in the applicable accounting regulations of
the Securities and Exchange Commission are not required pursuant
to the instructions to Item 8 or are inapplicable and
therefore have been omitted.

Exhibits

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

Reports on Form 8-K

On April 24, 2003, we filed a Form 8-K
attaching a press release relating to the Registrants
financial results for the quarter ended March 31, 2003.

On July 25, 2003, we filed a Form 8-K
attaching a press release relating to the Registrants
financial results for the quarter ended June 30, 2003.

On October 23, 2003, we filed a
Form 8-K attaching a press release relating to the
Registrants financial results for the quarter ended
September 30, 2003.

On December 23, 2003, we filed a
Form 8-K attaching a press release announcing a definitive
purchase agreement to acquire the Enterprise Mobility Solutions
business unit of Aether Systems, Inc.

On January 23, 2004, we filed a
Form 8-K attaching a press release announcing that we had
consummated the purchase of the Enterprise Mobility Solutions
business unit of Aether Systems, Inc.

On February 12, 2004, we filed a
Form 8-K attaching a press release relating to the
Registrants financial results for the quarter and fiscal
year ended December 31, 2003.

37



---



##### 



Report of Independent Auditors

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, 2003 and 2002, and the related consolidated
statements of operations, stockholders equity, and cash
flows for each of the three years in the period ended
December 31, 2003. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of TeleCommunication Systems,
Inc. at December 31, 2003 and 2002, and the consolidated
results of its operations and its cash flows for each of the
three years in the period ended December 31, 2003, in
conformity with accounting principles generally accepted in the
United States.



| |                      
| | ---------------------
| | /s/ Ernst & Young LLP

Baltimore, Maryland

January 30, 2004


F-1



---



##### 



TeleCommunication Systems, Inc.

Consolidated Balance Sheets

(amounts in thousands, except share
data)


|                                         |                                                                                                                         |                                                                           |                                                                                                                     |              |          |        |  |        |          |        | 
|---------------------------------------- | ----------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------- | ------------ | -------- | ------ |  | ------ | -------- | ------ | 
|                                         |                                                                                                                         | December 31,                                                              |                                                                                                                     | December 31,
|                                         |                                                                                                                         | 2003                                                                      |                                                                                                                     | 2002        
|                                         |                                                                                                                         |                                                                           |                                                                                                                     |             
|Assets                                   |                                                                                                                         |                                                                           |                                                                                                                     |              |          |        |  |       
|                                         | Current assets:                                                                                                         |                                                                           |                                                                                                                     |              |          |        |  |        |         
|                                         |                                                                                                                         | Cash and cash equivalents                                                 |                                                                                                                     | $            | 18,785   |        |  | $      | 27,402   |       
|                                         |                                                                                                                         | Accounts receivable                                                       |                                                                                                                     |              | 20,601   |        |  |        | 22,911   |       
|                                         |                                                                                                                         | Unbilled receivables, less allowance of $393 in
    2003 and $360 in 2002 |                                                                                                                     |              | 8,469    |        |  |        | 6,987    |       
|                                         |                                                                                                                         | Other current assets                                                      |                                                                                                                     |              | 2,366    |        |  |        | 1,675    |       
|                                         |                                                                                                                         |                                                                           |                                                                                                                     |              |          |        |  |       
|                                         |                                                                                                                         |                                                                           | Total current assets                                                                                                |              |          | 50,221 |  |        |          | 58,975 | 
|                                         | Property and equipment, net of accumulated
    depreciation and amortization of $20,925 in 2003 and $14,125 in
    2002 |                                                                           |                                                                                                                     | 11,449       |          |        |  | 11,814 |         
|                                         | Software development costs, net of accumulated
    amortization of $754 in 2003 and $1,347 in 2002                      |                                                                           |                                                                                                                     | 518          |          |        |  | 7,688  |         
|                                         | Other assets                                                                                                            |                                                                           |                                                                                                                     | 3,092        |          |        |  | 1,987  |         
|                                         |                                                                                                                         |                                                                           |                                                                                                                     |              |          |        |  |       
|                                         |                                                                                                                         |                                                                           | Total assets                                                                                                        |              | $        | 65,280 |  |        | $        | 80,464 | 
|                                         |                                                                                                                         |                                                                           |                                                                                                                     |              |          |        |  |       
|Liabilities and stockholders
    equity |                                                                                                                         |                                                                           |                                                                                                                     |              |          |        |  |       
|                                         | Current liabilities:                                                                                                    |                                                                           |                                                                                                                     |              |          |        |  |        |         
|                                         |                                                                                                                         | Accounts payable and accrued expenses                                     |                                                                                                                     | $            | 8,817    |        |  | $      | 16,274   |       
|                                         |                                                                                                                         | Accrued payroll and related liabilities                                   |                                                                                                                     |              | 3,331    |        |  |        | 3,395    |       
|                                         |                                                                                                                         | Deferred revenue                                                          |                                                                                                                     |              | 1,683    |        |  |        | 2,846    |       
|                                         |                                                                                                                         | Current portion of notes payable                                          |                                                                                                                     |              | 5,698    |        |  |        | 1,767    |       
|                                         |                                                                                                                         | Current portion of capital lease obligations                              |                                                                                                                     |              | 2,154    |        |  |        | 3,003    |       
|                                         |                                                                                                                         |                                                                           |                                                                                                                     |              |          |        |  |       
|                                         |                                                                                                                         |                                                                           | Total current liabilities                                                                                           |              |          | 21,683 |  |        |          | 27,285 | 
|                                         | Capital lease obligations and notes payable, less
    current portion                                                   |                                                                           |                                                                                                                     | 6,746        |          |        |  | 5,543  |         
|                                         | Stockholders equity:                                                                                                   |                                                                           |                                                                                                                     |              |          |        |  |        |         
|                                         |                                                                                                                         | Class A Common Stock; $0.01 par value:                                    |                                                                                                                     |              |          |        |  |        |          |       
|                                         |                                                                                                                         |                                                                           | Authorized shares  225,000,000; issued
    and outstanding shares of 22,062,974 in 2003 and 19,632,123 in
    2002 |              |          | 221    |  |        |          | 196    | 
|                                         |                                                                                                                         | Class B Common Stock; $0.01 par value:                                    |                                                                                                                     |              |          |        |  |        |          |       
|                                         |                                                                                                                         |                                                                           | Authorized shares  75,000,000; issued
    and outstanding shares of 9,363,688 in 2003 and 9,890,960 in 2002        |              |          | 94     |  |        |          | 99     | 
|                                         |                                                                                                                         | Deferred compensation                                                     |                                                                                                                     |              | (1,399   | )      |  |        |         |       
|                                         |                                                                                                                         | Additional paid-in capital                                                |                                                                                                                     |              | 169,256  |        |  |        | 165,176  |       
|                                         |                                                                                                                         | Accumulated deficit                                                       |                                                                                                                     |              | (131,321 | )      |  |        | (117,835 | )     
|                                         |                                                                                                                         |                                                                           |                                                                                                                     |              |          |        |  |       
|                                         |                                                                                                                         |                                                                           | Total stockholders equity                                                                                          |              |          | 36,851 |  |        |          | 47,636 | 
|                                         |                                                                                                                         |                                                                           |                                                                                                                     |              |          |        |  |       
|                                         |                                                                                                                         |                                                                           | Total liabilities and stockholders equity                                                                          |              | $        | 65,280 |  |        | $        | 80,464 | 
|                                         |                                                                                                                         |                                                                           |                                                                                                                     |              |          |        |  |       

See accompanying Notes to Consolidated Financial
Statements.

F-2



---



##### 



TeleCommunication Systems, Inc.

Consolidated Statements of
Operations

(amounts in thousands, except per share
data)


|                                                            |                                                               |                           |                                    |               |       |         |         |        |        |         |         |        |        |         |        | 
|----------------------------------------------------------- | ------------------------------------------------------------- | ------------------------- | ---------------------------------- | ------------- | ----- | ------- | ------- | ------ | ------ | ------- | ------- | ------ | ------ | ------- | ------ | 
|                                                            |                                                               |                          
|                                                            |                                                               | Year ended December 31,  
|                                                            |                                                               |                          
|                                                            |                                                               | 2003                      |                                    | 2002          |       | 2003   
|                                                            |                                                               |                           |                                    |               |       |        
|Revenue                                                     |                                                               |                           |                                    |               |       |         |         |        |        |         |         |       
|                                                            | Network software:                                             |                           |                                    |               |       |         |         |        |        |         |         |        |       
|                                                            |                                                               | Network software licenses |                                    | $             | 9,164 |         |         | $      | 16,552 |         |         | $      | 9,059  |        
|                                                            |                                                               | Network software services |                                    |               | 5,513 |         |         |        | 10,576 |         |         |        | 11,424 |        
|                                                            |                                                               |                           |                                    |               |       |         |         |        |        |         |         |       
|                                                            | Network software total                                        |                           |                                    | 14,677        |       |         |         | 27,128 |        |         |         | 20,483 |       
|                                                            | Service bureau                                                |                           |                                    | 34,081        |       |         |         | 23,881 |        |         |         | 16,775 |       
|                                                            | Network solutions                                             |                           |                                    | 43,307        |       |         |         | 41,036 |        |         |         | 32,294 |       
|                                                            |                                                               |                           |                                    |               |       |         |         |        |        |         |         |       
|                                                            |                                                               |                           |                                    | Total revenue |       |         | 92,065  |        |        |         | 92,045  |        |        |         | 69,552 | 
|Operating costs and expenses                                |                                                               |                           |                                    |               |       |         |         |        |        |         |         |       
|                                                            | Direct cost of network software                               |                           |                                    | 6,458         |       |         |         | 13,112 |        |         |         | 9,507  |       
|                                                            | Direct cost of service bureau                                 |                           |                                    | 16,231        |       |         |         | 13,468 |        |         |         | 6,289  |       
|                                                            | Direct cost of network solutions                              |                           |                                    | 28,492        |       |         |         | 30,371 |        |         |         | 24,280 |       
|                                                            | Research and development                                      |                           |                                    | 16,932        |       |         |         | 17,047 |        |         |         | 18,083 |       
|                                                            | Sales and marketing                                           |                           |                                    | 8,917         |       |         |         | 10,029 |        |         |         | 13,826 |       
|                                                            | General and administrative                                    |                           |                                    | 11,251        |       |         |         | 12,235 |        |         |         | 14,325 |       
|                                                            | Non-cash stock compensation expense                           |                           |                                    | 1,501         |       |         |         | 1,554  |        |         |         | 2,587  |       
|                                                            | Depreciation and amortization of property and
    equipment   |                           |                                    | 6,612         |       |         |         | 6,156  |        |         |         | 4,550  |       
|                                                            | Amortization of software development costs                    |                           |                                    | 9,035         |       |         |         | 4,831  |        |         |         | 4,946  |       
|                                                            | Amortization of goodwill and other intangible
    assets      |                           |                                    | 531           |       |         |         | 553    |        |         |         | 9,226  |       
|                                                            | Write-off of acquired in-process research and
    development |                           |                                    |              |       |         |         |       |        |         |         | 9,700  |       
|                                                            | Impairment of goodwill and other intangible assets            |                           |                                    |              |       |         |         |       |        |         |         | 43,000 |       
|                                                            |                                                               |                           |                                    |               |       |         |         |        |        |         |         |       
|                                                            |                                                               |                           | Total operating costs and expenses |               |       | 105,960 |         |        |        | 109,356 |         |        |        | 160,319 |       
|                                                            |                                                               |                           |                                    |               |       |         |         |        |        |         |         |       
|Loss from operations                                        |                                                               |                           | (13,895                            | )             |       |         | (17,311 | )      |        |         | (90,767 | )     
|Interest expense                                            |                                                               |                           | (1,088                             | )             |       |         | (897    | )      |        |         | (684    | )     
|Interest and other income, net                              |                                                               |                           | 1,497                              |               |       |         | 370     |        |        |         | 1,968   |       
|                                                            |                                                               |                           |                                    |               |       |         |         |        |        |         |         |       
|Net loss                                                    |                                                               | $                         | (13,486                            | )             |       | $       | (17,838 | )      |        | $       | (89,483 | )     
|                                                            |                                                               |                           |                                    |               |       |         |         |        |        |         |         |       
|Loss per share  basic and diluted                          |                                                               | $                         | (0.45                              | )             |       | $       | (0.61   | )      |        | $       | (3.16   | )     
|                                                            |                                                               |                           |                                    |               |       |         |         |        |        |         |         |       
|Weighted average shares outstanding 
    basic and diluted |                                                               |                           | 29,796                             |               |       |         | 29,149  |        |        |         | 28,297  |       
|                                                            |                                                               |                           |                                    |               |       |         |         |        |        |         |         |       

See accompanying Notes to Consolidated Financial
Statements.

F-3



---



##### 



TeleCommunication Systems, Inc.

Consolidated Statements of Stockholders
Equity

(amounts in thousands, except share
data)


|                                                                                                                    |  |         |     |         |  |              |     |            |  |             |        |       |  |   |         |  |  |   |          |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------- |  | ------- | --- | ------- |  | ------------ | --- | ---------- |  | ----------- | ------ | ----- |  | - | ------- |  |  | - | -------- | - |  | - | ------- | -
|                                                                                                                    |  | Class A |     | Class B |  |              |     | Additional |  |             |        |      
|                                                                                                                    |  | Common  |     | Common  |  | Deferred     |     | Paid-in    |  | Accumulated |        |      
|                                                                                                                    |  | Stock   |     | Stock   |  | Compensation |     | Capital    |  | Deficit     |        | Total
|                                                                                                                    |  |         |     |         |  |              |     |            |  |             |        |      
|Balance at January 1, 2001                                                                                          |  | $       | 137 |         |  | $            | 108 |            |  | $           |       |       |  | $ | 94,418  |  |  | $ | (10,514  | ) |  | $ | 84,149  |  
|Options exercised for the purchase of 510,494
    shares of Class A Common Stock                                    |  |         | 5   |         |  |              |    |            |  |             |       |       |  |   | 387     |  |  |   |         |   |  |   | 392     |  
|Issuance of 102,699 shares of Class A Common
    Stock under Employee Stock Purchase Plan                           |  |         | 1   |         |  |              |    |            |  |             |        |       |  |   | 274     |  |  |   |          |   |  |   | 275     |  
|Issuance of 3,597,520 shares of Class A
    Common Stock for the acquisition of Xypoint                             |  |         | 36  |         |  |              |    |            |  |             |       |       |  |   | 56,625  |  |  |   |         |   |  |   | 56,661  |  
|Issuance of stock options to purchase 656,990
    shares of Class A Common Stock for the acquisition of
    Xypoint |  |         |    |         |  |              |    |            |  |             |       |       |  |   | 7,860   |  |  |   |         |   |  |   | 7,860   |  
|Issuance of 53,264 shares of Class A Common
    Stock for an acquired company                                       |  |         | 1   |         |  |              |    |            |  |             |       |       |  |   | 409     |  |  |   |         |   |  |   | 410     |  
|Issuance of stock options to purchase 5,554
    shares of Class A Common Stock for an acquired company              |  |         |    |         |  |              |    |            |  |             |       |       |  |   | 10      |  |  |   |         |   |  |   | 10      |  
|Stock compensation expense for issuance of Class
    A Common Stock options at below fair market value              |  |         |    |         |  |              |    |            |  |             |       |       |  |   | 2,587   |  |  |   |         |   |  |   | 2,587   |  
|Conversion of Class B Common Stock into
    Class A Common Stock  194,083 shares                                   |  |         | 2   |         |  |              | (2  | )          |  |             |       |       |  |   |        |  |  |   |         |   |  |   |        |  
|Net loss for 2001                                                                                                   |  |         |    |         |  |              |    |            |  |             |       |       |  |   |        |  |  |   | (89,483  | ) |  |   | (89,483 | )
|                                                                                                                    |  |         |     |         |  |              |     |            |  |             |        |       |  |   |         |  |  |   |          |   |  |   |         |  
|Balance at December 31, 2001                                                                                        |  |         | 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 | )
|                                                                                                                    |  |         |     |         |  |              |     |            |  |             |        |       |  |   |         |  |  |   |          |   |  |   |         |  
|Balance at December 31, 2003                                                                                        |  | $       | 221 |         |  | $            | 94  |            |  | $           | (1,399 | )     |  | $ | 169,256 |  |  | $ | (131,321 | ) |  | $ | 36,851  |  
|                                                                                                                    |  |         |     |         |  |              |     |            |  |             |        |       |  |   |         |  |  |   |          |   |  |   |         |  

See accompanying Notes to Consolidated Financial
Statements.

F-4



---



##### 



TeleCommunication Systems, Inc.

Consolidated Statements of Cash
Flows

(amounts in thousands)


|                                                                                |                                                               |                                         |         |       |        |      |         |       |        |   |         |        |        |  
|------------------------------------------------------------------------------- | ------------------------------------------------------------- | --------------------------------------- | ------- | ----- | ------ | ---- | ------- | ----- | ------ | - | ------- | ------ | ------ | -
|                                                                                |                                                               |                                        
|                                                                                |                                                               | Year ended December 31,                
|                                                                                |                                                               |                                        
|                                                                                |                                                               | 2003                                    |         | 2002  |        | 2001
|                                                                                |                                                               |                                         |         |       |        |     
|Operating activities:                                                           |                                                               |                                         |         |       |        |      |         |       |        |   |         |       
|Net loss                                                                        |                                                               | $                                       | (13,486 | )     |        | $    | (17,838 | )     |        | $ | (89,483 | )     
|Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                               |                                         |         |       |        |      |         |       |        |   |         |       
|                                                                                | Depreciation and amortization of property and
    equipment   |                                         |         | 6,612 |        |      |         | 6,156 |        |   |         | 4,550  |       
|                                                                                | Amortization of software development costs                    |                                         |         | 9,035 |        |      |         | 4,831 |        |   |         | 4,946  |       
|                                                                                | Non-cash compensation expense for employees                   |                                         |         | 1,501 |        |      |         | 1,759 |        |   |         | 2,587  |       
|                                                                                | Amortization of goodwill and other intangible
    assets      |                                         |         | 531   |        |      |         | 553   |        |   |         | 9,226  |       
|                                                                                | Write-off of acquired in-process research and
    development |                                         |         |      |        |      |         |      |        |   |         | 9,700  |       
|                                                                                | Impairment of goodwill and other intangible assets            |                                         |         |      |        |      |         |      |        |   |         | 43,000 |       
|                                                                                | Other non-cash expenses included in net loss                  |                                         |         | 403   |        |      |         |      |        |   |         |       |       
|                                                                                | State of Maryland loan forgiveness                            |                                         |         | (100  | )      |      |         | (100  | )      |   |         |       |       
|                                                                                | Changes in operating assets and liabilities:                  |                                         |         |       |        |      |         |       |        |   |         |        |       
|                                                                                |                                                               | Accounts receivable                     |         |       | 2,310  |      |         |       | (8,658 | ) |         |        | 95     |  
|                                                                                |                                                               | Unbilled receivables, net               |         |       | (1,482 | )    |         |       | (1,990 | ) |         |        | 1,434  |  
|                                                                                |                                                               | Other current assets                    |         |       | (705   | )    |         |       | 31     |   |         |        | 41     |  
|                                                                                |                                                               | Accounts payable and accrued expenses   |         |       | (7,457 | )    |         |       | 3,878  |   |         |        | 3,092  |  
|                                                                                |                                                               | Accrued payroll and related liabilities |         |       | (64    | )    |         |       | (65    | ) |         |        | (1,052 | )
|                                                                                |                                                               | Deferred revenue                        |         |       | (1,163 | )    |         |       | 564    |   |         |        | 134    |  
|                                                                                |                                                               |                                         |         |       |        |      |         |       |        |   |         |       
|Net cash used in operating activities                                           |                                                               |                                         | (4,065  | )     |        |      | (10,879 | )     |        |   | (11,730 | )     
|Investing activities:                                                           |                                                               |                                         |         |       |        |      |         |       |        |   |         |       
|Purchases of property and equipment                                             |                                                               |                                         | (5,951  | )     |        |      | (4,907  | )     |        |   | (6,082  | )     
|Capitalized software development costs                                          |                                                               |                                         | (1,865  | )     |        |      | (4,801  | )     |        |   | (3,613  | )     
|Change in restricted cash                                                       |                                                               |                                         |        |       |        |      |        |       |        |   | 1,431   |       
|Acquisitions, net of cash acquired                                              |                                                               |                                         |        |       |        |      | (303    | )     |        |   | (3,029  | )     
|Funding of notes receivable from employees                                      |                                                               |                                         |        |       |        |      |        |       |        |   | (3,411  | )     
|Payments on notes receivable from employees                                     |                                                               |                                         | 14      |       |        |      | 3,507   |       |        |   | 1,336   |       
|Change in other assets                                                          |                                                               |                                         | (1,635  | )     |        |      | (146    | )     |        |   | 304     |       
|                                                                                |                                                               |                                         |         |       |        |      |         |       |        |   |         |       
|Net cash used in investing activities                                           |                                                               |                                         | (9,437  | )     |        |      | (6,650  | )     |        |   | (13,064 | )     
|Financing activities:                                                           |                                                               |                                         |         |       |        |      |         |       |        |   |         |       
|Payments on capital lease obligations                                           |                                                               |                                         | (3,058  | )     |        |      | (3,656  | )     |        |   | (2,603  | )     
|Payment on note payable to related party                                        |                                                               |                                         |        |       |        |      |        |       |        |   | (1,426  | )     
|Payments on long-term debt                                                      |                                                               |                                         | (2,392  | )     |        |      | (200    | )     |        |   |        |       
|Proceeds from long-term debt                                                    |                                                               |                                         | 9,266   |       |        |      | 5,266   |       |        |   | 300     |       
|Proceeds from sale-leaseback of equipment                                       |                                                               |                                         |        |       |        |      |        |       |        |   | 4,667   |       
|Proceeds from exercise of employee stock options
    and sale of stock          |                                                               |                                         | 1,069   |       |        |      | 593     |       |        |   | 667     |       
|                                                                                |                                                               |                                         |         |       |        |      |         |       |        |   |         |       
|Net cash provided by financing activities                                       |                                                               |                                         | 4,885   |       |        |      | 2,003   |       |        |   | 1,605   |       
|                                                                                |                                                               |                                         |         |       |        |      |         |       |        |   |         |       
|Net decrease in cash                                                            |                                                               |                                         | (8,617  | )     |        |      | (15,526 | )     |        |   | (23,189 | )     
|Cash and cash equivalents at the beginning of the
    year                      |                                                               |                                         | 27,402  |       |        |      | 42,928  |       |        |   | 66,117  |       
|                                                                                |                                                               |                                         |         |       |        |      |         |       |        |   |         |       
|Cash and cash equivalents at the end of the
    year                            |                                                               | $                                       | 18,785  |       |        | $    | 27,402  |       |        | $ | 42,928  |       
|                                                                                |                                                               |                                         |         |       |        |      |         |       |        |   |         |       

See accompanying Notes to Consolidated Financial
Statements.

F-5



---



##### 



TeleCommunication Systems, Inc.

Notes to Consolidated Financial
Statements

(amounts in thousands, except share
data)


1. Significant Accounting
Policies

Description of Business

We operate three interrelated business units
providing location and text messaging software to wireless
carriers, enhanced 9-1-1 public safety services for wireless
carriers, and highly reliable and secure network integration
services and communications systems for government customers.

Our Network Software products enable wireless
carriers to deliver short text messages, location information,
Internet content, alerts and privacy information and other
enhanced communication services to and from wireless phones. We
earn network software 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.

Our Service Bureau offerings include our E9-1-1
application, hosted Position Determining Entity
(PDE) software and Message Distribution Center
applications. We deliver our E9-1-1 and hosted messaging
services via our carrier grade network operations centers, using
a service bureau business model. As a service bureau we allow
customers to acquire use of our software functionality through
network connections to and from our facilities and to pay us
monthly based on service coverage volume, generally measured by
number of subscribers, cell cites, or call center circuits, or
by message volume.

Our Network Solutions segment designs, produces,
installs and operates wireless and data network communication
systems, including our SwiftLink® compact deployable
products, and high speed, satellite, Internet protocol solutions
principally for government customer enterprise networks. We have
been performing contract task orders for federal defense
customers for more than 15 years.

As set forth in Note 22, Subsequent Events,
the Company acquired the Enterprise Mobility Solutions division
of Aether Systems, Inc. on January 13, 2004, with an
effective date of January 1, 2004.

Use of Estimates.The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions
that affect the 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.

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.

Allowances for Doubtful Accounts Receivable.We use estimates to determine the
amount of the allowance for doubtful accounts necessary to
reduce accounts receivable and unbilled receivables 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 general provisions for
estimated losses by analyzing current and historical bad debt
trends. Actual collection experience has not varied
significantly from our estimates, due primarily to credit and
collection policies and the financial strength of our customers.
Receivables that are ultimately deemed uncollectible are
charged-off as a reduction of receivables and the allowance for
doubtful accounts.

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

F-6



---



##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

(amounts in thousands, except share
data)


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.

Software Development Costs.Costs of developing software products
incurred prior to confirming technological feasibility are
accounted for as research and development expense and expensed
as incurred. These costs are incurred to enhance existing
packaged software products as well as to create new software
products, and primarily include personnel costs and costs
associated with using third party laboratory and testing
resources.

Costs incurred for the development of computer
software that will be sold, leased or otherwise marketed 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 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 capitalized costs
are subject to an ongoing assessment of recoverability based
upon anticipated future revenue and changes in hardware and
software technologies. Unamortized capitalized software
development costs determined to be in excess of net realizable
value of the product are expensed immediately as additional
amortization.

Amortization of capitalized software development
costs begins when the product is available for general release.
Amortization is computed on a product-by-product basis using the
straight-line method over the products estimated useful
life, which is not to exceed 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. 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.

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.

Revenue Recognition.Revenue is generated from our three
segments as described below and as discussed more fully in
Note 19.

Network Software Revenue.We license packaged network software
principally for use in the wireless telecommunications industry.
These licenses typically contain multiple elements. In addition
to the product license, elements may include installation,
integration services, hardware and maintenance. 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 of the
software 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.

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.

F-7



---



##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

(amounts in thousands, except share
data)


Our network software services revenue is derived
primarily from maintenance fees for packaged software products,
and fees from development, implementation and maintenance of
custom applications.

Software maintenance fees include telephone
support, bug fixes, and rights to software upgrades on a
when-and-if-available basis. These fees are collected in advance
and recognized ratably over the annual maintenance period.
Unrecognized maintenance fees are included in deferred revenue.

Fees from the development and implementation of
custom applications are generally performed under time and
materials and fixed fee contracts. Professional services that
are provided under long-term fixed fee contracts to develop and
implement customized applications are recognized using the
percentage-of-completion method. These contracts generally allow
for monthly billing or billing upon achieving certain specified
milestones. Progress to completion is generally measured using
costs incurred compared to estimated total costs. Any estimated
losses under long-term contracts are recognized in their
entirety at the date that they become evident.

Our direct cost of network software consists
primarily of compensation, benefits, purchased equipment,
third-party software and travel expenses incurred when providing
our services.

Service Bureau Revenue.Our service bureau offerings include
our E9-1-1 application, hosted Position Determining Entity
(PDE) software and Message Distribution Center
applications. Revenue from our service bureau offerings consists
of monthly recurring service fees and is recognized in the month
earned. E9-1-1 and PDE service fees are primarily dependent on
either the number of subscribers the carrier covers, Public
Service Answering Points (PSAPs) served or cell sites that
provide E9-1-1 services for the carrier. As the carriers
number of subscribers, PSAPs, or cell sites increases, the
monthly recurring service fees increase. Message Distribution
Center revenue is priced based on the volume of messaging
traffic handled each month.

Our direct cost of service bureau consists
primarily of compensation, benefits, maintenance fees related to
purchased equipment, and third-party software and travel
expenses incurred when providing our services, as well as the
cost of our network operations centers circuits for connectivity
to carrier customers and local governments PSAPs.

Network Solutions Revenue.Network solutions revenue is generated
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 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 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 on contracts are recognized in
their entirety at the date that they become evident.

Our direct cost of network solutions consists of
compensation, benefits, travel and the costs of third party
consultants as well as purchased equipment components. Federal
government contract costs, including allocated indirect
expenses, are subject to audit and adjustment by the Defense
Contract Audit Agency. Contract revenue under these contracts is
recorded at estimated net realizable amounts. Adjustments to
recorded revenue upon the completion of audits have been
insignificant.

Advertising Costs.Advertising is expensed as incurred.
Advertising expense totaled $98, $68 and $379 for the years
ended December 31, 2003, 2002 and 2001, respectively.

Capitalized Interest.Total interest incurred was $1,088,
$1,164, and $684 for the years ended December 31, 2003,
2002, and 2001, respectively. Approximately $267 of total
interest incurred was capitalized

F-8



---



##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

(amounts in thousands, except share
data)


as a component of software development costs
during the year ended December 31, 2002. No interest was
capitalized during the years ended December 31, 2003 or
2001.

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. 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. Fair value is
generally determined by estimates of discounted cash flows. The
discount rate used in any estimate of discounted cash flows
would be the rate required for a similar investment of like
risk. Assets to be disposed of are reported at the lower of
carrying values or fair values, less estimated costs of disposal.

Stock-Based Compensation.We have two stock-based employee
compensation plans, which are described more fully in Note 14.
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 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 following table illustrates the effect on net loss
attributable to common stockholders 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(Statement
No. 123), to stock-based employee compensation.

|                                                                                                                    |             |                     |         |       |   |      |         |       |   |   |         |       |  
|------------------------------------------------------------------------------------------------------------------- | ----------- | ------------------- | ------- | ----- | - | ---- | ------- | ----- | - | - | ------- | ----- | -
|                                                                                                                    |             |                    
|                                                                                                                    |             | For the years ended
|                                                                                                                    |             | December 31,       
|                                                                                                                    |             |                    
|                                                                                                                    |             | 2003                |         | 2002  |   | 2001
|                                                                                                                    |             |                     |         |       |   |     
|Net loss attributable to common stockholders, as
    reported                                                       |             | $                   | (13,486 | )     |   | $    | (17,838 | )     |   | $ | (89,483 | )    
|Add: Stock-based employee compensation expense
    included in reported net loss                                    |             |                     | 1,501   |       |   |      | 1,554   |       |   |   | 2,587   |      
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards |             |                     | (5,102  | )     |   |      | (6,794  | )     |   |   | (6,377  | )    
|                                                                                                                    |             |                     |         |       |   |      |         |       |   |   |         |      
|Pro forma net loss per share attributable to
    common stockholders                                                |             | $                   | (17,087 | )     |   | $    | (23,078 | )     |   | $ | (93,273 | )    
|                                                                                                                    |             |                     |         |       |   |      |         |       |   |   |         |      
|Loss per share-basic and diluted:                                                                                   |             |                     |         |       |   |      |         |       |   |   |         |      
|                                                                                                                    | As reported |                     | $       | (0.45 | ) |      | $       | (0.61 | ) |   | $       | (3.16 | )
|                                                                                                                    |             |                     |         |       |   |      |         |       |   |   |         |      
|                                                                                                                    | Pro forma   |                     | $       | (0.57 | ) |      | $       | (0.79 | ) |   | $       | (3.30 | )
|                                                                                                                    |             |                     |         |       |   |      |         |       |   |   |         |      

In making the pro forma estimates of stock
compensation expense, we were required by generally accepted
accounting principles to use an option-pricing model, and we
selected the Black-Scholes model. The Black-Scholes
option-pricing model was developed for use in estimating the
fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including our
expected stock price volatility. Because our stock-based awards
have characteristics significantly different from those of
traded options and because changes in the subjective input
assumptions can materially affect our fair value estimate, in
our opinion, this model does not provide a reliable single
measure of the fair value of our stock-based awards. In
calculating the fair value of our stock options using
Black-Scholes, we assumed that the expected life was
5 years for options granted to employees and 3 years
for options granted to non-employees, that the risk free
interest rate was 3% for 2003 and 2002, respectively, and 5.5%
for 2001 and that there was no dividend yield. We also assumed
that the expected

F-9



---



##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

(amounts in thousands, except share
data)


volatility of our stock was 124% for options
granted in 2003, 139% for options granted in 2002, and 164% for
options granted in 2001.

We occasionally grant options or warrants to
acquire our Class A Common Stock to consultants or
advisors. We record compensation expense in an amount equal to
the fair value of the services we receive from the outside
consultant or advisor if the fair value of the services received
is more reliably determinable than the fair value of the options
granted, determined using an option-pricing model. We measure
the fair value of the equity instruments issued to a
non-employee on the earlier of the performance commitment date
or the date the services required under the arrangement have
been completed. Estimated amounts of expense are recognized as
the advisor performs under the arrangement. Those estimates are
adjusted on the final measurement date.

Hedging and Derivative Activities.During 2002, we entered into a foreign
currency forward contract to protect against the potential
reduction in value of foreign currency cash flows from a
long-term contract denominated in a foreign currency. These
derivative instruments classified as cash flow hedges expired in
2003.

We recognize all of our derivative instruments as
either assets or liabilities at their fair value. The accounting
for changes in the fair value of a derivative instrument depends
on whether it has been designated and qualifies as part of a
hedging relationship, and further, on the type of the hedging
relationship. For our cash flow hedge related to our long-term
contract denominated in a foreign currency, the effective
portion of the gain or loss on the derivative instrument was
reported as a component of other comprehensive income and
reclassified into revenue in the same period or periods during
which the hedged transaction affected earnings. The remaining
gain or loss in excess of the cumulative change in the present
value of future cash flows of the hedged item, if any, was
recognized in other income or expense in current earnings in the
period of change.

Recent Accounting Pronouncements.In January 2003, the Financial
Accounting Standards Board issued Interpretation No. 46,
Consolidation of Variable Interest Entities.The FASB in
2003 also issued various interpretive releases related to the
adoption of Interpretation No. 46. The objective of
Interpretation No. 46 is to improve financial reporting by
companies involved with variable interest entities. It requires
variable interest entities to be consolidated by a company if
that company is subject to a majority of the risk of loss from
the variable interest entitys activities or is entitled to
receive a majority of the entitys residual returns or
both. We currently do not have any interests in variable
interest entities and, therefore, the adoption of Interpretation
No. 46 during 2003 did not have an impact on our financial
position or results of operations.

The Emerging Issues Task Force of the FASB has
issued EITF Issue No. 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables, which addresses
arrangements which may involve the delivery or performance of
multiple products, services, and/or rights to use assets, and
for which performance may occur at different points in time or
over different periods of time. EITF Issue No. 00-21 also
addresses whether the different revenue generating activities,
or deliverables, are sufficiently separable, and whether there
exists sufficient evidence of their fair values to separately
account for some or all of the deliverables. The guidance
applies to all contractual arrangements requiring performance of
multiple revenue-generating activities not within the scope of
higher-level authoritative literature. EITF Issue No. 00-21
is effective for all revenue arrangements entered into in fiscal
periods beginning after June 15, 2003, with early adoption
permitted. We adopted this guidance prospectively for all
revenue arrangements entered into after January 1, 2003, and
upon adoption, there was no effect on reported operating results.

Income Taxes.Income
tax amounts and balances are accounted for using the liability
method of accounting for income taxes and deferred income tax
assets and liabilities are measured using the enacted tax rates
and laws that will be in effect when the differences are
expected to reverse.

F-10



---



##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

(amounts in thousands, except share
data)


2. Loss Per Common Share

|                                              |                                                                                       |                           |       |         |   |      |       |         |   |   |       |         |  
|--------------------------------------------- | ------------------------------------------------------------------------------------- | ------------------------- | ----- | ------- | - | ---- | ----- | ------- | - | - | ----- | ------- | -
|                                              |                                                                                       |                          
|                                              |                                                                                       | Year ended December 31,  
|                                              |                                                                                       |                          
|                                              |                                                                                       | 2003                      |       | 2002    |   | 2001
|                                              |                                                                                       |                           |       |         |   |     
|                                              |                                                                                       |                          
|                                              |                                                                                       | (share data in thousands)
|Numerator:                                    |                                                                                       |                           |       |         |   |      |       |         |   |   |       |        
|                                              | Net loss attributable to common stockholders                                          |                           | $     | (13,486 | ) |      | $     | (17,838 | ) |   | $     | (89,483 | )
|                                              |                                                                                       |                           |       |         |   |      |       |         |   |   |       |        
|Denominator:                                  |                                                                                       |                           |       |         |   |      |       |         |   |   |       |        
|                                              | Denominator for basic and diluted loss per common
    share  weighted-average shares |                           |       | 29,796  |   |      |       | 29,149  |   |   |       | 28,297  |  
|                                              |                                                                                       |                           |       |         |   |      |       |         |   |   |       |        
|Loss per common share  basic and
    diluted |                                                                                       | $                         | (0.45 | )       |   | $    | (0.61 | )       |   | $ | (3.16 | )      
|                                              |                                                                                       |                           |       |         |   |      |       |         |   |   |       |        

Basic loss per common share is based upon the
average number of shares of common stock outstanding during the
period. Because we incurred a net loss in 2003, 2002 and 2001,
potentially dilutive securities were excluded from the
computation because the result would be anti-dilutive. These
potentially dilutive securities consist of stock options and
restricted stock, as summarized in Note 14.

3. Supplemental Disclosure of Cash Flow
Information

Property and equipment acquired under capital
leases totaled $568, $174, and $7,593 during the years ended
December 31, 2003, 2002, and 2001, respectively.

Interest paid totaled $918, $1,164, and $767
during the years ended December 31, 2003, 2002, and 2001,
respectively.

4. Unbilled Receivables

Unbilled receivables consisted of the following
at December 31:

|                                                                                   |  |      |       |      |  |   |       | 
|---------------------------------------------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                                                                                   |  | 2003 |       | 2002
|                                                                                   |  |      |       |     
|Amounts billable at specified milestones, less
    allowance for doubtful accounts |  | $    | 8,174 |      |  | $ | 6,507 | 
|Contract retentions                                                                |  |      | 100   |      |  |   | 138   | 
|Rate variances and costs and estimated earnings
    in advance of billings         |  |      | 195   |      |  |   | 342   | 
|                                                                                   |  |      |       |      |  |   |       | 
|                                                                                   |  | $    | 8,469 |      |  | $ | 6,987 | 
|                                                                                   |  |      |       |      |  |   |       | 

Substantially all unbilled receivables are
expected to be collected within twelve months.

5. Property and Equipment

Property and equipment consisted of the following
at December 31:

|                                                |  |      |         |      |  |   |         |  
|----------------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | -
|                                                |  | 2003 |         | 2002
|                                                |  |      |         |     
|Computer equipment                              |  | $    | 19,325  |      |  | $ | 17,597  |  
|Computer software                               |  |      | 7,693   |      |  |   | 4,061   |  
|Furniture and fixtures                          |  |      | 2,447   |      |  |   | 2,467   |  
|Leasehold improvements                          |  |      | 1,802   |      |  |   | 1,675   |  
|Land                                            |  |      | 1,000   |      |  |   |        |  
|Vehicles                                        |  |      | 107     |      |  |   | 139     |  
|                                                |  |      |         |      |  |   |         |  
|                                                |  |      | 32,374  |      |  |   | 25,939  |  
|Less: accumulated depreciation and amortization |  |      | (20,925 | )    |  |   | (14,125 | )
|                                                |  |      |         |      |  |   |         |  
|                                                |  | $    | 11,449  |      |  | $ | 11,814  |  
|                                                |  |      |         |      |  |   |         |  

F-11



---



##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

(amounts in thousands, except share
data)


6. Line of Credit

We maintain a $15,000 line of credit with a bank
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%. Under the term
of the line of credit, we borrowed $2,500 as a term loan
maturing in 36 months at a rate of 5.5%. At
December 31, 2003, there were no other amounts outstanding
under the line.

7. Long-Term Debt

Long-term debt consists of the following at
December 31:

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |      |        |      |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ------ | ---- |  | - | ------ | -
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  | 2003 |        | 2002
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |      |        |     
|Note payable dated September 25, 2002, due
    March 31, 2004, and bearing interest at 7.75% per annum.
    The note requires monthly installments of principal and interest
    of $84 through February 28, 2004. The note is secured by
    the accounts receivable of one customer                                                                                                                                                                                                                                                                                                                                                                        |  | $    | 1,605  |      |  | $ | 2,432  |  
|Note payable dated December 20, 2002, due
    June 30, 2004, and bearing interest at 7.75% per annum. The
    note requires monthly installments of principal and interest of
    $84 through May 31, 2004. The note is secured by the
    accounts receivable of one customer                                                                                                                                                                                                                                                                                                                                                                               |  |      | 1,802  |      |  |   | 2,634  |  
|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.                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |      | 15     |      |  |   |       |  
|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                                                                                                                                                                                                                                                                                                                                                                         |  |      | 2,072  |      |  |   |       |  
|Note payable dated September 26, 2003, due
    April 30, 2005, and bearing interest at 7.75% per annum.
    The note requires monthly installments of principal and interest
    of $83 through February 28, 2005 and a final payment of
    $1,481 on March 31, 2005. The note is secured by the
    accounts receivable of one customer                                                                                                                                                                                                                                                                                                                    |  |      | 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                                                                                                                                                                                                                                                                                                                                                                                                   |  |      | 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 and interest
    of $76 through December 1, 2006. The note is secured by
    property and equipment                                                                                                                                                                                                                                                                                                                                                                                           |  |      | 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 becomes 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. The loan is secured by a letter of credit
    in favor of the State of Maryland |  |      | 100    |      |  |   | 200    |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |      |        |      |  |   |        |  
|Total                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |      | 12,040 |      |  |   | 5,266  |  
|Less: current portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |      | (5,698 | )    |  |   | (1,767 | )
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |      |        |      |  |   |        |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  | $    | 6,342  |      |  | $ | 3,499  |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |      |        |      |  |   |        |  

F-12



---



##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

(amounts in thousands, except share
data)


Aggregate maturities of debt at December 31,
2003, are as follows:

|     |       |   |       |        | 
|---- | ----- | - | ----- | ------ | 
|2004 |       | $ | 5,698 |       
|2005 |       |   | 5,500 |       
|2006 |       |   | 837   |       
|2007 |       |   | 5     |       
|     |       |   |       |       
|     | Total |   | $     | 12,040 | 
|     |       |   |       |       

8. Capital Leases

We lease certain furniture and equipment under
capital leases. Property and equipment included the following
amounts for capital leases at December 31:

|                               |  |      |        |      |  |   |        |  
|------------------------------ |  | ---- | ------ | ---- |  | - | ------ | -
|                               |  | 2003 |        | 2002
|                               |  |      |        |     
|Computer equipment             |  | $    | 5,724  |      |  | $ | 9,814  |  
|Computer software              |  |      | 857    |      |  |   | 1,149  |  
|Furniture and fixtures         |  |      | 775    |      |  |   | 1,064  |  
|Leasehold improvements         |  |      | 102    |      |  |   | 243    |  
|Vehicles                       |  |      |       |      |  |   | 71     |  
|                               |  |      |        |      |  |   |        |  
|                               |  |      | 7,458  |      |  |   | 12,341 |  
|Less: accumulated amortization |  |      | (4,901 | )    |  |   | (7,512 | )
|                               |  |      |        |      |  |   |        |  
|                               |  | $    | 2,557  |      |  | $ | 4,829  |  
|                               |  |      |        |      |  |   |        |  

Amortization of leased assets is included in
depreciation and amortization expense.

Future minimum payments under capital lease
obligations consisted of the following at
December 31, 2003:

|                                                                                      |                              |   |       |       | 
|------------------------------------------------------------------------------------- | ---------------------------- | - | ----- | ----- | 
|2004                                                                                  |                              | $ | 2,303 |      
|2005                                                                                  |                              |   | 222   |      
|2006                                                                                  |                              |   | 164   |      
|                                                                                      |                              |   |       |      
|                                                                                      | Total minimum lease payments |   |       | 2,689 | 
|Less: amounts representing interest                                                   |                              |   | (132  | )    
|                                                                                      |                              |   |       |      
|Present value of net minimum lease payments
    (including current portion of $2,154) |                              | $ | 2,557 |      
|                                                                                      |                              |   |       |      

9. Common Stock

Our Class A common stockholders are entitled
to one vote for each share of stock held for all matters
submitted to a vote of stockholders. Our Class B
stockholders are entitled to three votes for each share owned.

10. Fair Value of Financial
Instruments

The fair value of our cash and cash equivalents,
long-term debt and derivative instruments approximates their
respective carrying values as of December 31, 2003 and 2002.

We used the following methods and assumptions to
estimate the fair value of each class of financial instruments:

Cash and cash equivalents:The carrying amounts approximate fair
value because of the short maturity of these instruments.

Long-term debt:The
fair value of our long-term debt obligations was estimated by
discounting the future cash flows at rates available to us for
similar borrowings.

F-13



---



##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

(amounts in thousands, except share
data)


Derivative instruments:The fair value of our foreign currency
forward contracts was determined based on quoted market prices.

11. Income Taxes

Significant components of the benefit for income
taxes attributable to loss before income taxes for the years
ended December 31 are as follows:

|          |                 |       |   |      |   |      |   |   |   |  |   |   |   | 
|--------- | --------------- | ----- | - | ---- | - | ---- | - | - | - |  | - | - | - | 
|          |                 | 2003  |   | 2002 |   | 2001
|          |                 |       |   |      |   |     
|Current:  |                 |       |   |      |   |      |   |   |   |  |   |  
|          | State and local |       | $ |     |   |      | $ |  |   |  | $ |  |  
|          | Federal         |       |   |     |   |      |   |  |   |  |   |  |  
|          |                 |       |   |      |   |      |   |   |   |  |   |  
|          |                 |       |  |      |   |      |  |   |   |  |  |  
|Deferred: |                 |       |   |      |   |      |   |   |   |  |   |  
|          | State and local |       |   |     |   |      |   |  |   |  |   |  |  
|          | Federal         |       |   |     |   |      |   |  |   |  |   |  |  
|          |                 |       |   |      |   |      |   |   |   |  |   |  
|          |                 |       |  |      |   |      |  |   |   |  |  |  
|          |                 |       |   |      |   |      |   |   |   |  |   |  
|          |                 | Total |   | $    |  |      |   | $ |  |  |   | $ |  | 
|          |                 |       |   |      |   |      |   |   |   |  |   |  

Significant components of our deferred tax assets
and liabilities at December 31 consisted of:

|                                               |                                        |                        |                                |        |        |        |         |        |        |        |  
|---------------------------------------------- | -------------------------------------- | ---------------------- | ------------------------------ | ------ | ------ | ------ | ------- | ------ | ------ | ------ | -
|                                               |                                        | 2003                   |                                | 2002  
|                                               |                                        |                        |                                |       
|Deferred tax assets:                           |                                        |                        |                                |        |        |        |         |       
|                                               | Reserves and accrued expenses          |                        | $                              | 765    |        |        | $       | 521    |       
|                                               | Deferred revenue                       |                        |                                | 34     |        |        |         | 394    |       
|                                               | Depreciation                           |                        |                                | 986    |        |        |         |       |       
|                                               | Charitable contributions               |                        |                                | 116    |        |        |         | 94     |       
|                                               | Net operating loss carry forward       |                        |                                | 32,018 |        |        |         | 30,483 |       
|                                               |                                        |                        |                                |        |        |        |         |       
|                                               |                                        |                        | Total deferred tax assets      |        |        | 33,919 |         |        |        | 31,492 |  
|                                               |                                        |                        |                                |        |        |        |         |       
|Deferred tax liabilities:                      |                                        |                        |                                |        |        |        |         |       
|                                               | Capitalized software development costs |                        |                                | (200   | )      |        |         | (2,921 | )     
|                                               | Depreciation                           |                        |                                |       |        |        |         | (136   | )     
|                                               |                                        |                        |                                |        |        |        |         |       
|                                               |                                        |                        | Total deferred tax liabilities |        |        | (200   | )       |        |        | (3,057 | )
|                                               |                                        |                        |                                |        |        |        |         |       
|                                               |                                        | Net deferred tax asset |                                |        | 33,719 |        |         |        | 28,435 |       
|Valuation allowance for net deferred tax asset |                                        |                        | (33,719                        | )      |        |        | (28,435 | )     
|                                               |                                        |                        |                                |        |        |        |         |       
|Net deferred tax asset                         |                                        | $                      |                               |        |        | $      |        |       
|                                               |                                        |                        |                                |        |        |        |         |       

At December 31, 2003, we had U.S. federal
net operating loss carryforwards for income tax purposes of
approximately $83,046, which includes $34,600 acquired upon the
acquisition of Xypoint. The net operating loss carryforwards
from Xypoint will begin to expire in 2016. The remaining net
operating loss carryforwards will expire from 2019 through 2023.
The amount available to be used in any given year may be limited
by operation of certain provisions of the Internal Revenue Code.
We have state net operating loss carryforwards available, the
utilization of which may be similarly limited.

F-14



---



##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

(amounts in thousands, except share
data)


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:

|                                     |       |      |        |      |  |      |        |   |  |   |         |   | 
|------------------------------------ | ----- | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------- | - | 
|                                     |       | 2003 |        | 2002 |  | 2001
|                                     |       |      |        |      |  |     
|Income tax benefit at statutory rate |       | $    | (4,585 | )    |  | $    | (6,065 | ) |  | $ | (30,424 | )
|State tax benefit                    |       |      | (556   | )    |  |      | (631   | ) |  |   | (956    | )
|Change in State tax rate             |       |      | (414   | )    |  |      |       |   |  |   |        |  
|Non-deductible items                 |       |      | 430    |      |  |      | 703    |   |  |   | 22,316  |  
|Other                                |       |      | (159   | )    |  |      | (109   | ) |  |   | 246     |  
|Change in valuation allowance        |       |      | 5,284  |      |  |      | 6,102  |   |  |   | 8,818   |  
|                                     |       |      |        |      |  |      |        |   |  |   |         |  
|                                     | Total |      | $      |     |  |      | $      |  |  |   | $       |  | 
|                                     |       |      |        |      |  |      |        |   |  |   |         |  

12. Acquisitions

Xypoint Corporation.We completed the purchase of Xypoint
Corporation (Xypoint) for aggregate consideration of
$69,005 on January 19, 2001. Xypoint is a leading provider
of E9-1-1 services to wireless carriers and focuses its business
on wireless technology that identifies and makes use of
information as to a wireless users location. The
acquisition was accounted for under the purchase method of
accounting. Our results of operations include the results of
Xypoint commencing January 19, 2001.

We issued 3,597,520 shares of Class A Common
Stock, valued at $15.75 per share, the average market price per
share of our Class A Common Stock in a range of two trading
days before and after November 15, 2000, the announcement
date of the acquisition. In addition, we issued 656,990 options
and warrants to purchase shares of Class A Common Stock in
exchange for all options and warrants to purchase shares of
Xypoint common stock or convertible preferred stock. The fair
value of the options and warrants was estimated using the
Black-Scholes option-pricing model. In estimating this value, we
assumed that the risk free interest rate was 5.80%, the dividend
yield was 0%, the expected life of vested options and warrants
was one to two years, and the expected volatility of our common
stock was 60%.

The value allocated to projects identified as
in-process research and development of Xypoints product
suite was charged to expense immediately following completion of
the acquisition. This write-off was necessary because the
acquired in-process research and development had not yet reached
technological feasibility and had no future alternative uses,
and the related products under development had uncertain
commercial viability. The nature of the efforts required to
develop the purchased in-process research and development into
commercially viable products principally related to the
completion of all planning, designing, prototyping, verification
and testing activities necessary to establish that the product
could be produced to meet its design specifications, including
functions, features and technical performance requirements.

Goodwill was determined based on the residual
difference between the amount of consideration paid and the
values assigned to identifiable tangible and intangible net
assets. See also Note 13 for a discussion of the 2001 impairment
charge for acquired intangible assets.

Open Telephone Network, Inc.On September 24, 2002, we
acquired substantially all of the assets of Open Telephone
Network, Inc. (Otelnet), a provider of real-time and on-demand
alerting solutions of the wireless industry. Otelnets
software platform integrates easily with existing carrier
network elements and wireless portals, as well as our carrier
software. Otelnets technology currently interoperates with
our Wireless Internet GatewayTM and our
VoyagerTM platform.

F-15



---



##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

(amounts in thousands, except share
data)


13. Impairment of Goodwill and Other
Intangibles

During the quarter ended September 30, 2001,
we performed an impairment assessment of the identifiable
intangibles and goodwill principally recorded upon the
acquisition of Xypoint. The assessment was performed as a result
of the decision by management to discontinue the further
development of certain products and unexpected competitive
influences. Based on these factors, it was determined that our
goodwill and other intangible assets may have become impaired by
September 30, 2001. Accordingly, we performed an
undiscounted cash flow analysis to determine whether an
impairment existed. Because the estimated undiscounted cash
flows for these segments was less than the carrying value of the
net assets, we determined the fair value of the remaining net
assets using a discounted cash flow analysis.

As a result of the review, we determined that the
carrying value of our goodwill and certain other intangible
assets were not likely to be fully recoverable. Accordingly, at
September 30, 2001, an impairment charge of $43,000 was
recorded, which represented the difference between the carrying
value and our estimate of the fair value of goodwill and other
intangible assets. Approximately $39,139 of the impairment
related to goodwill and the remaining $3,861 was for acquired
technology assets.

14. Stock Compensation Plans

Stock Options.We
maintain a stock option plan that is administered by our
Compensation Committee of our Board of Directors. The number of
shares reserved for issuance under the plan is currently
15,904,110. Options granted under the plan vest over periods
ranging from one to five years and expire 10 years from the date
of grant.

A summary of our stock option activity and
related information consists of the following for the years
ended December 31 (all share amounts in thousands):

|                                                                                        |                             |           |           |          |  |           |      |          |  |           |           |          |  |   |      |      |  |   |           |       |  |   |      |      | 
|--------------------------------------------------------------------------------------- | --------------------------- | --------- | --------- | -------- |  | --------- | ---- | -------- |  | --------- | --------- | -------- |  | - | ---- | ---- |  | - | --------- | ----- |  | - | ---- | ---- | 
|                                                                                        |                             |           |           |          |  |          
|                                                                                        |                             | 2003      |           | 2002     |  | 2001     
|                                                                                        |                             |           |           |          |  |          
|                                                                                        |                             |           |           | 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                                                          |                             |           | 6,838     |          |  | $         | 2.95 |          |  |           | 6,545     |          |  | $ | 3.36 |      |  |   | 3,233     |       |  | $ | 3.90 |     
|Granted                                                                                 |                             |           | 1,240     |          |  |           | 2.05 |          |  |           | 1,854     |          |  |   | 2.45 |      |  |   | 4,807     |       |  |   | 3.86 |     
|Exercised                                                                               |                             |           | (735      | )        |  |           | 1.26 |          |  |           | (416      | )        |  |   | 0.89 |      |  |   | (510      | )     |  |   | 0.77 |     
|Forfeited                                                                               |                             |           | (1,195    | )        |  |           | 2.83 |          |  |           | (1,145    | )        |  |   | 5.23 |      |  |   | (985      | )     |  |   | 8.54 |     
|                                                                                        |                             |           |           |          |  |           |      |          |  |           |           |          |  |   |      |      |  |   |           |       |  |   |      |     
|Outstanding, end of year                                                                |                             |           | 6,148     |          |  | $         | 2.95 |          |  |           | 6,838     |          |  | $ | 2.95 |      |  |   | 6,545     |       |  | $ | 3.36 |     
|                                                                                        |                             |           |           |          |  |           |      |          |  |           |           |          |  |   |      |      |  |   |           |       |  |   |      |     
|                                                                                        | Exercisable, at end of year |           |           | 2,736    |  |           | $    | 3.05     |  |           |           | 2,442    |  |   | $    | 2.64 |  |   |           | 1,554 |  |   | $    | 2.39 | 
|                                                                                        |                             |           |           |          |  |           |      |          |  |           |           |          |  |   |      |      |  |   |           |       |  |   |      |     
|Estimated weighted-average grant-date fair value
    of options granted during the year |                             | $         | 1.72      |          |  |           |      |          |  | $         | 2.15      |          |  |   |      |      |  | $ | 3.61      |       |  |   |      |     
|                                                                                        |                             |           |           |          |  |           |      |          |  |           |           |          |  |   |      |      |  |   |           |       |  |   |      |     
|Weighted-average remaining contractual life of
    options outstanding at end of year   |                             |           | 7.7 years |          |  |           |      |          |  |           | 7.6 years |          |  |   |      |      |  |   | 7.7 years |       |  |   |      |     
|                                                                                        |                             |           |           |          |  |           |      |          |  |           |           |          |  |   |      |      |  |   |           |       |  |   |      |     

F-16



---



##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

(amounts in thousands, except share
data)


Exercise prices for options outstanding at
December 31, 2003 ranged from $0.01 to $26.05 as follows
(all share amounts in thousands):

|                |  |             |       |                    |  |                     |       |             |  |             |     |  |  |  |       |  |  |   |       | 
|--------------- |  | ----------- | ----- | ------------------ |  | ------------------- | ----- | ----------- |  | ----------- | --- |  |  |  | ----- |  |  | - | ----- | 
|                |  |             |       |                    |  |                     |       |             |  | Weighted - 
|                |  |             |       |                    |  | Weighted-Average    |       |             |  | Average    
|                |  |             |       | Weighted-Average   |  | Remaining           |       |             |  | Exercise   
|                |  |             |       | Exercise Prices of |  | Contractual Life of |       |             |  | Prices of  
|                |  | Options     |       | Options            |  | Options             |       | Options     |  | Options    
|Exercise Prices |  | Outstanding |       | Outstanding        |  | Outstanding (years) |       | Exercisable |  | Exercisable
|                |  |             |       |                    |  |                     |       |             |  |            
|$ 0.01  $2.61  |  |             | 2,603 |                    |  | $                   | 1.65  |             |  |             | 8.0 |  |  |  | 944   |  |  | $ | 1.16  | 
|$ 2.61  $5.21  |  |             | 2,862 |                    |  | $                   | 3.20  |             |  |             | 7.4 |  |  |  | 1,394 |  |  | $ | 3.16  | 
|$ 5.21  $7.82  |  |             | 645   |                    |  | $                   | 6.51  |             |  |             | 7.1 |  |  |  | 360   |  |  | $ | 6.50  | 
|$ 7.82  $10.42 |  |             | 7     |                    |  | $                   | 9.60  |             |  |             | 6.9 |  |  |  | 7     |  |  | $ | 9.60  | 
|$10.42  $26.05 |  |             | 31    |                    |  | $                   | 14.61 |             |  |             | 6.6 |  |  |  | 31    |  |  | $ | 14.61 | 

Prior to our initial public offering in 2000, we
granted incentive stock options to employees and directors to
purchase 885,983 shares of Class A Common Stock. The
options were granted at an exercise price less than the
estimated market value of Class A Common Stock at the date
of grant. Net loss includes $1,010, $1,554, and $2,587 of
non-cash stock compensation expense related to these grants for
the years ended December 31, 2003, 2002, 2001,
respectively. We expect to record future stock compensation
expense of $805 as a result of option grants that will be
recognized over the remaining vesting period of two years.

Restricted Stock Grants.In the second quarter of 2003, we
issued 1,077,250 shares of restricted Class A Common Stock
to directors and certain key executives. The restrictions expire
at the end of one year for directors and in annual increments
over three years for executives and are based on continued
employment. Net loss for the year ended December 31, 2003,
as reported, includes $491 of non-cash stock compensation
expense related to such stock grants. We expect to record future
stock compensation expense of $1,399 as a result of these
restricted stock grants that will be recognized over the
remaining vesting period for directors and executives.

Employee Stock Purchase Plan.We have an employee stock purchase
plan (the Plan) that gives all employees an opportunity to
purchase shares of our Class A Common Stock. The Plan
allows for the purchase of 684,932 shares of our Class A
Common Stock at a discount of 15% of the fair market value.
Option periods are generally three months in duration. As of
December 31, 2003, 310,018 shares of Class A Common
Stock have been issued under the Plan.

15. Operating Leases

We 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, 2003:

|                |  |   |        | 
|--------------- |  | - | ------ | 
|2004            |  | $ | 2,780  | 
|2005            |  |   | 2,032  | 
|2006            |  |   | 1,468  | 
|2007            |  |   | 1,456  | 
|2008            |  |   | 1,377  | 
|2009 and beyond |  |   | 2,368  | 
|                |  |   |        | 
|                |  | $ | 11,481 | 
|                |  |   |        | 

Rent expense was $3,004, $3,258, and $2,607 for
the years ended December 31, 2003, 2002, and 2001, respectively.

F-17



---



##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

(amounts in thousands, except share
data)


16. Retirement Plan

We maintain a defined contribution benefit plan
that covers substantially all employees who have attained age
twenty-one. Participants may contribute from 1% to 15% of their
annual compensation to the plan. On a discretionary basis, we
may match contributions made by participants. All employer
contributions vest over a six-year period. During 2003, 2002,
and 2001, we made matching contributions of $0, $670, and $978,
respectively.

17. Derivative and Hedging
Activities

In January 2002, we entered into a contract to
sell products and services, which was denominated in British
Pounds Sterling. Under the terms of this contract, we were paid
in British Pounds Sterling, which exposed us to foreign currency
exchange risk. In April 2002, we entered into several foreign
currency forward and option contracts primarily to manage our
foreign currency exchange risk. All of the contracts expired
during the first quarter of 2003.

The asset associated with the foreign currency
forward contracts that met the criteria for hedge accounting
treatment was valued at less than $1 as of December 31,
2002.

The remaining portion of the foreign currency
option contracts did not meet the criteria for hedge accounting
treatment. These foreign currency options were entered into for
speculative purposes. Therefore, the expense related to the
change in fair market value of these derivatives of $17 and $445
for the years ended December 31, 2003 and 2002,
respectively, is included in other income. The liability of $394
associated with this derivative is included in accounts payable
and accrued expenses as of December 31, 2002.

18. Concentrations of Credit Risk and
Major Customers

Financial instruments that potentially subject us
to significant concentrations of credit risk consist primarily
of accounts receivable and unbilled receivables. Those customers
that comprised 10% or more of our revenues are summarized in the
following table.

|                 |  |                                        |  |                     |      |      |  |      |    |   |  |  |      |  
|---------------- |  | -------------------------------------- |  | ------------------- | ---- | ---- |  | ---- | -- | - |  |  | ---- | -
|                 |  |                                        |  |                    
|                 |  |                                        |  | % of Total Revenues
|                 |  |                                        |  | For the year ended 
|                 |  |                                        |  | December 31,       
|                 |  |                                        |  |                    
|Customer         |  | Segment                                |  | 2003                |      | 2002 |  | 2001
|                 |  |                                        |  |                     |      |      |  |     
|Federal Agencies |  | Network Solutions and Network Software |  |                     | 32   | %    |  |      | 40 | % |  |  | 30   | %
|Customer A       |  | Network Software and Service Bureau    |  |                     | 17   | %    |  |      | 15 | % |  |  | 14   | %
|Customer B       |  | Network Software and Service Bureau    |  |                     | N/ A |      |  |      | 10 | % |  |  | N/ A |  

|                 |  |                         |    |                         |  |            |    |             |  |  |     |   |  |  |    |  
|---------------- |  | ----------------------- | -- | ----------------------- |  | ---------- | -- | ----------- |  |  | --- | - |  |  | -- | -
|                 |  |                         |    |                        
|                 |  | As of December 31, 2003 |    | As of December 31, 2002
|                 |  |                         |    |                        
|                 |  | Accounts                |    | Unbilled                |  | Accounts   |    | Unbilled   
|Customer         |  | Receivable              |    | Receivables             |  | Receivable |    | Receivables
|                 |  |                         |    |                         |  |            |    |            
|Federal Agencies |  |                         | 19 | %                       |  |            | 32 | %           |  |  | 27  | % |  |  | 18 | %
|Customer A       |  |                         | 30 | %                       |  |            | 6  | %           |  |  | 18  | % |  |  | 11 | %
|Customer B       |  |                         | 6  | %                       |  |            | 28 | %           |  |  | 12  | % |  |  | 38 | %
|Customer C       |  |                         | 11 | %                       |  |            | 12 | %           |  |  | N/A |   |  |  | 10 | %

19. Business and Geographic Segment
Information

Management evaluates company performance based on
gross profit within three operating segments: network software,
service bureau and network solutions. Gross profit is defined as
revenue less direct cost of revenue, excluding the amortization
of software development costs, which under accounting principles
generally accepted in the United States, is considered in
determining gross profit from software license revenues.

F-18



---



##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

(amounts in thousands, except share
data)




| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Network Software We develop packaged and custom
    network software including intelligent network products (TCS
    Xypoint® Location Platform products, Wireless Internet
    Gateway, Short Message Service Center and message notification
    applications) that enable the delivery of Internet content,
    short messages, and enhanced communication services to a wide
    variety of wireless devices, including phones, two-way pagers
    and personal digital assistants.
|
| | Service Bureau Our service bureau offerings
    include E9-1-1, hosted Position Determining Entity software, and
    Message Distribution Center applications. We also provide
    implementation, operation and maintenance services to support
    these applications.                                                                                                                                                                                                               
|
| | Network Solutions Network solutions revenue is
    generated from the design, development and deployment of
    information processing and communication systems primarily for
    government enterprises.                                                                                                                                                                                                                                                                             

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

We do not maintain information regarding segment
assets. Accordingly, asset information by reportable segment is
not presented. The accounting policies used by our reportable
segments are the same as those described in Note 1.

The following table sets forth information on
reportable segments:

|                       |                           |                            |        |        |        |      |        |        |        |  |        |        |        | 
|---------------------- | ------------------------- | -------------------------- | ------ | ------ | ------ | ---- | ------ | ------ | ------ |  | ------ | ------ | ------ | 
|                       |                           |                           
|                       |                           | Year ended December 31,   
|                       |                           |                           
|                       |                           | 2003                       |        | 2002   |        | 2001
|                       |                           |                            |        |        |        |     
|Revenue:               |                           |                            |        |        |        |      |        |        |        |  |        |       
|Network software       |                           |                            |        |        |        |      |        |        |        |  |        |       
|                       | Network software licenses |                            | $      | 9,164  |        |      | $      | 16,552 |        |  | $      | 9,059  |       
|                       | Network software services |                            |        | 5,513  |        |      |        | 10,576 |        |  |        | 11,424 |       
|                       |                           |                            |        |        |        |      |        |        |        |  |        |       
|Network software total |                           |                            | 14,677 |        |        |      | 27,128 |        |        |  | 20,483 |       
|Service bureau         |                           |                            | 34,081 |        |        |      | 23,881 |        |        |  | 16,775 |       
|Network solutions      |                           |                            | 43,307 |        |        |      | 41,036 |        |        |  | 32,294 |       
|                       |                           |                            |        |        |        |      |        |        |        |  |        |       
|                       |                           | Total revenue              |        | $      | 92,065 |      |        | $      | 92,045 |  |        | $      | 69,552 | 
|                       |                           |                            |        |        |        |      |        |        |        |  |        |       
|Segment gross profit:  |                           |                            |        |        |        |      |        |        |        |  |        |       
|                       | Network software          |                            | $      | 8,219  |        |      | $      | 14,016 |        |  | $      | 10,976 |       
|                       | Service bureau            |                            |        | 17,850 |        |      |        | 10,413 |        |  |        | 10,486 |       
|                       | Network solutions         |                            |        | 14,815 |        |      |        | 10,665 |        |  |        | 8,014  |       
|                       |                           |                            |        |        |        |      |        |        |        |  |        |       
|                       |                           | Total segment gross profit |        | $      | 40,884 |      |        | $      | 35,094 |  |        | $      | 29,476 | 
|                       |                           |                            |        |        |        |      |        |        |        |  |        |       

F-19



---



##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

(amounts in thousands, except share
data)


A reconciliation of segment gross profit for our
three segments to net loss is as follows:

|                           |                                                             |                         |         |         |   |      |         |         |   |   |         |         |  
|-------------------------- | ----------------------------------------------------------- | ----------------------- | ------- | ------- | - | ---- | ------- | ------- | - | - | ------- | ------- | -
|                           |                                                             |                        
|                           |                                                             | Year ended December 31,
|                           |                                                             |                        
|                           |                                                             | 2003                    |         | 2002    |   | 2001
|                           |                                                             |                         |         |         |   |     
|Total segment gross profit |                                                             | $                       | 40,884  |         |   | $    | 35,094  |         |   | $ | 29,476  |        
|                           | Research and development expense                            |                         |         | (16,932 | ) |      |         | (17,047 | ) |   |         | (18,083 | )
|                           | Sales and marketing expense                                 |                         |         | (8,917  | ) |      |         | (10,029 | ) |   |         | (13,826 | )
|                           | General and administrative expense                          |                         |         | (11,251 | ) |      |         | (12,235 | ) |   |         | (14,325 | )
|                           | Non-cash stock compensation expense                         |                         |         | (1,501  | ) |      |         | (1,554  | ) |   |         | (2,587  | )
|                           | Depreciation and amortization of property and
    equipment |                         |         | (6,612  | ) |      |         | (6,156  | ) |   |         | (4,550  | )
|                           | Amortization of software development costs                  |                         |         | (9,035  | ) |      |         | (4,831  | ) |   |         | (4,946  | )
|                           | Amortization of goodwill and other intangibles              |                         |         | (531    | ) |      |         | (553    | ) |   |         | (9,226  | )
|                           | Acquired in-process research and development                |                         |         |        |   |      |         |        |   |   |         | (9,700  | )
|                           | Impairment of goodwill and other intangibles                |                         |         |        |   |      |         |        |   |   |         | (43,000 | )
|                           | Interest expense                                            |                         |         | (1,088  | ) |      |         | (897    | ) |   |         | (684    | )
|                           | Other income, net                                           |                         |         | 1,497   |   |      |         | 370     |   |   |         | 1,968   |  
|                           |                                                             |                         |         |         |   |      |         |         |   |   |         |        
|Net Loss                   |                                                             | $                       | (13,486 | )       |   | $    | (17,838 | )       |   | $ | (89,483 | )      
|                           |                                                             |                         |         |         |   |      |         |         |   |   |         |        

20. Quarterly Financial Information
(unaudited)

The following is a summary of the quarterly
results of operations for the years ended December 31, 2003
and 2002. The quarterly information has not been audited, but in
our opinion, includes all adjustments necessary for a fair
presentation.

|                                          |  |                    |        |         |  |              |         |             |  |   |        |  |  |   |        | 
|----------------------------------------- |  | ------------------ | ------ | ------- |  | ------------ | ------- | ----------- |  | - | ------ |  |  | - | ------ | 
|                                          |  |                   
|                                          |  | 2003              
|                                          |  |                   
|                                          |  |                   
|                                          |  | Three months ended
|                                          |  |                   
|                                          |  | March 31           |        | June 30 |  | September 30 |         | December 31
|                                          |  |                    |        |         |  |              |         |            
|Revenue                                   |  | $                  | 19,292 |         |  | $            | 20,080  |             |  | $ | 28,247 |  |  | $ | 24,446 | 
|Direct cost of revenue                    |  | $                  | 11,051 |         |  | $            | 11,805  |             |  | $ | 16,425 |  |  | $ | 11,900 | 
|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   | 

|                                          |  |                    |        |         |  |              |        |             |  |   |        |   |  |   |        |  
|----------------------------------------- |  | ------------------ | ------ | ------- |  | ------------ | ------ | ----------- |  | - | ------ | - |  | - | ------ | -
|                                          |  |                   
|                                          |  | 2002              
|                                          |  |                   
|                                          |  |                   
|                                          |  | Three months ended
|                                          |  |                   
|                                          |  | March 31           |        | June 30 |  | September 30 |        | December 31
|                                          |  |                    |        |         |  |              |        |            
|Revenue                                   |  | $                  | 16,850 |         |  | $            | 23,932 |             |  | $ | 23,245 |   |  | $ | 28,018 |  
|Direct cost of revenue                    |  | $                  | 10,285 |         |  | $            | 16,333 |             |  | $ | 13,078 |   |  | $ | 17,285 |  
|Net loss                                  |  | $                  | (7,306 | )       |  | $            | (6,136 | )           |  | $ | (2,559 | ) |  | $ | (1,837 | )
|Loss per common share  basic and diluted |  | $                  | (0.25  | )       |  | $            | (0.21  | )           |  | $ | (0.09  | ) |  | $ | (0.06  | )

21. Commitments and
Contingencies

In 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

F-20



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##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

(amounts in thousands, except share
data)


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 intend to vigorously
defend the lawsuit. We believe that 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.

Although we cannot currently predict the ultimate
outcome of this matter, we do not expect the resolution will
have a material effect on our consolidated results of
operations, financial position or cash flows.

22. Subsequent EventsAcquisition of
Aether EMS and Related Financing.

We acquired the Enterprise Mobility Solutions
business unit of Aether Systems, Inc. on January 13, 2004,
with an effective date of January 1, 2004. The Enterprise
Mobility Solutions business unit provides wireless data and
location-based solutions to approximately 1,200 large enterprise
customers and 60,000 wireless data users, 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. The Enterprise
Mobility Solutions business unit is a leading reseller of
Blackberry devices and provides real-time financial market data
to wireless device users under annual subscriber contracts.

The purchase price for Aether EMS was $20,000,
consisting of a cash payment of $18,000, a note payable on
August 14, 2004 in the amount of $1,000 and 204,020 shares
of our Class A Common Stock. In addition, we expect to
incur approximately $2,500 of costs directly related to the
acquisition, making the total cost of the acquisition
approximately $22,500. Although we have not yet completed the
analyses and asset valuations needed to allocate the purchase
price to acquired assets and assumed liabilities, we expect to
record goodwill and amortizable intangible assets in excess of
$21,000 related to the acquisition.

To provide the necessary cash to complete the
acquisition, on January 13, 2004 we issued to third parties
for total cash proceeds of $21,000 (i) convertible subordinated
debentures with a face value of $15,000, bearing interest at a
stated rate of 3% per annum and due in lump sum on
January 13, 2009 in cash or shares of common stock
(ii) warrants to purchase 341,072 shares of our
Class A Common Stock at an exercise price of $6.50 per
share expiring in January 2007, and (iii) 1,364,288 shares
of our Class A Common Stock. We determined that the value
of the common stock that we issued was $7,640 based on the
quoted closing price of our common stock on the issue date of
$5.60. The value of the warrants was estimated to be $1,395,
determined using the Black-Scholes option-pricing model. The
convertible subordinated debenture provides for a contractual
conversion price of $5.38 per share, and was estimated to have
an issuance date beneficial conversion value of $3,662, which
was recorded as additional paid-in capital. The resulting
carrying value of the debt at January 13, 2004 of $9,943 is
net of $5,057 of original issue discount that will be amortized
to interest expense over its five-year term. The investors were
also granted registration rights for their shares of our
Class A Common Stock issued and potentially issuable upon
the conversion or exercise of debt and warrants. These
registration rights provide that the shares be registered within
100 days of the closing date. The investor has the right to
impose a penalty of approximately $14,000 per day for every day
beyond the 100-day period.

F-21



---



##### 



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. TOSÉ

| |                                           
| | ------------------------------------------
| |                                           
| | Maurice B. Tosé                           
| | Chief Executive Officer, President
    and
| | Chairman of the Board                     

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

|                                               |  |                                                                                                |  |                  
|---------------------------------------------- |  | ---------------------------------------------------------------------------------------------- |  | -----------------
|Name                                           |  | Title                                                                                          |  | Date             
|                                               |  |                                                                                                |  |                  
|/s/ /S/ MAURICE B. TOSÉMaurice B. Tosé         |  | Chief Executive Officer, President and Chairman
    of the Board (Principal Executive Officer) |  | February 24, 2004
|/s/ THOMAS M. BRANDT, JR.Thomas M. Brandt, Jr. |  | Chief Financial Officer and Senior Vice President
    (Principal Financial Officer)            |  | February 24, 2004
|/s/ CLYDE A. HEINTZELMANClyde A. Heintzelman   |  | Director                                                                                       |  | February 24, 2004
|/s/ RICHARD A. KOZAKRichard A. Kozak           |  | Director                                                                                       |  | February 24, 2004
|/s/ WELDON H. LATHAMWeldon H. Latham           |  | Director                                                                                       |  | February 24, 2004
|/s/ BYRON F. MARCHANTByron F. Marchant         |  | Director                                                                                       |  | February 24, 2004

38



---



##### 



EXHIBIT INDEX

|        |       |             |  |                                                                                                                                
|------- | ----- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Numbers |       | Description
|        |       |            
|        | 10.48 |             |  | Restricted stock award certificate to
    Mr. Thomas M. Brandt, Jr.                                                            
|        | 10.49 |             |  | Restricted stock award certificate to
    Mr. Thomas M. Brandt, Jr.                                                            
|        | 10.50 |             |  | Restricted stock award certificate to
    Mr. Clyde A. Heintzelman.                                                            
|        | 10.51 |             |  | Restricted stock award certificate to
    Mr. Richard A. Kozak.                                                                
|        | 10.52 |             |  | Restricted stock award certificate to
    Mr. Weldon H. Latham.                                                                
|        | 10.53 |             |  | Restricted stock award certificate to
    Mr. Timothy J. Lorello.                                                              
|        | 10.54 |             |  | Restricted stock award certificate to
    Mr. Timothy J. Lorello.                                                              
|        | 10.55 |             |  | Restricted stock award certificate to
    Mr. Byron F. Marchant.                                                               
|        | 10.56 |             |  | Restricted stock award certificate to
    Mr. Drew A. Morin.                                                                   
|        | 10.57 |             |  | Restricted stock award certificate to
    Mr. Drew A. Morin.                                                                   
|        | 10.58 |             |  | Restricted stock award certificate to
    Mr. Maurice B. Tosé.                                                                 
|        | 10.59 |             |  | Restricted stock award certificate to
    Mr. Maurice B. Tosé.                                                                 
|        | 10.60 |             |  | Restricted stock award certificate to
    Mr. Kevin M. Webb.                                                                   
|        | 10.61 |             |  | Restricted stock award certificate to
    Mr. Kevin M. Webb.                                                                   
|        | 10.62 |             |  | Restricted stock award certificate to
    Mr. Richard A. Young.                                                                
|        | 10.63 |             |  | Restricted stock award certificate to
    Mr. Richard A. Young.                                                                
|        | 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 906 of
    the Sarbanes-Oxley Act of 2002.
|        | 32.2  |             |  | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.
|        | 99.01 |             |  | Risk Factors Affecting Our Business and Future
    Results                                                                     

39