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________________________________________________________________________________

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-K

|                                                |  |                                                                                                 
|----------------------------------------------- |  | ------------------------------------------------------------------------------------------------
|(Mark One)                                      |  |                                                                                                 
|                                               
|x                                               |  | ANNUAL REPORT PURSUANT TO
    SECTION 13 OR 15(d) OF
    THE SECURITIES EXCHANGE ACT OF 1934    
|For the year ended
    December 31, 2005
    OR
|o                                               |  | TRANSITION REPORT PURSUANT TO
    SECTION 13 OR 15(d) OF
    THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 0-30821


TELECOMMUNICATION SYSTEMS, INC.




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

(410) 263-7616








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S-K 10-K 10-K. o




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DOCUMENTS INCORPORATED BY REFERENCE


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|Document                                                           |  | Part of 10-K into which
    incorporated
|Definitive Statement related to
    registrants Annual Meeting of |  | Part III                                
|Stockholders to be held on
    June 8, 2006                        |  |                                         











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TABLE OF CONTENTS

|                                               |  |                                                                                                                      |      |             |    | 
|---------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- | ---- | ----------- | -- | 
|                                               |  |                                                                                                                      |      | Page Number |   
|                                               |  |                                                                                                                      |      |             |   
|Part I                                         |  |                                                                                                                      |      |             |    | 
|Item 1                                         |  | Business                                                                                                             |      |             | 2  | 
|Item 1A                                        |  | Risk
    Factors                                                                                                     |      |             | 11 | 
|Item 1B                                        |  | Unresolved
    Staff Comments                                                                                        |      |             | 22 | 
|Item 2                                         |  | Properties                                                                                                           |      |             | 22 | 
|Item 3                                         |  | Legal
    Proceedings                                                                                                |      |             | 23 | 
|Item 4                                         |  | Submission of
    Matters to a Vote of Security Holders                                                              |      |             | 23 | 
|Part II                                        |  |                                                                                                                      |      |             |    | 
|Item 5                                         |  | Market for
    Registrants Common Equity, Related Stockholder Matters and
    Issuer Purchases of Equity Securities |      |             | 24 | 
|Item 6                                         |  | Selected
    Financial Data                                                                                          |      |             | 26 | 
|Item 7                                         |  | Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations                        |      |             | 27 | 
|Item 7A                                        |  | Qualitative
    and Quantitative Disclosure About Market Risk                                                        |      |             | 43 | 
|Item 8                                         |  | Financial
    Statements and Supplementary Data                                                                      |      |             | 43 | 
|Item 9                                         |  | Changes In and
    Disagreements With Accountants on Accounting and Financial
    Disclosure                         |      |             | 43 | 
|Item 9A                                        |  | Controls and
    Procedures                                                                                          |      |             | 43 | 
|Part III                                       |  |                                                                                                                      |      |             |    | 
|Item 10                                        |  | Directors and
    Executive Officers of the Registrant                                                               |      |             | 46 | 
|Item 11                                        |  | Executive
    Compensation                                                                                           |      |             | 46 | 
|Item 12                                        |  | Security
    Ownership of Certain Beneficial Owners and Management                                                   |      |             | 46 | 
|Item 13                                        |  | Certain
    Relationships and Related Transactions                                                                   |      |             | 46 | 
|Item 14                                        |  | Principal
    Accountant Fees and Services                                                                           |      |             | 46 | 
|Part IV                                        |  |                                                                                                                      |      |             |    | 
|Item 15                                        |  | Exhibits,
    Financial Statement Schedules                                                                          |      |             | 47 | 
|Signatures                                     |  |                                                                                                                      | F-32 |            
|Exhibit Index                                  |  |                                                                                                                      | F-33 |            
|Index to
    Consolidated Financial Statements |  |                                                                                                                      | F-1  |            
|Ex-4.6                                        
|Ex-4.7                                        
|Ex-4.8                                        
|Ex-4.9                                        
|Ex-4.10                                       
|Ex-4.11                                       
|EX-10.37                                      
|EX-10.38                                      
|EX-10.39                                      
|EX-10.40                                      
|EX-12.1                                       
|EX-21.1                                       
|Ex-23.1                                       
|Ex-23.2                                       
|EX-31.1                                       
|EX-31.2                                       
|EX-32.1                                       
|EX-32.2                                       
|EX-99.1                                       



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##### Table of Contents

This document contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of
1934, as amended. Forward-looking statements are statements
other than historical information or statements of current
condition. We generally identify forward-looking statements by
the use of terms such as believe,
intend, expect, may,
should, plan, project,
contemplate, anticipate, or other
similar statements. Examples of forward looking statements in
this Annual Report on Form 10-K include, but are not
limited to: (i) that we believe the combined availability
of teleport, deployable device, and integration capability from
a single source is compelling and that because of our
companys portfolio of software, patented intellectual
property and teams of wireless and encryption specialists we
believe this gives us a competitive advantage, (ii) we
expect to launch other location-based applications in 2006
involving fleet tracking, family finder, and turn-by-turn
navigation, (iii) that we plan to continue to develop and
sell software and engineered systems which we will deliver
through deployment in customer networks or through hosted and
subscription business models and we believe that our software is
positioned for early adoption by carriers, (iv) wireless
growth is expected to continue to increase in all regions around
the world for the foreseeable future, (v) both the number
of users and messages per individual are projected to increase
significantly, (vi) we will continue to develop network
software for wireless carriers that operate on all major types
of networks, (vii) 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 reside inside wireless
networks, (viii) we will continue to invest in our
underlying technology and to capitalize on our expertise to meet
the growing demand for sophisticated wireless applications,
(ix) 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, (x) federal agencies,
as well as state and local governments, are increasingly
contracting with specialist teams for functions such as network
management, and for long-term projects such as software
development and systems integration, (xi) that we expect to
realize $59.1 million of backlog within the next
12 months, (xii) that we expect to complete the sale
of the Enterprise division by the end of 2006, (xiii) our
belief that we have sufficient capital resources to meet our
anticipated cash operating expenses, working capital and capital
expenditure and debt services needs for the next twelve months,
and (xiv) our belief that our capitalized research and
development expense will be recoverable from future gross
profits generated by the related products. 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-w1 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 in Item 1A, and those factors discussed elsewhere in
this Annual Report on
Form 10-K
including, changes in economic conditions, technology and the
market in general, and our ability to adapt our products and
services to these changes. We undertake no obligation to release
publicly the results of any future revisions we make to
forward-looking statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of
unanticipated events. We caution you not to put undue reliance
on these forward-looking statements.

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##### Table of Contents

Item 1.
    BusinessRecent Developments

In 2004 and 2005, our Commercial Applications segment included a
division called the Enterprise division, consisting of assets
that we acquired in 2004 from Aether Systems, Inc. On
December 29, 2005, our Board of Directors resolved to offer
the Enterprise assets for sale, and we have engaged an
investment bank that is actively marketing the assets of the
Enterprise division. As a result, the Enterprise division has
been reclassified in our Consolidated Financial Statements as
discontinued operations for accounting purposes in accordance
with Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. We expect to complete the sale of these assets by
the end of 2006. The Enterprise division will continue to be a
part of our business until it is sold.

On March 10, 2006, pursuant to a note purchase agreement
dated the same date, we issued and sold to two institutional
lenders (i) $10 million in aggregate principal amount of
secured notes due March 10, 2009, which bear cash interest
at the rate of 14% per annum, or non-cash interest, in the form
of additional notes, at the rate of 16% per annum, at our
option, and (ii) warrants to purchase an aggregate of 1.75
million shares of our Class A Common Stock at an exercise
price of $2.40 per share. We received net cash proceeds of
approximately $9.3 million from this transaction, which are
intended to be used for general corporate purposes.

Overview

TeleCommunication Systems, Inc. develops and applies highly
reliable wireless data communications technology, with emphasis
on location-based services such as enhanced
9-1-1
(E9-1-1) for wireless
carriers and Voice over Internet Protocol (VoIP) service
providers.

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

Our business is conducted through two operating segments,
Commercial Applications (65% of 2005 revenue) and Government
(35% of 2005 revenue). In addition, our business includes the
Enterprise division, which we are currently in the process of
selling. See discussion of segment reporting in Note 21 to
the audited Consolidated Financial Statements presented
elsewhere in this Annual Report on
Form 10-K for
additional segment information.

Commercial Applications Segment: Our carrier software
system products enable wireless carriers to deliver short text
messages, location information, internet content, and other
enhanced communication services to and from wireless phones. We
provide E9-1-1
services, commercial location-based services, and inter-carrier
text message distribution services on a hosted, or service
bureau basis, that is, customers use our software functionality
through connections to and from our network operations centers,
paying us monthly based on the number of subscribers, cell
sites, or call center circuits, or message volume. As of
December 31, 2005, we provide hosted services under
contracts with 36 wireless carrier networks, as well as VoIP
service providers. We also earn subscriber revenue through
wireless applications including our Rand
McNallytm
Traffic application which is available via all major U.S.
wireless carriers. We earn carrier software-based systems
revenue through the sale of licenses, deployment and
customization fees and maintenance fees. Pricing is generally
based on the volume of capacity purchased from us by the
carrier. As of December 31, 2005, we had deployed 85
software systems for our customers in wireless carrier networks
around the world, including those of Verizon Wireless, Vodafone,
T-Mobile, Telefonica
and its affiliate Vivo, Alltel, and Hutchison Whampoas
3 brand third generation networks. We also provide
carrier technology on a hosted or service bureau basis.

2



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##### Table of Contents

Government Segment: 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.
We also own and operate secure satellite teleport facilities,
and resell access to satellite airtime (known as space segment.)
We design, furnish, install and operate wireless and data
network communication systems, including our
SwiftLink®
deployable communication systems which incorporate high speed,
satellite, and internet protocol technology. More than 600 of
our
SwiftLink®
deployable communication systems are in use for security,
defense, and law enforcement around the world. We believe that
the combined availability of teleport, deployable device, and
integration capability from a single source is uniquely
compelling.

Enterprise Division. The Enterprise division, formerly
part of our Commercial Applications segment, generates
subscriber revenue as a reseller of Research in Motions
BlackBerry®
devices and service, and as a provider of wireless client device
software applications, including real-time wireless delivery of
financial market data . The Enterprise division software uses a
proprietary
Fusiontmbehind-the-enterprise-firewall
platform uniting messaging, synchronization and web
technologies, and its 20/20
Deliverytm
application enables package and vehicle tracking, productivity
tools, and the ability to capture digital signatures for proof
of delivery. We are currently offering the Enterprise
divisions assets for sale. However, the division will
continue to be a part of our business until it is sold. See
Recent Developments above.

We currently have 40 patents, primarily for wireless messaging
and location technology, and over 100 patent applications
pending. We employ 629 people.

Swiftlink®,
Xypoint®,
Enabling Convergent
Technologies®
Wireless Internet
Gatewaytm,
20/20
Deliverytm,
Fusiontm,
and
mobeotm
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.

I. Commercial Applications Segment:

A. Commercial Product and Service Offerings

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



a. Hosted Location-Based Services, including
    E9-1-1. 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 network operations center in
    Seattle, Washington with data center redundancy in Phoenix,
    Arizona. As of December 31, 2005, we are under contract to
    provide E9-1-1 services
    to 36 wireless carriers, including Verizon, Cingular and US
    Cellular. We also provide
    E9-1-1 service to 6
    Voice over IP service providers, including Vonage and VoIP, Inc.b. Customer subscriptions to application-based
    services such as Traffic
    Matterstm.
    TCS strategy is to have a suite of location-based
    applications that carrier subscribers may select and for which
    they pay recurring monthly fees. TCS first major
    application launched on multiple U.S. carriers is a real-time
    traffic application called Traffic
    Matterstm
    that is sold under the Rand McNally brand. TCS expects to launch
    other location-based applications in 2006 involving fleet
    tracking, family finder, and turn-by-turn navigation.3



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##### Table of Contents

c. Software and system maintenance. For our
    installed base of systems in use by customers (see system
    descriptions below), we provide ongoing operational support,
    including administration of system components, system
    optimization and configuration management. Maintenance services
    include tracking customer support issues, trouble shooting, and
    developing and installing maintenance releases. We typically
    provide maintenance services for an annual fee paid in advance,
    which is priced based on the cumulative license fees we have
    billed for the systems being supported.2. Commercial Services. We provide telematic
location database maintenance services for DENSO Corporation of
Japan, (a global supplier to the automotive industry) through
the compilation of geographic information databases used in
Densos in-vehicle navigation systems that are in products
including Toyota, Lexus, Land Rover and Lincoln brands.

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



a. Xypoint®
    Location Platform (XLP) and Applications for Location-based
    Services: Our
    Xypoint®
    Location Platform system interacts with the wireless network to
    extract location information (the X/Y coordinates)
    of the users device. In order to determine a users
    location with sufficient precision for public safety compliance
    and for commercial location-based applications, our technology
    interacts with network triangulation software which some
    carriers have added to cell towers and switches in the network;
    it can also work with networks that have incorporated Assisted
    GPS systems that use Global Positioning System (GPS) chips in
    user handsets. Our platform also provides privacy controls so
    that the wireless device user controls access to the users
    location information. The X/Y information extracted
    from networks by our XLP is used by application software
    including 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 users current
    position.b. Short Message Service Center and Wireless
    Messaging Gateway. 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. Our Wireless Messaging
    Gateway is a portal for two-way data communication between users
    of wireless networks and the Internet. The Wireless Messaging
    Gateway allows users to customize the services they receive on
    wireless devices by setting up a user profile through a single
    Internet-based procedure. Wireless carriers can access these
    user profiles and usage data to gain a better understanding of
    customer behavior. The Wireless Messaging Gateway allows
    additional wireless applications to be added as desired, as well
    as personalization, instant messaging and spam-blocking
    capabilities that can be independently customized by the
    end-user.B. Commercial Market Opportunities and Strategy

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



Growth in Wireless and Voice over Internet Protocol (VoIP)
    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.
    Likewise, VoIP service offers cost advantages over traditional
    wireline service. Wireless growth is expected to continue to
    increase in all regions around the world for the foreseeable
    future. Driving this growth is the replacement of landline4



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connections with wireless connections. Some households are now
    using cellular phones exclusively. This is especially true for
    young adults, but also true in developing countries where
    wireless may often be the only means of communications.The FCCs
    E9-1-1
    Mandates. We are one of the two leading providers of
    E9-1-1 service to
    wireless and VoIP service providers in the U.S. 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 E9-1-1
    wireless capabilities. In 1996, the Federal Communications
    Commission (FCC) mandated the adoption of
    E9-1-1 technology by
    wireless carriers. In June 2005, the FCC ordered providers of
    interconnected VoIP service to provide
    E9-1-1 services to all
    of their customers as a standard feature of the service, rather
    than as an optional enhancement. The FCC requires carriers to
    issue quarterly reports as to their progress and compliance with
    FCC-mandated deployment schedules. We are under long-term
    contracts, usually three to five years, with 36 wireless and 6
    VoIP service providers, including all of the four largest
    wireless carriers in the United States.Cellular Network Improvements to Third Generation
    Capabilities. Mobile operators are deploying high-speed
    data networks based on third generation technologies that, in
    many cases, equal or surpass data rates that are typically
    available for residential wireline users. The deployments of
    these high-speed wireless data networks have made it possible
    for individuals and enterprises to wireless-enable
    many services that previously required a wireline connection,
    such as connecting to the Internet and accessing corporate data
    outside the office. Our companys location-based technology
    and applications incorporating map graphics take advantage of
    these network enhancements.Improving Wireless Device Functionality.
    Manufacturers continue to increase the functionality of mobile
    devices including phones and personal digital assistants through
    higher resolution, color screens, and increased computing
    capability for sophisticated applications. These devices enable
    the user to take advantage of the high-speed data networks for
    Internet and data usage. Broad adoption of location-based
    services (LBS) has required, among other things, handsets
    incorporating components for interoperation with Global
    Positioning System satellites and with LBS network components
    that we have developed and provide.Growing Use of Commercial Location-Based Wireless Services
    (LBS). A driver of wireless communications growth is the
    delivery of timely, highly specialized, interactive and
    location-specific information. Technology incorporated in a
    growing number of networks and handsets now enables
    determination of the handsets location with sufficient
    precision to allow useful applications beyond public
    safetys E9-1-1.
    Wireless users benefit from the ability to receive highly
    customized location-specific information in response to their
    queries or via targeted opt-in content delivered to the wireless
    device. 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.) This technology is being used, via
    interconnection with XLP systems hosted in our companys
    network operations, by Sprint in the U.S. and Iusacell in
    Mexico. Our XLP systems are deployed in six of Hutchison
    Whampoas
    3tm
    networks, Telefonicas Vivo network in Brazil, and the
    Altel network in Kazakhstan.Growing Use of Short Messaging,
    E-mail and Internet
    Applications. E-mail and short messaging services
    (SMS) are increasingly important means of communication,
    with both the number of users and messages per individual
    projected to increase significantly. Mobile operators in the
    United States are experiencing rapid SMS traffic growth,
    according to statistics from mobile operators. 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. We
    provide solutions for mobile operators to receive and route
    e-mail and SMS messages
    through our Short Message Service Center and Wireless Messaging
    Gateway systems.Growing Use of Secure Wireless Communications and Location
    Technology for Defense, Intelligence and Homeland
    Security. Wireless communications and location
    technology are key initiatives within the federal government for
    both security and supply-chain management. As was dramatically
    illustrated during5



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2005 by Hurricane Katrina, wireless communications in
    emergencies are of paramount importance, as emergency personnel
    need to be able to communicate and share information across
    agencies and departments where wireline systems may be
    unavailable. We believe that our expertise in the areas of
    wireless E9-1-1,
    location and messaging services, and secure satellite
    communications can be leveraged to provide the needed wireless
    infrastructure for the U.S. Departments of Homeland
    Security and Defense 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.The key elements of our commercial strategy are to:




    Focus our Software and Integration Resources on Evolving
    Carrier Network Capabilities. 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 determination. Mobile operators have made large capital
    expenditure investments in infrastructure for wireless data and
    location determination technologies. While originally envisioned
    as separate technologies, messaging and location determination
    technologies can be integrated to provide value-added services
    and applications for the operators end-users.
    Expand Our Sales and Marketing Capabilities. We are
    developing relationships with communication infrastructure
    providers in order to expand our sales channels for our carrier
    software products and services. We have historically leveraged
    our strategic relationships with original equipment
    manufacturers to market our Commercial Applications segment
    products to wireless carriers worldwide. We are adding
    partnerships for our location technologies.
    Grow Our Wireless Carrier and Voice Over IP Customer
    Base. We now serve or are under contract with 36 wireless
    carrier networks in 15 countries, and with 6 VoIP service
    providers. 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.
    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 reside inside
    wireless networks and are difficult to retrieve and utilize.
    Using this information, we intend to expand the range of
    capabilities that wireless data technology can accomplish for
    our customers.
    Develop and Enhance Our Technology. We will continue to
    invest in our underlying technology and to capitalize on our
    expertise to meet the growing demand for sophisticated wireless
    applications. As of January 1, 2006, our staff included
    more than 350 technical personnel who specialize in wireless
    network and client software development, hosted wireless
    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
    Xypoint®
    platform architecture efficiently integrates our presence,
    location, call control and messaging technology, resulting in
    reduced costs, increased reliability, more efficient
    deployments, compatibility with our existing products and a
    migration path to third-generation services.
    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.6



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##### Table of Contents

II. Government Segment:

A. Government Products and Services

1. Government Services. In addition to maintenance
services, which we began selling in 2005, generating monthly,
usage-based revenue for indefinite periods, we enter into
fee-for-service contracts under which revenue is generated based
on contract labor billing rates or based on fixed fees for
deliverables. These services, typically under multi-year
contracts or contract vehicles, include:



a. Network Operation Support. We design,
    install, and operate networks that integrate computing and
    communications, including systems that provide communications
    via both satellite and terrestrial links. 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 under multi-year contracts with government customers.b. Custom Software. We develop custom
    software applications to support specific customer requirements.
    We have historically tailored enhancements of our software
    products for wireless carrier customers and developed custom
    applications for government agencies.c. Secure Satellite Teleport Data Landing and
    Transmission Services. We own and operate high-speed
    satellite communications teleports in Baltimore, Maryland and
    Manassas, Virginia that are connected to the public switched
    telephone network. These facilities provide transport services
    for Internet protocol (IP)-based media content consisting of
    Voice over IP (VOIP), Internet, video and messaging data using
    Very Small Aperture Terminal (VSAT) satellite technology as
    part of our communication solutions for our customers.2. Government Systems. We have designed and produce
SwiftLink®,
a lightweight, satellite-based secure communication system,
which can be immediately deployed in remote areas where other
means of reliable communications may not be available.
SwiftLink®
provides secure voice, video and data communications for up to
eight people and a single person can deploy the system in less
than ten minutes, creating critical communication channels from
any location around the world. Uses include: emergency response,
news reporting, public safety, drilling and mining operations,
field surveys and other activities that require remote
capabilities for video and data transmission. Integration work
which typically accompanies customer purchases of our secure
deployable systems is reported together with the system sales
revenue. The Broadband Global Area Network upgrade of the
Inmarsat satellite constellation, which enables lower cost
Internet protocol traffic with broader band capability, expands
our opportunity for
Swiftlink®
sales volume.

B. Government Market Opportunities and Strategy

Government Outsourcing of Network and Telecom Technical
Functions. Federal agencies, as well as state and local
governments, are increasingly contracting with specialist teams
for functions such as network management, and for long-term
projects such as software development and systems integration.
Since the founding of our Company, we have built relationships
with federal agencies, including the Special Operations Command
and the FBI, as well as the State of Maryland and the City of
Baltimore. Since early 2004, we have made it a management
priority to aggressively expand our base of long-term service
contract engagements. We have added experienced sales personnel
and enhanced our relationships with systems integrators and
specialist vendors such as SAP to expand our penetration of the
government service market.

Expanded Need for Secure, Interoperable Deployable
Communication Solutions. During 2005, disaster response
efforts in the U.S. Gulf Coast area by the Department of
Homeland Securitys Federal Emergency Management Agency
illustrated the need for enhanced communication capabilities in
such circumstances. Military responders in New Orleans used our
Swiftlink®
systems to coordinate deployable resources. We are continuing to
enhance our deployable communication systems product line to
take advantage of the evolving environment, including the
benefits of Very Small Aperture Terminal (VSAT) satellite
communications architectures where desirable, and the Inmarsat
Broadband Global Area Network enhancements to its satellite
services.

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Secure Teleport and Integration Capabilities along with
Deployable Systems as a Bundled Offering. Government
customers can benefit from single-sourcing secure communications
solutions which include a secure U.S. landing site for
backhaul traffic as well as network engineering expertise and
secure remote terminals. We believe that our company enjoys a
competitive advantage, because it can offer all of these
elements from a single vendor.

Application of Commercially Proven Technology to
Government Solutions. Government customers increasingly
are using commercial carrier networks. Procurement officers have
expressed a preference for solutions that incorporate proven
commercial technology, rather than reliance on government
research and development funding. Our companys portfolio
of software, patented intellectual property, and teams of
wireless and encryption specialists positions us to tap into
this opportunity.

Customers

Commercial Applications Segment. Our commercial customers
include wireless telecommunications carriers in the United
States and foreign countries, either directly or through our
channel partners. We provide licensed software-based systems,
and hosted service bureau offerings in our Commercial
Applications segment to carriers around the world. Our wireless
carrier customers include Verizon Wireless (17% of total 2005
revenue from continuing operations), Cingular Wireless (10% of
total 2005 revenue from continuing operations), US Cellular,
Sprint, and the Hutchison Whampoa third generation 3
brand networks. Customers for our Voice Over IP
E9-1-1 services include
Vonage and Level 3. Our sales efforts target wireless and
Voice over IP service providers around the world. The Enterprise
divisions customers include Corporate Express and Staples.

Government Segment. Our major Government segment
customers include units of the U.S. Departments of Defense,
Justice, and State, the General Services Administration, the
City of Baltimore, and Northrop Grumman. In the aggregate,
U.S. federal government entities accounted for 17% of total
2005 revenue from continuing operations.

Backlog

As of December 31, 2005 and 2004, we had unfilled orders,
or backlog, as follows:

|                                             |  |              |       |  |      |   |      | 
|-------------------------------------------- |  | ------------ | ----- |  | ---- | - | ---- | 
|                                             |  | December 31, |      
|                                             |  |              |      
|($ in millions)                              |  | 2005         |       |  | 2004 |  
|                                             |  |              |       |  |      |  
|Commercial Applications segment              |  | $            | 69.0  |  |      | $ | 58.0 | 
|Government segment                           |  |              | 52.8  |  |      |   | 40.1 | 
|                                             |  |              |       |  |      |  
|Total backlog                                |  | $            | 121.8 |  |      | $ | 98.1 | 
|                                             |  |              |       |  |      |  
|                                            
|Expected to be realized within
    12 months |  | $            | 59.1  |  |      | $ | 51.0 | 
|                                             |  |              |       |  |      |  



Sales and Marketing




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Intermec, and Qualcomm. During the indirect sales process, as
well as during installation and maintenance, we have extensive
direct contact with prospective carrier customers.

We are pre-qualified as an approved vendor for some government
contracts, and some of our products and services are available
to government customers via the General Services
Administrations Information Technology Schedule 70.
We collaborate in sales efforts under various arrangements with
integrators including Anteon and SAP. 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 continue to
compete primarily on the basis of the functionality, breadth,
time to market, ease of integration, price, and quality of our
products and services. The market and competitive conditions are
continually developing. Our software products compete with many
similar products provided by other companies. It is difficult to
present a meaningful comparison between our competitors and us
because there is a large variation in revenue generated by
different customers, different products and services, as well as
the different combinations of products and services offered by
our competitors. We cannot, therefore, quantify our relative
competitive position.

Our current and potential competitors include:



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

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

Research and Development

Our success depends on a number of factors, which include our
ability to identify and respond to emerging technological trends
in our target markets, to develop and maintain competitive
products, to enhance our existing products by adding features
and functionality that differentiate the products from those of
our competitors, and to bring products to market on a timely
basis and at competitive prices. As of January 1, 2006, our
research and development staff included more than 350
professionals who specialize in wireless network and client
software development. Since 1996, we have made substantial
investments in wireless application research and development,
most of which has been devoted to the development of carrier and
enterprise network software products and services. We are
primarily focusing our current research and development
investments in cellular location-based technology, including
E9-1-1 technology. 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

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expand the role of short messaging, we co-founded the Short
Message Peer-to-Peer
Forum in 1999. For the years ended December 31, 2005, 2004,
and 2003, our research and development expense in continuing
operations was $13.9 million, $18.0 million, and
$16.9 million, respectively.

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 over 40 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 more than 100 additional
patent applications for certain apparatus and processes we
believe we have invented to enable key features of the locations
services, wireless text alerts, Financial Market Data, Short
Message Service Center, Prepaid Wireless, mobile-originated data
and E9-1-1network
software. There is no assurance that these patent applications
will result in a patent being issued by the U.S. Patent and
Trademark Office or other patent offices, nor is there any
guarantee that any issued patent will be valid and enforceable.
Additionally, foreign patent rights may or may not be available
or pursued in any technology area for which U.S. patent
applications have been filed. We expect to sell four foreign
patents along with the sale of the Enterprise division, and
royalty-free rights to use some of our domestic patents. In
addition, we have engaged an intellectual capital merchant bank
to assist us in selling or licensing certain of our patents
covering technology that the company does not currently plan to
use.

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 is
subject to challenge by either party.

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

Employees

As of December 31, 2005, we had 629 employees,
620 full-time and 9 part-time. We believe relations
with our employees are good. None of our employees is
represented by a union.

Geographical Information

During the fiscal years ended December 31, 2005, 2004 and
2003, our total revenues generated from products and services of
our continuing operations in the U.S. were
$95.3 million, $90.5 million, and $88.5 million,
respectively, and our total revenues generated from products and
services outside of the U.S. from our continuing operations were
$6.9 million, $6.4 million, and $3.6 million,
respectively. As of December 31, 2005 and 2004, essentially
all of the long-lived assets of our continuing operations were
located in the U.S.

During the fiscal years ended December 31, 2005 and 2004,
total revenues generated from products and services of our
Enterprise division in the U.S. were $23.1 million and
$39.8 million, respectively, and our total revenues
generated from products and services of our Enterprise division
outside of the U.S. were $5.0 million and
$6.2 million, respectively. As of December 31, 2005
and 2004, our Enterprise division had approximately
$2.2 million and $2.8 million, respectively, of assets
located outside the U.S.

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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 Item
1A.







Item 1A.
    Risk FactorsYou should consider carefully each of the following risks and
all of the other information in this Annual Report on
Form 10-K and the documents incorporated by reference
herein. If any of the following risks and uncertainties develops
into actual events, our business, financial condition or results
of operations could be materially adversely affected.

Risks Related to Our Business



We have a history of
    losses and can offer no assurance that we will achieve
    profitability in the near future.We incurred net losses of $11.5 million, $18.5 million
and $13.5 million for the years ended December 31,
2005, 2004 and 2003, respectively. As of December 31, 2005,
we had an accumulated deficit of $161 million. We have
never declared or paid cash dividends on our Class A common
stock and do not currently anticipate paying any cash dividends
on our Class A common stock in the foreseeable future. We
expect to incur significant expenses in the near term,
especially due to product development, sales and marketing and
administrative expenses. Therefore, we will need to generate
significant additional revenue and control costs to achieve and
sustain profitability on a quarterly or annual basis. If we are
not able to increase revenue or control costs, our operating
results and profitability could be adversely affected.



Our stock price, like that
    of many technology companies, has been and may continue to be
    volatile.We expect that the market price of our Class A common stock
will continue to be volatile. We are involved in a highly
visible, rapidly changing industry and stock prices in our
industry and similar industries have risen and fallen in
response to a variety of factors, including:




    announcements of new wireless data communications technologies
    and new providers of wireless data communications;
    announcements of the issuance of new patents
    acquisitions of, or strategic alliances among, providers of
    wireless data communications;
    changes in recommendations by securities analysts regarding the
    results or prospects of providers of wireless data
    communications;
    changes in investor perceptions of the acceptance or
    profitability of wireless data communications; and
    other global economic uncertainties.

If wireless carriers do
    not continue to provide additional products and services to
    their subscribers, our business could be
    harmed.If wireless carriers limit their product and service offerings
or do not purchase additional products containing our
applications, our business will be harmed. Wireless carriers
face implementation and support challenges in introducing
Internet-based services via wireless devices, which may slow the
rate of adoption or implementation of our products and services.
Historically, wireless carriers have been relatively slow to
implement complex new services such as Internet-based services.
Our future success depends upon a continued increase in the use
of wireless devices to access the Internet and upon the
continued development of wireless devices as a medium for the
delivery of network-based content and services. We have no
control over the pace at which wireless carriers implement these
new services. The failure of wireless carriers to introduce and
support services utilizing our products in a timely and
effective manner could reduce sales of our products and services
and seriously harm our business.

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We may fail to support our
    anticipated growth in operations which could reduce demand for
    our services and materially adversely affect our
    revenue.Our business strategy is based on the assumption that the number
of customers, the amount of information they want to receive and
the number of services we offer will all increase. We must
continue to develop and expand our systems and operations to
accommodate this growth. The expansion and adaptation of our
systems operations requires substantial financial, operational
and management resources. Due to the limited deployment of our
services to date, the ability of our systems and operations to
connect and manage a substantially larger number of customers
while maintaining superior performance is unknown. Any failure
on our part to develop and maintain our wireless data services
as we experience rapid growth could significantly reduce demand
for our services and materially adversely affect our revenue.



We could incur substantial
    costs from product liability claims relating to our
    software.Our agreements with customers may require us to indemnify
customers for our own acts of negligence and non-performance.
Product liability and other forms of insurance are expensive and
may not be available in the future. We cannot be sure that we
will be able to maintain or obtain insurance coverage at
acceptable costs or in sufficient amounts or that our insurer
will not disclaim coverage as to a future claim. A product
liability or similar claim may adversely affect our business,
operating results or financial condition.



Our operating results
    could be adversely affected by any interruption of our data
    delivery services or system failure.Our E9-1-1, market data, enterprise mobility and mobile asset
delivery and logistics operations depend on our ability to
maintain our computer and telecommunications equipment and
systems in effective working order, and to protect our systems
against damage from fire, natural disaster, power loss,
telecommunications failure, sabotage, unauthorized access to our
system or similar events. Although all of our mission-critical
systems and equipment are designed with built-in redundancy and
security, any unanticipated interruption or delay in our
operations or breach of security could have a material adverse
effect on our business, financial condition and results of
operations.

Furthermore, any addition or expansion of our facilities to
increase capacity could increase our exposure to natural or
other disasters. Our property and business interruption
insurance may not be adequate to compensate us for any losses
that may occur in the event of a system failure or a breach of
security. Furthermore, insurance may not be available to us at
all or, if available, may not be available to us on commercially
reasonable terms.



Because we rely on a few
    key customers, our revenue may decline if we fail to retain
    those customers.To date, the largest customers for our product and service
offerings in terms of revenue generated have been Cingular
Wireless, US Cellular, Sprint, Hutchison 3G, Verizon Wireless,
and the U.S. government. For the fiscal years ended
December 31, 2005, 2004, and 2003, each of Verizon Wireless
and the U.S. government accounted for 10% or more of our total
revenue. For the year ended December 31, 2005, Cingular
Wireless also accounted for 10% or more of our total revenue. We
expect to generate a significant portion of our total revenue
from these customers for the foreseeable future. For the year
ended December 31, 2005, the largest customers for our
Commercial Applications Segment were Verizon Wireless, US
Cellular and Cingular, the largest customers for our Government
Segment were various U.S. government agencies, and the largest
customers for our Enterprise division were Merrill Lynch,
Goldman Sachs, Bank of America, Office Depot and Corporate
Express. To date, the attrition rate for enterprise customers
from the businesses that we acquired in connection with the
acquisition of Aethers EMS division has been approximately
10% due to technology changes, but we have not experienced any
unanticipated customer attrition in the segment. However, we are
currently offering the assets of the Enterprise division for
sale. If and when this sale is carried out, our customer base
will be further reduced. See Business  Recent
Developments.

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Our growth depends on maintaining relationships with our major
customers and on developing other customers and distribution
channels. The loss of any of the customers discussed in this
paragraph would have a material adverse impact on our business.



Because we rely on key
    partners to expand our marketing and sales efforts, if we fail
    to maintain or expand our relationships with strategic partners
    and indirect distribution channels our license revenues could
    decline.We have announced strategic partnerships with Nokia and
Motorola, and are working on additional partnerships to provide
supplemental channels for the marketing and sale of our software
applications. Our growth depends on maintaining relationships
with these partners and on developing other distribution
channels. The loss of any of these partners would have a
material adverse impact on our business.



Because our business may
    not generate sufficient cash to fund operations, we may not be
    able to continue to grow our business if we are unable to obtain
    additional capital when needed.We believe that our cash and cash equivalents including proceeds
received from the financing which occurred in March 2006, and
our bank line of credit, coupled with the funds anticipated to
be generated from operations will be sufficient to finance our
operations for at least the next twelve months. Although we
currently believe that we have sufficient capital resources to
meet our anticipated working capital and capital expenditures
requirements beyond the next twelve months, unanticipated
events, such as the failure to sell the Enterprise division, a
failure to generate sufficient capital from such a sale, or the
failure to license or sell a portion of our intellectual
property portfolio, could cause us to fall short of our capital
requirements. In addition, such events could cause us to violate
our bank line of credit covenants causing the bank to foreclose
on the line and/or opportunities may make it necessary for us to
return to the public markets, or establish new credit facilities
or raise capital in private transactions in order to meet our
capital requirements. We cannot assure you that we will be able
to raise additional capital in the future on terms acceptable to
us, or at all.

Our bank credit agreement contains a tangible net worth covenant
which is required to be met on a monthly basis. In March, 2006
the bank amended our line of credit agreement, reducing the
tangible net worth requirement through March 31, 2007, as
discussed in the notes to our audited financial statements. The
line of credit agreement also contains a subjective acceleration
clause which allows the bank to declare the amounts outstanding
under the line of credit due and payable if certain material
adverse changes occur, as described in the notes to the audited
financial statements. Also, the loan document governing the
subordinated debt issued in March 2006 contains a cross-default
provision that would allow the debt holder to accelerate payment
of the subordinated debt if other debt exceeding
$2.5 million is declared due and payable. We believe that
we will continue to comply with our restrictive covenants under
our debt agreements. If our performance does not result in
compliance with any of the restrictive covenants, or if our line
of credit agreement lender seeks to exercise its rights under
the subjective acceleration clause referred to above, we would
seek to further modify our financing arrangements, but there can
be no assurance that our debt holders would not exercise their
rights and remedies under their agreements with us, including
declaring all outstanding debt due and payable.



Variations in quarterly
    operating results due to factors such as changes in demand for
    our products and changes in our mix of revenues and costs may
    cause our Class A common stock price to
    decline.Our quarterly revenue and operating results are difficult to
predict and are likely to fluctuate from quarter-to-quarter. For
example, 2003 revenues of our Government Segment (formerly our
Network Solutions Segment) were higher in the second half of the
year than in the first half, whereas its 2004 revenues were
higher in the first half of the year than in the second. In
2005, Revenues from our Government Segment were significantly
higher in the second half of the year than in the first half. In
addition, we generally derive a significant portion of wireless
carrier license revenue in our Commercial Applications segment
from initial license fees. The initial license fees that we
receive in a particular quarter may vary significantly. As these
projects begin and end, quarterly results may vary. We therefore
believe that quarter-to-quarter comparisons of our operating
results may not be a good indication of our future performance,
and you should not rely on them

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to predict our future performance or the future performance of
our Class A common stock. Our quarterly revenues, expenses
and operating results could vary significantly from quarter-
to-quarter. If our operating results in future quarters fall
below the expectations of market analysts and investors, the
market price of our stock may fall.

Additional factors that have either caused our results to
fluctuate in the past or that are likely to do so in the future
include:




    changes in our relationships with wireless carriers, the U.S.
    government or other customers;
    timing of introduction of new products and services;
    changes in pricing policies and product offerings by us or our
    competitors;
    changes in projected profitability of acquired assets that would
    require the write down of the value of the goodwill reflected on
    our balance sheet.
    costs associated with advertising, marketing and promotional
    efforts to acquire new customers;
    capital expenditures and other costs and expenses related to
    improving our business, expanding operations and adapting to new
    technologies and changes in consumer preferences; and
    our lengthy and unpredictable sales cycle.

Growing market acceptance
    of open source software could cause a decline in our
    revenues and operating margins.Growing market acceptance of open source software has presented
both benefits and challenges to the commercial software industry
in recent years. Open source software is made widely
available by its authors and is licensed as is for a
nominal fee or, in some cases, at no charge. For example, Linux
is a free Unix-type operating system, and the source code for
Linux is freely available.

We have incorporated some types of open source software into our
products, allowing us to enhance certain solutions without
incurring substantial additional research and development costs.
Thus far, we have encountered no unanticipated material problems
arising from our use of open source software. However, as the
use of open source software becomes more widespread, certain
open source technology could become competitive with our
proprietary technology, which could cause sales of our products
to decline or force us to reduce the fees we charge for our
products, which could have a material adverse impact on our
revenues and operating margins.



Because our product
    offerings are sold internationally, we are subject to risks of
    conducting business in foreign countries.Wireless carriers in Europe, Asia, Australia, Africa and Central
and South America have purchased our products. In addition, a
significant portion of the revenue historically generated by our
Enterprise division has typically been generated outside the
United States. (For information regarding our intention to sell
this division, see Business  Recent Developments.)
We believe our revenue will be increasingly dependent on
business in foreign countries, and we will be subject to the
social, political and economic risks of conducting business in
foreign countries, including:




    inability to adapt our products and services to local business
    practices, customs and mobile user preferences;
    costs of adapting our product and service offerings for foreign
    markets;
    inability to locate qualified local employees, partners and
    suppliers;
    reduced protection of intellectual property rights;14



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
    the potential burdens of complying with a variety of U.S. and
    foreign laws, trade standards and regulatory requirements,
    including the regulation of wireless communications and the
    Internet and uncertainty regarding liability for information
    retrieved and replicated in foreign countries;
    general geopolitical risks, such as political and economic
    instability and changes in diplomatic and trade relations; and
    unpredictable fluctuations in currency exchange rates.Any of the foregoing risks could have a material adverse effect
on our business by diverting time and money toward addressing
them or by reducing or eliminating sales in such foreign
countries.



We derive a significant
    portion of our revenue from sales to various agencies of the
    U.S. government which has special rights unlike other customers
    and exposes us to additional risks that could have a material
    adverse effect on our business, financial condition and
    operating results.Sales to various agencies of the U.S. government accounted for
approximately 17% of our total revenue for the fiscal year ended
December 31, 2005, all of which was attributable to our
Government Segment. Our ability to earn revenue from sales to
the U.S. government can be affected by numerous factors outside
of our control including:




    The U.S. government may terminate the contracts it has with
    us.All of the contracts we have with the U.S. government
    are, by their terms, subject to termination by the U.S.
    government either for its convenience or in the event of a
    default by us. In the event of termination of a contract by the
    U.S. government, we may have little or no recourse.
    Our contracts with the U.S. government may be terminated due
    to Congress failing to appropriate funds.Our U.S.
    government contracts are conditioned upon the continuing
    availability of Congressional appropriations. Congress usually
    appropriates funds for a given program on a fiscal-year basis
    even though contract performance may take more than one year.
    Any failure by Congress to appropriate funds to any program that
    we participate in could materially delay or terminate the
    program and have a material adverse effect on our business.
    We are subject to procurement and other related laws and
    regulations which carry significant penalties for
    non-compliance.We are subject to extensive and complex U.S.
    government procurement laws and regulations. Failure to comply
    with these laws and regulations and with laws governing the
    export of controlled products and commodities, and any
    significant violations of any other federal law, could subject
    us to potential contract termination, civil and criminal
    penalties, and under certain circumstances, suspension and
    debarment from future U.S. government contracts.Additionally, the U.S. government may audit and review our costs
and performance on their contracts, as well as our accounting
and general practices. The costs and prices under these
contracts may be subject to adjustment based upon the results of
any audits. Future audits may harm our business.



Because several of our
    competitors have significantly greater resources than we do, we
    could lose customers and market share.Our business is highly competitive. Several of our competitors
are substantially larger than we are and have greater financial,
technical and marketing resources than we do. In particular,
larger competitors have certain advantages over us which could
cause us to lose customers and impede our ability to attract new
customers, including: larger bases of financial, technical,
marketing, personnel and other resources; more established
relationships with wireless carriers; more funds to deploy
products and services; and the ability to lower prices of
competitive products and services because they are selling
larger volumes.

The widespread adoption of open industry standards such as the
Secure User Plane for Location (SUPL) specifications may
make it easier for new market entrants and existing competitors
to introduce products that compete with our software products.
Because our commercial applications segment is part of an
emerging market, we cannot identify or predict which new
competitors may enter the mobile location services

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industry in the future. With time and capital, it would be
possible for competitors to replicate any of our products and
service offerings or develop alternative products. Additionally,
the wireless communications industry continues to experience
significant consolidation which may make it more difficult for
smaller companies, like us, us to compete. Our competitors
include application developers, telecommunications equipment
vendors, location determination technology vendors and
information technology consultants, and may include traditional
Internet portals and Internet infrastructure software companies.
We expect that we will compete primarily on the basis of price,
time to market, functionality, quality and breadth of product
and service offerings.

The Enterprise division that we acquired from Aether in January
2004 has developed software using standard industry development
tools. Many of its agreements with wireless carriers, wireless
handheld device manufacturers, distributors, and data providers
are non-exclusive. Competitors could develop or license the same
products and services in competition with us. With time and
capital, it would be possible for competitors to replicate our
services.

These competitors could include wireless network carriers,
mobile and/or wireless software companies, wireless data
services providers and wireless systems integrators and database
vendors. As discussed above, many of our potential competitors
have significantly greater resources than we do. Furthermore,
competitors may develop a different approach to marketing the
services we provide in which subscribers may not be required to
pay for the information provided by our services. Competition
could reduce our market share or force us to lower prices to
unprofitable levels.

In addition, we are currently offering the Enterprise division
for sale. If competitors develop and use similar products and
services, this could reduce the attractiveness and value of the
Enterprise assets for sale.



While we characterize a
    significant portion of our revenue as being
    recurring there is no guarantee that we will
    actually achieve this revenue.A significant portion of our revenue is generated from long-term
customer contracts that pay certain fees on a month-to-month
basis. While we currently believe that these revenue streams
will continue, renegotiation of the contract terms or
non-renewal of material contracts could cause our recurring
revenues to be lower than expected and any growth depends on
maintaining relationships with these important customers and on
developing other customers and distribution channels.



The loss of key personnel
    or any inability to attract and retain additional personnel
    could harm our business.Our future success will depend in large part on our ability to
hire and retain a sufficient number of qualified personnel,
particularly in sales and marketing and research and
development. If we are unable to do so, our business could be
harmed. Our future success also depends upon the continued
service of our executive officers and other key sales,
engineering and technical staff. The loss of the services of our
executive officers and other key personnel could harm our
operations. We maintain key person life insurance on certain of
our executive officers. We would be harmed if one or more of our
officers or key employees decided to join a competitor or if we
failed to attract qualified personnel. Our ability to attract
qualified personnel may be adversely affected by a decline in
the price of our Class A common stock. In the event of a
decline in the price of our Class A common stock, the
retention value of stock options will decline and our employees
may choose not to remain with us, which could harm our business.

Risks Related to Acquisitions



Our past and future
    acquisitions of companies or technologies could prove difficult
    to integrate, disrupt our business, dilute stockholder value or
    adversely affect operating results or the market price of our
    Class A common stock.We have in the past acquired a number of businesses and
technologies, and we may in the future acquire or make
investments in other companies, services and technologies. Any
acquisitions, strategic alliances or investments we may pursue
in the future will have a continuing, significant impact on our
business, financial

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condition and operating results. The value of the companies or
assets that we acquire or invest in may be less than the amount
we paid if there is a decline of their position in the
respective markets they serve or a decline in general of the
markets they serve. If we fail to properly evaluate and execute
acquisitions and investments, our business and prospects may be
seriously harmed. To successfully complete an acquisition, we
must:




    properly evaluate the technology;
    accurately forecast the financial impact of the transaction,
    including accounting charges and transaction expenses;
    integrate and retain personnel;
    combine potentially different corporate cultures; and
    effectively integrate products and services, and research and
    development, sales and marketing and support operations.If we fail to do any of these, we may suffer losses, our
management may be distracted from day-to-day operations and the
market price of our Class A common stock may be materially
adversely affected. In addition, if we consummate future
acquisitions using our equity securities or convertible debt,
existing stockholders may be diluted which could have a material
adverse effect on the market price of our Class A common
stock.

In addition, the companies and business units we have acquired
or invested in or may acquire or invest in are subject to each
of the business risks we describe in this section, and if they
incur any of these risks the businesses may not be as valuable
as the amount we paid. Further, we cannot guarantee that we will
realize the benefits or strategic objectives we are seeking to
obtain by acquiring or investing in these companies.



One of the suppliers of
    wireless services to our Enterprise division has been sued for
    patent infringement, which raises uncertainty regarding its
    ability to continue to supply us with these
    services.Research In Motion Limited (RIM), which supplies our
Enterprise division with hardware and wireless services that are
in turn packaged with other services and resold, is engaged in
legal proceedings with NTP Inc., which alleges that certain RIM
products infringed on patents held by NTP Inc. We understand
from press announcements that RIM and NTP have reached a
settlement of this dispute, but to the extent such settlement
does not mature, this creates uncertainty regarding RIMs
ability to continue to supply the Enterprise division with
services. RIMs inability to supply services to our
Enterprise division could increase our loss from discontinued
operations and our net losses. RIM is the only producer of the
aforementioned hardware and wireless services, and, in the
unlikely event that RIM is prohibited from supplying our
Enterprise division in the United States or elsewhere as a
result of the litigation or otherwise, we would be unable to
operate the business of our Enterprise division as it is
currently conducted. This would also affect our ability to sell
the Enterprise division, as well as the divisions resale
value.



An interruption in the
    supply of products and services that we obtain from third
    parties could cause a decline in sales of the services from the
    Enterprise division, and products we purchase to avoid shortages
    may become obsolete before we can use them.In designing, developing and supporting the wireless data
services of our Enterprise division, we have relied on wireless
carriers, wireless handheld device manufacturers, content
providers, software providers and companies that manage some of
our other services such as our internal IT operations and
customer care services. These suppliers may experience
difficulty in supplying us products or services sufficient to
meet our needs or they may terminate or fail to renew contracts
for supplying us these products or services on terms we find
acceptable. Any significant interruption in the supply of any of
these products or services could cause a decline in sales of our
services unless and until we are able to replace the
functionality provided by these products and services. We also
depend on third parties to deliver and support reliable
products, enhance our current products, develop new products on
a timely and cost-effective basis and respond to emerging
industry standards and other technological changes. In addition,
we rely on the ability of our content providers 

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including Reuters, the New York Stock Exchange, Inc., the
Chicago Board of Trade, the Nasdaq Stock Market, Inc. and the
Options Price Reporting Authority  to continue to provide
us with uninterrupted access to the news and financial
information we provide to our customers. The failure of third
parties to meet these criteria, or their refusal or failure to
deliver the information for whatever reason could materially
harm our business. This would also affect our ability to sell
the Enterprise division, as well as the divisions resale
value.

Industry Risks



Because the wireless data
    industry is a new and rapidly evolving market, our product and
    service offerings could become obsolete unless we respond
    effectively and on a timely basis to rapid technological
    changes.The successful execution of our business strategy is contingent
upon wireless network operators launching and maintaining mobile
location services, our ability to create new network software
and mobile asset products and adapt our existing network
software products to rapidly changing technologies, industry
standards and customer needs. As a result of the complexities
inherent in our product offerings, new technologies may require
long development and testing periods. Additionally, new products
may not achieve market acceptance or our competitors could
develop alternative technologies that gain broader market
acceptance than our products. If we are unable to develop and
introduce technologically advanced products that respond to
evolving industry standards and customer needs, or if we are
unable to complete the development and introduction of these
products on a timely and cost effective basis, our business will
suffer.

New laws and regulations that impact our industry could increase
costs or reduce opportunities to earn revenue. The wireless
carriers that use our product and service offerings are subject
to regulation by domestic, and in some cases, foreign,
governmental and other agencies. Regulations that affect them
could increase our costs or reduce our ability to sell our
products and services. In addition, there are an increasing
number of laws and regulations pertaining to wireless telephones
and the Internet under consideration in the United States and
elsewhere.

The applicability to the Internet of existing laws governing
issues such as intellectual property ownership and infringement,
copyright, trademark, trade secret, taxation, obscenity, libel,
employment and personal privacy is uncertain and developing. Any
new legislation or regulation, or the application or
interpretation of existing laws, may have a material adverse
effect on our business, results of operations and financial
condition. Additionally, modifications to our business plans or
operations to comply with changing regulations or certain
actions taken by regulatory authorities might increase our costs
of providing our product and service offerings and materially
adversely effect our financial condition.



Concerns about personal
    privacy and commercial solicitation may limit the growth of
    mobile location services and reduce demand for our products and
    services.In order for mobile location products and services to function
properly, wireless carriers must locate their subscribers and
store information on each subscribers location. Although
data regarding the location of the wireless user resides only on
the wireless carriers systems, users may not feel
comfortable with the idea that the wireless carrier knows and
can track their location. Carriers will need to obtain
subscribers permission to gather and use the
subscribers personal information, or they may not be able
to provide customized mobile location services which those
subscribers might otherwise desire. If subscribers view mobile
location services as an annoyance or a threat to their privacy,
that could reduce demand for our products and services and have
an adverse effect on prospective sales.



Because many providers are
    not in compliance with current regulatory mandates and because
    our industry is undergoing rapid technological and regulatory
    change, our future performance is uncertain.The Federal Communication Commission, or FCC, has mandated that
certain location information be provided to operators when they
receive an E9-1-1 call. Phase I of the FCCs 9-1-1 mandate
required providers to be able to locate wireless E9-1-1 callers
within their originating cell sector site and report their
callback number by April 1998. Phase II of the FCC mandate
required providers to be able to pinpoint the location of all
E9-1-1 callers within 125 meters in 67% of all cases by
October 1, 2001. Although both the

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Phase I and Phase II deadlines have passed, many providers are
not currently in compliance with either phase of the FCCs
mandate. Even so, we believe that many public safety
jurisdictions are continuing to deploy Phase I technology and
when available, we believe they will deploy Phase II technology.

Carriers obligations to provide Phase I and Phase II
services are subject to request by public safety organizations.
Due to complex regulatory, funding and political issues many
public safety organizations have not yet requested this service.
As a result, wireless carriers and wireless users may never
exhibit sufficient demand for our mobile location services.
Technical failures, time delays or the significant costs
associated with developing or installing improved location
technology could slow down or stop the deployment of our mobile
location products. If deployment of improved location technology
is delayed, stopped or never occurs, market acceptance of our
products and services may be adversely affected.

In addition, we will rely on third-party providers to
manufacture and deploy devices that determine the precise
geographic location of wireless users to comply with Phase II of
the FCC mandate. The extent and timing of the deployment of our
products and services is dependent both on public safety
requests for such service and wireless carriers ability to
certify the accuracy of and deploy the precise location
technology. Because we will rely on third-party location
technology instead of developing the technology ourselves, we
have little or no influence over its improvement. If the
technology never becomes precise enough to satisfy wireless
users needs or the FCCs requirements, we may not be
able to increase or sustain demand for our products and
services, if at all.



Our E9-1-1 business is
    dependent on state and local governments and the regulatory
    environment for Voice over Internet Protocol (VoIP) services is
    developing.Under the FCCs mandate, wireless carriers are required to
provide E9-1-1 services only if state and local governments
request the service. As part of a state or local
governments decision to request E9-1-1, they have the
authority to develop cost recovery mechanisms. However, cost
recovery is no longer a condition to wireless carriers
obligation to deploy the service. If state and local governments
do not widely request that E9-1-1 services be provided or we
become subject to significant pressures from wireless carriers
with respect to pricing of E9-1-1 services, our E9-1-1 business
would be significantly harmed and future growth of our business
would be significantly reduced.

Additionally, the FCC has determined that VoIP services are not
subject to the same regulatory scheme as traditional wireline
and wireless telephone services. If the regulatory environment
for VoIP services evolves in a manner other than the way we
anticipate, our E9-1-1 business would be significantly harmed
and future growth of our business would be significantly reduced.



Because the industries
    which we serve are currently in a cycle of consolidation, the
    number of customers may be reduced which could result in a loss
    of revenue for our business.The telecommunications industry generally is currently
undergoing a consolidation phase. Many of our customers,
specifically wireless carrier customers of our Commercial
Applications segment, have or may become the target of
acquisitions. If the number of our customers is significantly
reduced as a result of this consolidation trend, or if the
resulting companies do not utilize our product offerings, our
financial condition and results of operations could be
materially adversely affected.

Technology Risks



Because our software may
    contain defects or errors, our sales could decrease if these
    defects or errors adversely affect our reputation or delays
    shipments of our software.The software products that we develop are complex and must meet
the stringent technical requirements of our customers. We must
quickly develop new products and product enhancements to keep
pace with the rapidly changing software and telecommunications
markets in which we operate. Software as complex as ours is
likely to contain undetected errors or defects, especially when
first introduced or when new versions are released. Our software
may not be error or defect free after delivery to customers,
which could damage our

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reputation, cause revenue losses, result in the rejection of our
software or services, divert development resources and increase
service and warranty costs, each of which could have a serious
harmful effect on us.



If we are unable to
    integrate our products with wireless service providers
    systems we may lose sales to competitors.Our products operate with wireless carriers systems,
various wireless devices and, in the case of our E9-1-1
offering, with mobile telephone switches and VOIP service
provider systems. If we are unable to continue to design our
software to operate with these systems and devices, we may lose
sales to competitors. Mobile telephone switches and wireless
devices can be manufactured according to many different
standards and may have different variations within each
standard. Combining our products with each type of switch,
device or VOIP system requires a specialized interface and
extensive testing. If, as a result of technology enhancements or
upgrades to carrier and VOIP provider systems, our products can
no longer operate with such systems, we may no longer be able to
sell our products. Further, even if we successfully redesign our
products to operate with these systems, we may not gain market
acceptance before our competitors.

Because
our systems may be vulnerable to systems failures and security
risks, we may incur significant costs to protect against the
threat of these problems.

We provide for the delivery of information and content to and
from wireless devices in a prompt and timely manner. Any systems
failure that causes a disruption in our ability to facilitate
the transmission of information to these wireless devices could
result in delays in end users receiving this information and
cause us to lose customers. Our systems could experience such
failures as a result of unauthorized access by hackers, computer
viruses, hardware or software failures, power or
telecommunications failures and other accidental or intentional
actions which could disrupt our systems. We may incur
significant costs to prevent such systems disruptions.

In addition, increasingly our products will be used to create or
transmit secure information and data to and from wireless
devices. For example, our software can be used to create private
address lists and to provide the precise location of an
individual. To protect private information like this from
security breaches, we may incur significant costs. Further, if a
third party were able to misappropriate our proprietary
information or disrupt our operations, we could be subject to
claims, litigation or other potential liabilities that could
materially adversely impact our business.

The wireless data services provided by our Commercial
Applications segment are dependent on real-time, continuous
feeds from Reuters and others. The ability of our subscribers to
make securities trades, receive sales leads and receive critical
business information requires timely and uninterrupted
connections with our wireless network carriers. Any disruption
from our satellite feeds or backup landline feeds could result
in delays in our subscribers ability to receive
information or execute trades. We cannot be sure that our
systems will operate appropriately if we experience a hardware
or software failure, intentional disruptions of service by third
parties, an act of God or an act of war. A failure in our
systems could cause delays in transmitting data, and as a result
we may lose customers or face litigation that could involve
material costs and distract management from operating our
business.



If mobile equipment
    manufacturers do not overcome capacity, technology and equipment
    limitations, we may not be able to sell our products and
    services.The wireless technology currently in use by most wireless
carriers has limited bandwidth, which restricts network capacity
to deliver bandwidth-intensive applications like data services
to a large number of users. Because of capacity limitations,
wireless users may not be able to connect to their network when
they wish to, and the connection is likely to be slow,
especially when receiving data transmissions. Data services also
may be more expensive than users are willing to pay. To overcome
these obstacles, wireless equipment manufacturers will need to
develop new technology, standards, equipment and devices that
are capable of providing higher bandwidth services at lower
cost. We cannot be sure that manufacturers will be able to
develop technology and equipment that reliably delivers large
quantities of data at a reasonable price. If more

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capacity is not added, a sufficient market for our products and
services is not likely to develop or be sustained and sales of
our products and services would decline and our business would
suffer.



Because the market for
    most mobile content delivery and mobile location products is
    new, our future success is uncertain.The market for mobile content delivery and mobile location
products and services is new and its potential is uncertain. In
order to be successful, we need wireless network operators to
launch and maintain mobile location services utilizing our
products, and need corporate enterprises and individuals to
purchase and use our mobile content delivery and mobile location
products and services. We cannot be sure that wireless carriers
or enterprises will accept our products or that a sufficient
number of wireless users will ultimately utilize our products.



If wireless handsets pose
    health and safety risks, we may be subject to new regulations
    and demand for our products and services may
    decrease.Media reports have suggested that certain radio frequency
emissions from wireless handsets may be linked to various health
concerns, including cancer, and may interfere with various
electronic medical devices, including hearing aids and
pacemakers. Concerns over radio frequency emissions may have the
effect of discouraging the use of wireless handsets, which would
decrease demand for our services. In recent years, the FCC and
foreign regulatory agencies have updated the guidelines and
methods they use for evaluating radio frequency emissions from
radio equipment, including wireless handsets. In addition,
interest groups have requested that the FCC investigate claims
that wireless technologies pose health concerns and cause
interference with airbags, hearing aids and other medical
devices. There also are some safety risks associated with the
use of wireless handsets while driving. Concerns over these
safety risks and the effect of any legislation that may be
adopted in response to these risks could limit our ability to
market and sell our products and services.



If we are unable to
    protect our intellectual property rights or are sued by third
    parties for infringing upon intellectual property rights, we may
    incur substantial costs.Our success and competitive position depends in large part upon
our ability to develop and maintain the proprietary aspects of
our technology. We also rely on a combination of copyright,
trademark, service mark, trade secret laws, confidentiality
provisions and various other contractual provisions to protect
our proprietary rights, but these legal means provide only
limited protection. If we fail to protect our intellectual
property, we may be exposed to expensive litigation or risk
jeopardizing our competitive position. Similarly, third parties
could claim that our future products or services infringe upon
our intellectual property rights. Claims like these could
require us to enter into costly royalty arrangements or cause us
to lose the right to use critical technology.

Our ability to protect our intellectual property rights is also
subject to the terms of any future government contracts. We
cannot assure you that the federal government will not demand
greater intellectual property rights or restrict our ability to
disseminate intellectual property. We are also a member of the
Wireless Application Protocol Forum, Ltd. and have agreed to
license some 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.

Risks Related to Our Capital Structure and Common
Stock



A majority of our
    Class A common stock is beneficially owned by a small
    number of holders, and those holders could thereby transfer
    control of us to a third party without anyone elses
    approval or prevent a third party from acquiring
    us.We have two classes of common stock: Class A common stock
and Class B common stock. Holders of Class A common
stock generally have the same rights as holders of Class B
common stock, except that holders of Class A common stock
have one vote per share while holders of Class B common
stock have three

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votes per share. As of February 28, 2006, Maurice B.
Tosé, our President, Chief Executive Officer and Chairman
of the Board, beneficially owned 8,010,116 shares of our
Class B common stock and 1,104,461 shares of our
Class A common stock. Therefore, in the aggregate,
Mr. Tosé beneficially owned shares representing
approximately 48.24% of our total voting power, assuming no
conversion or exercise of issued and outstanding convertible or
exchangeable securities held by our other shareholders.
Accordingly, on this basis, Mr. Tosé controls us
through his ability to determine the outcome of elections of
directors, amend our charter and by-laws and take other actions
requiring stockholder action, including mergers, going private
transactions and other extraordinary transactions.
Mr. Tosé could, without seeking anyone elses
approval, transfer voting control of us to a third party. Such a
transfer could have a material adverse effect on our stock
price, and our business, operating results and financial
condition. Mr. Tosé is also able to prevent a change
of control regardless of whether holders of Class A common
stock might benefit financially from such a transaction.



Our governing corporate
    documents contain certain anti-takeover provisions that could
    prevent a change of control that may be favorable to
    shareholders.We are a Maryland corporation. Anti-takeover provisions of
Maryland law and provisions contained in our charter and by-laws
could make it more difficult for a third party to acquire
control of us, even if a change in control would be beneficial
to shareholders. These provisions include the following:




    authorization of the board of directors to issue blank
    check preferred stock;
    prohibition of cumulative voting in the election of directors;
    our classified board of directors;
    limitation of the persons who may call special meetings of
    stockholders; and
    prohibition on stockholders acting without a meeting other than
    through unanimous written consent;
    supermajority voting requirement on various charter and by-law
    provisions;
    establishment of advance notice requirements for nominations for
    election to the board of directors or for proposing matters that
    can be acted on by stockholders at stockholder meetings.These provisions could delay, deter or prevent a potential
acquirer from attempting to obtain control of us, depriving you
of an opportunity to receive a premium for your Class A
common stock. These provisions could therefore materially
adversely affect the market price of our Class A common
stock.



Because this report
    contains forward-looking statements, it may not prove to be
    accurate.This report, including the documents we incorporate by
reference, contains forward-looking statements and information
relating to our company. These statements are based upon
TCS current expectations and assumptions that are subject
to a number of risks and uncertainties that would cause actual
results to differ materially from those anticipated. We
generally identify forward-looking statements using words like
believe, intend, expect,
may, should, plan,
project, contemplate,
anticipate, or other similar statements. We base
these statements on our beliefs as well as assumptions we made
using information currently available to us. We do not undertake
to update our forward-looking statements or risk factors to
reflect future events or circumstances.

Statements in this report that are forward-looking include, but
are not limited to, the following: (a) 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.; (b) the
statement concerning our intent to expand our domestic and
international carrier base by capitalizing on our relationships
with original equipment manufacturers; (c) the statement
concerning our intent to expand our integrated package of
products and services for wireless carriers and enterprises;
(d) the statements regarding our belief as to the
sufficiency of our capital resources to meet our anticipated
working capital and capital expenditures for the next twelve
months; (e) the statement that we

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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 (f) the statement
concerning our expectations with regard to research and
development expenses.







Item 1B.
    Unresolved Staff CommentsNone.







Item 2.
    PropertiesOur principal executive office is located in Annapolis, Maryland
in a 27,000 square foot facility under a lease expiring in
March 2008. We have a second 26,000 square foot facility in
Annapolis, Maryland under a lease expiring in April 2011. The
Annapolis facilities are utilized for the executive and
administrative offices, as well as portions of our Commercial
Applications and Government segments. Other leased facilities
include a 33,000 square foot facility in Owings Mills,
Maryland under a lease expiring March 2008, a 46,000 square
foot facility in Seattle, Washington under a lease expiring in
September 2010, an 11,000 square foot facility in Oakland,
California under a lease expiring May 2007, and a
10,000 square foot facility in Tampa, Florida under a lease
expiring in December 2009. We also lease a hosting facility in
Phoenix, Arizona in a 1,500 square foot office under a
lease that expires in February 2008, which is utilized by our
Commercial Applications segment. Our international locations
lease a total of approximately 7,000 square feet of office
space in London, Madrid, Amsterdam, and Stockholm. The leases
for these facilities have varying expirations, but the
agreements are generally short-term and renewable at our option.

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







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

Research in Motion Limited (RIM), which supplies our
Enterprise operations with hardware and wireless services that
it in turn packages with other services and resells, recently
settled legal proceedings with NTP Inc., which alleged that
certain RIM products infringed on patents held by NTP Inc. There
can be no assurances that there will not be further litigation
concerning these patents. This creates uncertainty regarding
RIMs ability to continue to supply our Enterprise
customers with services. RIMs inability to supply services
to our Enterprise customers could cause a loss of revenue and
increase our net losses.

23



---



##### Table of Contents

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







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





Part II







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

|                                                   |  |      |      |  |     |   |      | 
|-------------------------------------------------- |  | ---- | ---- |  | --- | - | ---- | 
|                                                   |  | High |      |  | Low |  
|                                                   |  |      |      |  |     |  
|2006                                               |  |      |      |  |     |   |      | 
|First Quarter 2006 (through
    February 13, 2006) |  | $    | 2.28 |  |     | $ | 2.01 | 
|2005                                               |  |      |      |  |     |   |      | 
|First Quarter 2005                                 |  | $    | 3.22 |  |     | $ | 2.12 | 
|Second Quarter 2005                                |  | $    | 2.65 |  |     | $ | 2.17 | 
|Third Quarter 2005                                 |  | $    | 3.01 |  |     | $ | 2.27 | 
|Fourth Quarter 2005                                |  | $    | 2.84 |  |     | $ | 2.12 | 
|2004                                               |  |      |      |  |     |   |      | 
|First Quarter 2004                                 |  | $    | 8.39 |  |     | $ | 4.80 | 
|Second Quarter 2004                                |  | $    | 8.30 |  |     | $ | 4.20 | 
|Third Quarter 2004                                 |  | $    | 6.11 |  |     | $ | 3.18 | 
|Fourth Quarter 2004                                |  | $    | 3.85 |  |     | $ | 2.75 | 



Dividend Policy




Change in Securities and Use of Proceeds




24



---



##### Table of Contents

strike price of $6.50 expiring in January 2007. The Debenture
provided for an original conversion price of $5.38 per
share, subject to adjustment.

On August 30, 2004 we entered a Securities Purchase
Agreement (the August 2004 Securities Purchase
Agreement) with the same third-party investors who
purchased our securities used to finance the Enterprise
Acquisition. Pursuant to the August 2004 Securities Purchase
Agreement, we raised $10 million in cash through the sale
of 2,500,000 shares of our Class A Common Stock. We
used the majority of the proceeds from this offering to fund the
acquisition of Kivera, Inc. on September 20, 2004 as
described in Note 3 to our Consolidated Financial
Statements and for a $1 million cash fee paid in connection
with a Waiver Agreement signed on the same day.

The Waiver Agreement (the Waiver) with the holder of
the Debenture modified certain provisions of the Debenture as
follows: (1) the holder of the Debenture was required to
convert the entire $15 million principal amount into shares
of our Class A Common Stock by the end of 2004,
(2) all of the material restrictive covenants contained in
the Debenture were nullified and (3) the conversion price
set forth in the Debenture was decreased from $5.3753 to
$5.01581 as an inducement to enter into the Waiver (an
adjustment such that conversion of the Debenture yielded an
additional 200,000 shares of Class A Common Stock.) As
additional consideration for the holder of the Debenture
agreeing to the Waiver, we paid the holder of the Debenture a
$1 million one-time fee in cash. The $1 million fee,
the fair value of the additional shares of Class A Common
Stock issued as an inducement, the remaining debt discount, and
the unamortized deferred financing fees were recognized ratably
to debt conversion expense as the Debenture was converted
through the end of 2004. As of December 31, 2004, the
$15 million principal amount of the Debenture had been
converted into 2,990,015 shares of our Class A Common
Stock.

On March 10, 2006, pursuant to a note purchase agreement
dated the same date, we issued and sold to two institutional
lenders (i) $10 million in aggregate principal amount of
secured notes due March 10, 2009, which bear cash interest
at the rate of 14% per annum, or non-cash interest, in the form
of additional notes, at the rate of 16% per annum, at our
option, and (ii) warrants to purchase an aggregate of
1.75 million shares of our Class A Common Stock at an
exercise price of $2.40 per share. We received net cash proceeds
of approximately $9.3 million from this transaction, which
are intended to be used for general corporate purposes.

The warrants issued in the January 2004 financing described
above contain provisions requiring an adjustment in both the
warrant price and the number of warrants outstanding as a
consequence of the issuance of the new warrants in March 2006.
Consequently, the warrants from 2004 have been adjusted to a
purchase price of $2.50 per share and the total number of
January 2004 warrants now outstanding has been adjusted to
886,787.

The consummation of the note purchase agreement and the issuance
of notes and warrants thereunder were conducted as a private
placement made to accredited investors in a transaction exempt
from the registration requirements of the Securities Act of 1933.

With the exception of the notes and warrants issued in March
2006, all of the other securities issued by us in connection
with these transactions have been registered under the
Securities Act of 1933, as amended.

Issuer Purchases of Equity Securities

None.

25



---



##### Table of Contents

Item 6.
    Selected Financial DataThe table that follows presents portions of our consolidated
financial statements. You should read the following selected
financial data together with our Consolidated Financial
Statements and related notes and with Managements
Discussion and Analysis of Financial Condition and Results of
Operations and the more complete financial information
included elsewhere in this
Form 10-K. We have
derived the statement of operations data for the years ended
December 31, 2005, 2004 and 2003 and the balance sheet data
as of December 31, 2005 and 2004 from our consolidated
financial statements which have been audited by Ernst &
Young LLP, independent registered public accounting firm, and
which are included beginning on page F-1. We have derived the
statement of operations data for the years ended
December 31, 2002 and 2001 and the balance sheet data as of
December 31, 2003, 2002 and 2001, from our audited
financial statements which are not included in this
Form 10-K. As
described in Note 1 to our Consolidated Financial
Statements, in connection with the reclassification of the
Enterprise division as discontinued operations, we have
reclassified prior periods for comparability purposes.
Additionally, in connection with the realignment of our segments
in 2004, we reclassified prior period revenues, direct cost of
revenues, and gross profit for comparability with the three
revenue categories we currently use to manage our business. The
historical results presented below are not necessarily
indicative of the results to be expected for any future fiscal
year. See Managements Discussion and Analysis of
Financial Condition and Results of Operations.

|                                                                   |                                                                |                                      |        |      |       |   |        |      |      |   |        |      |      |      |        |      |      |   |        |      |       | 
|------------------------------------------------------------------ | -------------------------------------------------------------- | ------------------------------------ | ------ | ---- | ----- | - | ------ | ---- | ---- | - | ------ | ---- | ---- | ---- | ------ | ---- | ---- | - | ------ | ---- | ----- | 
|                                                                   |                                                                | Year Ended December 31,              |       
|                                                                   |                                                                |                                      |       
|                                                                   |                                                                | 2005                                 |        |      | 2004  |   |        | 2003 |      |   | 2002   |      |      | 2001 |       
|                                                                   |                                                                |                                      |        |      |       |   |        |      |      |   |        |      |      |      |       
|                                                                   |                                                                | (in millions, except per share data) |       
|Statement of Operations
    Data:                                  |                                                                |                                      |        |      |       |   |        |      |      |   |        |      |      |      |        |      |      |   |        |     
|Revenue                                                            |                                                                |                                      |        |      |       |   |        |      |      |   |        |      |      |      |        |      |      |   |        |     
|                                                                   | Hosted, subscriber, and maintenance                            |                                      | $      | 52.9 |       |   | $      | 44.2 |      |   | $      | 37.7 |      |      | $      | 26.9 |      |   | $      | 18.7 |      
|                                                                   | Services                                                       |                                      |        | 22.1 |       |   |        | 16.0 |      |   |        | 13.9 |      |      |        | 8.8  |      |   |        | 11.8 |      
|                                                                   | Systems                                                        |                                      |        | 27.2 |       |   |        | 36.7 |      |   |        | 40.5 |      |      |        | 56.3 |      |   |        | 39.1 |      
|                                                                   |                                                                |                                      |        |      |       |   |        |      |      |   |        |      |      |      |       
|                                                                   |                                                                | Total revenue                        |        |      | 102.2 |   |        |      | 96.9 |   |        |      | 92.1 |      |        |      | 92.0 |   |        |      | 69.6  | 
|                                                                   |                                                                |                                      |        |      |       |   |        |      |      |   |        |      |      |      |       
|Operating costs and expenses:                                      |                                                                |                                      |        |      |       |   |        |      |      |   |        |      |      |      |        |      |      |   |        |     
|                                                                   | Direct cost of hosted, subscriber,
    and maintenance revenue |                                      |        | 25.2 |       |   |        | 21.2 |      |   |        | 18.1 |      |      |        | 15.7 |      |   |        | 9.5  |      
|                                                                   | Direct cost of services revenue                                |                                      |        | 14.0 |       |   |        | 9.7  |      |   |        | 9.8  |      |      |        | 5.7  |      |   |        | 8.9  |      
|                                                                   | Direct cost of systems revenue                                 |                                      |        | 17.7 |       |   |        | 21.2 |      |   |        | 32.3 |      |      |        | 40.3 |      |   |        | 26.7 |      
|                                                                   |                                                                |                                      |        |      |       |   |        |      |      |   |        |      |      |      |       
|                                                                   |                                                                | Total direct cost of revenue         |        |      | 56.9  |   |        |      | 52.1 |   |        |      | 60.2 |      |        |      | 61.7 |   |        |      | 45.1  | 
|                                                                   |                                                                |                                      |        |      |       |   |        |      |      |   |        |      |      |      |       
|                                                                   | Hosted, subscriber, and maintenance
    gross profit           |                                      |        | 27.6 |       |   |        | 23.0 |      |   |        | 19.5 |      |      |        | 11.2 |      |   |        | 9.2  |      
|                                                                   | Services gross profit                                          |                                      |        | 8.1  |       |   |        | 6.3  |      |   |        | 4.1  |      |      |        | 3.1  |      |   |        | 2.9  |      
|                                                                   | Systems gross profit                                           |                                      |        | 9.5  |       |   |        | 15.5 |      |   |        | 8.2  |      |      |        | 16.0 |      |   |        | 12.4 |      
|                                                                   |                                                                |                                      |        |      |       |   |        |      |      |   |        |      |      |      |       
|                                                                   |                                                                | Total gross profit                   |        |      | 45.2  |   |        |      | 44.8 |   |        |      | 31.8 |      |        |      | 30.3 |   |        |      | 24.5  | 
|                                                                   |                                                                |                                      |        |      |       |   |        |      |      |   |        |      |      |      |       
|                                                                   | Research and development expense                               |                                      |        | 13.9 |       |   |        | 18.0 |      |   |        | 16.9 |      |      |        | 17.0 |      |   |        | 18.1 |      
|                                                                   | Sales and marketing expense                                    |                                      |        | 10.5 |       |   |        | 8.9  |      |   |        | 8.9  |      |      |        | 10.0 |      |   |        | 13.8 |      
|                                                                   | General and administrative expense                             |                                      |        | 14.4 |       |   |        | 14.1 |      |   |        | 11.3 |      |      |        | 12.2 |      |   |        | 14.3 |      
|                                                                   | Depreciation and amortization of
    property and equipment    |                                      |        | 8.6  |       |   |        | 7.4  |      |   |        | 6.6  |      |      |        | 6.2  |      |   |        | 4.6  |      
|                                                                   | Non-cash stock compensation expense                            |                                      |        | 0.7  |       |   |        | 1.2  |      |   |        | 1.5  |      |      |        | 1.6  |      |   |        | 2.6  |      
|                                                                   | Amortization of goodwill and other
    intangible assets       |                                      |        | 0.1  |       |   |        |     |      |   |        | 0.5  |      |      |        | 0.6  |      |   |        | 9.2  |      
|                                                                   | Acquired in-process research and
    development               |                                      |        |     |       |   |        |     |      |   |        |     |      |      |        |     |      |   |        | 9.7  |      
|                                                                   | Impairment of goodwill and other
    intangible assets         |                                      |        |     |       |   |        |     |      |   |        |     |      |      |        |     |      |   |        | 43.0 |      
|                                                                   |                                                                |                                      |        |      |       |   |        |      |      |   |        |      |      |      |       
|                                                                   |                                                                | Total operating costs and expenses   |        |      | 48.2  |   |        |      | 49.6 |   |        |      | 45.7 |      |        |      | 47.6 |   |        |      | 115.3 | 
|                                                                   |                                                                |                                      |        |      |       |   |        |      |      |   |        |      |      |      |       
|Loss from operations                                               |                                                                |                                      | (3.0   | )    |       |   | (4.8   | )    |      |   | (13.9  | )    |      |      | (17.3  | )    |      |   | (90.8  | )   
|Interest expense                                                   |                                                                |                                      | (1.2   | )    |       |   | (3.2   | )    |      |   | (1.1   | )    |      |      | (0.9   | )    |      |   | (0.7   | )   
|Debt conversion expense                                            |                                                                |                                      |       |      |       |   | (7.9   | )    |      |   |       |      |      |      |       |      |      |   |       |     
|Other (expense)/income, net                                        |                                                                |                                      | (0.1   | )    |       |   |       |      |      |   | 1.5    |      |      |      | 0.4    |      |      |   | 2.0    |     
|                                                                   |                                                                |                                      |        |      |       |   |        |      |      |   |        |      |      |      |       
|Loss from continuing operations                                    |                                                                |                                      | (4.3   | )    |       |   | (15.9  | )    |      |   | (13.5  | )    |      |      | (17.8  | )    |      |   | (89.5  | )   
|Loss from discontinued operations                                  |                                                                |                                      | (7.2   | )    |       |   | (2.6   | )    |      |   |       |      |      |      |       |      |      |   |       |     
|                                                                   |                                                                |                                      |        |      |       |   |        |      |      |   |        |      |      |      |       
|Net loss                                                           |                                                                | $                                    | (11.5  | )    |       | $ | (18.5  | )    |      | $ | (13.5  | )    |      | $    | (17.8  | )    |      | $ | (89.5  | )   
|                                                                   |                                                                |                                      |        |      |       |   |        |      |      |   |        |      |      |      |       
|Loss from continuing operations per
    share, basic and diluted   |                                                                | $                                    | (0.11  | )    |       | $ | (0.48  | )    |      | $ | (0.45  | )    |      | $    | (0.61  | )    |      | $ | (3.16  | )   
|Loss from discontinued operations
    per share, basic and diluted |                                                                | $                                    | (0.19  | )    |       | $ | (0.08  | )    |      | $ |       |      |      | $    |       |      |      | $ |       |     
|                                                                   |                                                                |                                      |        |      |       |   |        |      |      |   |        |      |      |      |       
|Net loss per share, basic and
    diluted                          |                                                                | $                                    | (0.30  | )    |       | $ | (0.56  | )    |      | $ | (0.45  | )    |      | $    | (0.61  | )    |      | $ | (3.16  | )   
|                                                                   |                                                                |                                      |        |      |       |   |        |      |      |   |        |      |      |      |       
|Basic and diluted shares used in
    computation                   |                                                                |                                      | 38,823 |      |       |   | 33,381 |      |      |   | 29,796 |      |      |      | 29,149 |      |      |   | 28,297 |     
|                                                                   |                                                                |                                      |        |      |       |   |        |      |      |   |        |      |      |      |       

26



---



##### Table of Contents



|                                                                  |  |                    |      |      |  |      |       |      |  |      |      |  |  |   |      |  |  |   |      | 
|----------------------------------------------------------------- |  | ------------------ | ---- | ---- |  | ---- | ----- | ---- |  | ---- | ---- |  |  | - | ---- |  |  | - | ---- | 
|                                                                  |  | As of December 31,
|                                                                  |  |                   
|                                                                  |  | 2005               |      | 2004 |  | 2003 |       | 2002 |  | 2001
|                                                                  |  |                    |      |      |  |      |       |      |  |     
|                                                                  |  | (in millions)     
|Balance Sheet Data:                                               |  |                    |      |      |  |      |       |      |  |      |      |  |  |   |      |  |  |   |      | 
|Cash and cash equivalents                                         |  | $                  | 9.3  |      |  | $    | 18.3  |      |  | $    | 18.9 |  |  | $ | 27.4 |  |  | $ | 42.9 | 
|Working capital                                                   |  |                    | 27.5 |      |  |      | 20.2  |      |  |      | 28.5 |  |  |   | 31.7 |  |  |   | 46.1 | 
|Total assets                                                      |  |                    | 90.6 |      |  |      | 102.4 |      |  |      | 65.3 |  |  |   | 81.4 |  |  |   | 89.6 | 
|Capital leases and long-term debt
    (including current portion) |  |                    | 16.5 |      |  |      | 18.4  |      |  |      | 14.6 |  |  |   | 10.3 |  |  |   | 4.8  | 
|Total liabilities                                                 |  |                    | 41.5 |      |  |      | 42.9  |      |  |      | 28.4 |  |  |   | 33.8 |  |  |   | 26.7 | 
|Total stockholders equity                                        |  |                    | 49.1 |      |  |      | 59.5  |      |  |      | 36.9 |  |  |   | 47.6 |  |  |   | 62.9 | 






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

Critical Accounting Policies and Estimates


percentage-of


percentage-of


Overview and Recent Developments


E9-1-1


Managements Discussion and
Analysis of Financial Condition and Results of Operations


27



---



##### Table of Contents

The operations of the Enterprise division were previously
included in our Commercial Applications segment. The Enterprise
assets provide wireless data solutions, uniting messaging,
synchronization and web technologies. These solutions include
package and vehicle tracking, productivity tools, and the
ability to capture digital signatures for proof of delivery to a
growing installed base of logistics customers. The Enterprise
division is a leading reseller of BlackBerry devices and provide
real-time financial market data to wireless device users under
annual subscriber contracts in the U.S. and Europe.

On March 10, 2006, pursuant to a note purchase agreement
dated the same date, we issued and sold to two institutional
lenders (i) $10 million in aggregate principal amount of
secured notes due March 10, 2009, which bears cash interest
at the rate of 14% per annum, or non-cash interest at the rate
of 16% per annum, at our option, and (ii) warrants to
purchase an aggregate of 1.75 million shares of our
Class A Common Stock at an exercise price of $2.40 per
share. We received net cash proceeds of approximately
$9.3 million from this transaction, which are intended to
be used for general corporate purposes.

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

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




    Revenue. We derive revenue from products and services
    including recurring monthly service and subscriber fees,
    software licenses and related service fees for the design,
    development, and deployment of software and communication
    systems, and products and services derived from the delivery of
    information processing and communication systems to governmental
    agencies.
    Cost of revenue. The major items comprising our cost of
    revenue are compensation and benefits, third-party hardware and
    software, amortization of software development costs, and
    overhead expenses. The costs of hardware and third-party
    software are primarily associated with the delivery of systems,
    and fluctuate from period to period as a result of the relative
    volume, mix of projects, level of service support required and
    the complexity of customized products and services delivered.
    Amortization of software development costs, including acquired
    technology, is associated with the recognition of hosted and
    subscriber revenue and systems from our Commercial Applications
    segment.
    Operating expenses. Our operating expenses are primarily
    compensation and benefits, professional fees, facility costs,
    marketing and sales-related expenses, and travel costs as well
    as certain non-cash expenses such as non-cash stock compensation
    expense, depreciation and amortization of property and
    equipment, and amortization of acquired intangible assets.
    Liquidity and cash flows. The primary driver of our cash
    flows is the results of our operations including discontinued
    operations. Important sources of our liquidity have been cash
    raised from our 2004 financings in connection with our 2004
    acquisitions and our 2006 debt financing, all as described below
    under Liquidity and Capital Resources, and
    borrowings under our bank credit agreement and lease financings
    secured for the purchase of equipment.
    Balance sheet. We view cash, working capital, and
    accounts receivable balances and days revenues outstanding as
    important indicators of our financial health.28



---



##### Table of Contents

Results of Operations

Revenue and Cost of Revenue

The following discussion addresses the revenue and cost of
revenue for the two segments of our business. For information
regarding the results of the Enterprise assets, seeDiscontinued OperationsEnterprise assets below.

Commercial
Applications Segment:

|                                                       |                                                   |      |      |      |      |          |      |      |   |   |          |     |  |      |     |    |   |   |       |      |   |   |      |      |   |  |     |     |   
|------------------------------------------------------ | ------------------------------------------------- | ---- | ---- | ---- | ---- | -------- | ---- | ---- | - | - | -------- | --- |  | ---- | --- | -- | - | - | ----- | ---- | - | - | ---- | ---- | - |  | --- | --- | --
|                                                       |                                                   |      |      |      |      | 2005 vs. |      |      |   |   | 2004 vs. |    
|                                                       |                                                   |      |      |      |      | 2004     |      |      |   |   | 2003     |    
|                                                       |                                                   |      |      |      |      |          |      |      |   |   |          |    
|($ in millions)                                        |                                                   | 2005 |      |      | 2004 |          |      | $    |   |   | %        |     |  | 2003 |     |    | $ |   |       | %    |  
|                                                       |                                                   |      |      |      |      |          |      |      |   |   |          |     |  |      |     |    |   |   |       |      |  
|Hosted, subscriber, and maintenance
    revenue        |                                                   | $    | 52.5 |      |      | $        | 44.3 |      |   | $ | 8.2      |     |  |      | 19  | %  |   | $ | 37.7  |      |   | $ | 6.6  |      |   |  | 18  | %  
|Services revenue                                       |                                                   |      | 1.7  |      |      |          | 0.4  |      |   |   | 1.4      |     |  |      | NM  |    |   |   |      |      |   |   | 0.4  |      |   |  | NM  |    
|Systems revenue                                        |                                                   |      | 11.7 |      |      |          | 13.1 |      |   |   | (1.4     | )   |  |      | (11 | %) |   |   | 11.1  |      |   |   | 1.9  |      |   |  | 18  | %  
|                                                       |                                                   |      |      |      |      |          |      |      |   |   |          |     |  |      |     |    |   |   |       |      |  
|                                                       | Total Commercial Applications
    revenue         |      |      | 65.9 |      |          |      | 57.7 |   |   |          | 8.2 |  |      |     | 14 | % |   |       | 48.8 |   |   |      | 8.9  |   |  |     | 18  | % 
|                                                       |                                                   |      |      |      |      |          |      |      |   |   |          |     |  |      |     |    |   |   |       |      |  
|Direct cost of hosted, subscriber,
    and maintenance |                                                   |      | 25.1 |      |      |          | 21.3 |      |   |   | 3.8      |     |  |      | 18  | %  |   |   | 18.1  |      |   |   | 3.2  |      |   |  | 18  | %  
|Direct cost of services                                |                                                   |      | 0.8  |      |      |          | 0.2  |      |   |   | 0.6      |     |  |      | NM  |    |   |   |      |      |   |   | 0.2  |      |   |  | NM  |    
|Direct cost of systems                                 |                                                   |      | 5.7  |      |      |          | 5.8  |      |   |   | (0.1     | )   |  |      | (2  | %) |   |   | 13.6  |      |   |   | (7.8 | )    |   |  | (57 | %) 
|                                                       |                                                   |      |      |      |      |          |      |      |   |   |          |     |  |      |     |    |   |   |       |      |  
|                                                       | Total Commercial Applications cost
    of revenue |      |      | 31.6 |      |          |      | 27.3 |   |   |          | 4.3 |  |      |     | 16 | % |   |       | 31.7 |   |   |      | (4.4 | ) |  |     | (14 | %)
|                                                       |                                                   |      |      |      |      |          |      |      |   |   |          |     |  |      |     |    |   |   |       |      |  
|Hosted, subscriber, and maintenance
    gross profit   |                                                   |      | 27.4 |      |      |          | 23.0 |      |   |   | 4.4      |     |  |      | 19  | %  |   |   | 19.6  |      |   |   | 3.4  |      |   |  | 17  | %  
|Services gross profit                                  |                                                   |      | 0.9  |      |      |          | 0.2  |      |   |   | 0.8      |     |  |      | NM  |    |   |   |      |      |   |   | 0.2  |      |   |  | NM  |    
|Systems gross profit                                   |                                                   |      | 6.0  |      |      |          | 7.2  |      |   |   | (1.3     | )   |  |      | (18 | %) |   |   | (2.5) |      |   |   | 9.7  |      |   |  | NM  |    
|                                                       |                                                   |      |      |      |      |          |      |      |   |   |          |     |  |      |     |    |   |   |       |      |  
|                                                       | Total Commercial Applications gross
    profit*   |      | $    | 34.3 |      |          | $    | 30.4 |   |   | $        | 3.9 |  |      |     | 13 | % |   | $     | 17.0 |   |   | $    | 13.3 |   |  |     | 78  | % 
|                                                       |                                                   |      |      |      |      |          |      |      |   |   |          |     |  |      |     |    |   |   |       |      |  
|                                                       | Segment gross profit as a percent
    of revenue  |      |      | 52   | %    |          |      | 53   | % |   |          |     |  |      |     |    |   |   |       | 35   | % |   |      |      |   |  |     |     |   




|  |                                                                                                                                                                                              
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | See discussion of segment reporting in Note 21 to the
    audited Consolidated Financial Statements presented elsewhere in
    this Annual Report on
    Form 10-K.
    (NM = Not meaningful)

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


E9-1-1, E9-1-1 E9-1-1, E9-1-1 E9-1-1


29



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##### Table of Contents

Subscriber revenue is generated by the Kivera assets we acquired
in September 2004, which provides wireless subscribers client
software applications such as Rand McNally(]) Traffic. The year
over year increase in subscriber revenue was mainly the result
of the inclusion of a full years revenue in 2005 compared
to a partial year in 2004.

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

Overall, hosted, subscriber and maintenance revenue increased
19% in 2005.

The direct cost of our hosted, subscriber, and maintenance
revenue consists primarily of network access, data feed and
circuit costs, compensation and benefits, equipment and software
maintenance. For the year ended December 31, 2005, the
direct cost of hosted, subscriber and maintenance revenue
increased 18% for the following reasons. In 2005, we increased
headcount and incurred costs related to custom development
efforts responding to customer requests. Additionally, we
increased costs for temporary contract staff to meet customer
deployment requirements for VoIP. While we increased the number
of cell sites, subscribers and PSAPs served, our circuit and
data access costs were relatively consistent year to year. In
2004, our facilities costs increased, related to renovations and
enhancements to our principal network operations center. For the
year ended December 31, 2005, the cost of circuit and other
data access costs accounted for approximately 13% of total
direct costs of hosted, subscriber, and maintenance revenues.
The cost of circuit and other data access costs accounted for
approximately 16% of the total direct costs of our commercial
hosted, subscriber, and maintenance revenues for each of the
years ended December 31, 2004 and 2003. The direct costs of
maintenance revenue consists primarily of compensation and
benefits.

The gross profit in hosted, subscriber, and maintenance revenue
remained relatively constant as a percentage of revenue from 53%
in 2004 to 52% in 2005.

Commercial Applications Services Revenue and Cost of
Revenue1

Services revenue does not represent a significant proportion of
the revenue of our Commercial Applications Segment. However,
Commercial Applications services revenue increased to
$1.7 million in 2005 from $0.4 million in 2004,
because the unit generating it was owned for only a partial year
in 2004.

Commercial Systems Revenue and Cost of Revenue

We sell communications systems for enhanced services to wireless
carriers. These systems are designed to incorporate our licensed
software. We design our software to ensure that it is compliant
with all applicable standards, notably including the GSM/ UMTS
standards for location-based wireless services that were
established in 2005 and, as such, we believe our software is
positioned for early adoption by carriers.

Licensing fees for our carrier software are generally a function
of its usage in our customers network. As a carriers
subscriber base or usage increases, the carrier must purchase
additional capacity under its license agreement and we receive
additional revenue. Systems revenues typically contain multiple
elements, which may include the product license, installation,
integration, and hardware. The total arrangement fee is
allocated among each element based on vendor-specific objective
evidence of the relative fair value of each of the elements.
Fair value is generally determined based on the price charged
when the element is sold separately. In the absence of evidence
of fair value of a delivered element, revenue is allocated first
to the undelivered elements based on fair value and the residual
revenue to the delivered elements. The software licenses are
generally perpetual licenses for a specified number of users
that allow for the purchase of annual maintenance at a specified
rate. We recognize license fee revenue when each of the
following has occurred: (1) evidence of an arrangement is
in place; (2) we have delivered the software; (3) the
fee is fixed or determinable; and (4) collection of the fee
is probable. Software projects that require significant
customization are accounted for under the
percentage-of-completion
method. We measure progress to completion using costs incurred
compared to estimated total costs or labor hours incurred
compared to estimated total labor

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##### Table of Contents

hours for contracts that have a significant component of
third-party materials costs. We recognize estimated losses under
long-term contracts in their entirety upon discovery. If we did
not accurately estimate total costs to complete a contract or do
not manage our contracts within the planned budget, then future
margins may be negatively affected or losses on existing
contracts may need to be recognized. Software license fees
billed and not recognized as revenue are included in deferred
revenue.

Systems revenue decreased 11% for the year ended
December 31, 2005, largely as a result of a decrease in
licensing fees. The decrease in licensing fees was primarily due
to a large purchase of increased license capacity by a major
carrier during the second quarter of 2004, followed by a large
but smaller license capacity purchase in the first quarter of
2005. In 2004, revenue from Commercial Applications systems
sales increased compared to 2003 primarily due to the large
purchase of increased license capacity by a major carrier during
the second quarter of 2004.

The direct cost of our systems consists primarily of
compensation, benefits, purchased equipment, third-party
software, travel expenses, and consulting fees as well as the
amortization of both acquired and capitalized software
development costs for all reported periods. In 2005, direct
costs of systems consisted primarily of compensation, benefits,
third-party hardware and software, and $0.8 million of
amortization of software development costs. In 2004, such costs
consisted primarily of compensation, benefits, third-party
hardware and software, and $0.4 million of amortization of
software development costs. In 2003, such costs primarily
included compensation, benefits, travel and consulting fees plus
$8.9 million of amortization of software development costs,
which included the accelerated amortization recorded during the
year.

Our commercial systems gross profit was $6.0 million in
2005 versus $7.2 million in 2004 and a loss of
$2.5 million in 2003. A larger proportion of high margin
license sales in 2004 and the inclusion of a lower margin
hardware sale in 2005 resulted in lower margins as a percentage
of revenue for 2005. Systems gross margins are higher in periods
when systems revenue includes a higher proportion of software
licenses relative to third party system components and
integration labor. System gross profits for 2003 was negatively
affected by the significant cost of acceleration of amortization
in the year.

We ascribe the lower revenue and related gross profit in 2005
primarily to later than expected implementation of
location-based service technology by wireless carriers.

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##### Table of Contents

Government
Segment:

|                                                       |                                  |                                                  |      |      |      |               |      |      |    |   |               |      |   |      |     |     |    |   |      |      |    |   |      |      |   |  |     |     |    | 
|------------------------------------------------------ | -------------------------------- | ------------------------------------------------ | ---- | ---- | ---- | ------------- | ---- | ---- | -- | - | ------------- | ---- | - | ---- | --- | --- | -- | - | ---- | ---- | -- | - | ---- | ---- | - |  | --- | --- | -- | 
|                                                       |                                  |                                                  |      |      |      | 2005 vs. 2004 |      |      |    |   | 2004 vs. 2003 |     
|                                                       |                                  |                                                  |      |      |      |               |      |      |    |   |               |     
|($ in millions)                                        |                                  | 2005                                             |      |      | 2004 |               |      | $    |    |   | %             |      |   | 2003 |     |     | $  |   |      | %    |   
|                                                       |                                  |                                                  |      |      |      |               |      |      |    |   |               |      |   |      |     |     |    |   |      |      |   
|Hosted, subscriber, and maintenance
    revenue        |                                  | $                                                | 0.4  |      |      | $             |     |      |    | $ | 0.4           |      |   |      | NM  |     |    | $ |     |      |    | $ |     |      |   |  | NM  |    
|Services revenue                                       |                                  |                                                  | 20.4 |      |      |               | 15.6 |      |    |   | 4.8           |      |   |      | 30  | %   |    |   | 13.9 |      |    |   | 1.7  |      |   |  | 12  | %  
|Systems revenue                                        |                                  |                                                  | 15.5 |      |      |               | 23.6 |      |    |   | (8.1          | )    |   |      | (34 | %)  |    |   | 29.4 |      |    |   | (5.8 | )    |   |  | (20 | %) 
|                                                       |                                  |                                                  |      |      |      |               |      |      |    |   |               |      |   |      |     |     |    |   |      |      |   
|                                                       | Total Government revenue         |                                                  |      | 36.3 |      |               |      | 39.2 |    |   |               | (2.9 | ) |      |     | (8  | %) |   |      | 43.3 |    |   |      | (4.1 | ) |  |     | (9  | %)
|                                                       |                                  |                                                  |      |      |      |               |      |      |    |   |               |      |   |      |     |     |    |   |      |      |   
|Direct cost of hosted, subscriber,
    and maintenance |                                  |                                                  | 0.2  |      |      |               |     |      |    |   | 0.2           |      |   |      | NM  |     |    |   |     |      |    |   |     |      |   |  | NM  |    
|Direct cost of services                                |                                  |                                                  | 13.2 |      |      |               | 9.5  |      |    |   | 3.7           |      |   |      | 39  | %   |    |   | 9.8  |      |    |   | (0.3 | )    |   |  | (4  | %) 
|Direct cost of systems                                 |                                  |                                                  | 12.0 |      |      |               | 15.4 |      |    |   | (3.4          | )    |   |      | (22 | %)  |    |   | 18.7 |      |    |   | (3.3 | )    |   |  | (18 | %) 
|                                                       |                                  |                                                  |      |      |      |               |      |      |    |   |               |      |   |      |     |     |    |   |      |      |   
|                                                       | Total Government cost of revenue |                                                  |      | 25.4 |      |               |      | 24.9 |    |   |               | 0.5  |   |      |     | 2   | %  |   |      | 28.5 |    |   |      | (3.6 | ) |  |     | (13 | %)
|                                                       |                                  |                                                  |      |      |      |               |      |      |    |   |               |      |   |      |     |     |    |   |      |      |   
|Hosted, subscriber, and maintenance
    gross profit   |                                  |                                                  | 0.2  |      |      |               |     |      |    |   | 0.2           |      |   |      | NM  |     |    |   |     |      |    |   |     |      |   |  | NM  |    
|Services gross profit                                  |                                  |                                                  | 7.2  |      |      |               | 6.1  |      |    |   | 1.1           |      |   |      | 17  | %   |    |   | 4.1  |      |    |   | 2.0  |      |   |  | 50  | %  
|Systems gross profit                                   |                                  |                                                  | 3.5  |      |      |               | 8.2  |      |    |   | (4.7          | )    |   |      | (57 | %)  |    |   | 10.7 |      |    |   | (2.5 | )    |   |  | (23 | %) 
|                                                       |                                  |                                                  |      |      |      |               |      |      |    |   |               |      |   |      |     |     |    |   |      |      |   
|                                                       | Total Government gross profit*   |                                                  | $    | 10.9 |      |               | $    | 14.3 |    |   | $             | (3.4 | ) |      |     | (24 | %) |   | $    | 14.8 |    |   | $    | (0.5 | ) |  |     | (3  | %)
|                                                       |                                  |                                                  |      |      |      |               |      |      |    |   |               |      |   |      |     |     |    |   |      |      |   
|                                                       |                                  | Segment gross profit as a percent
    of revenue |      |      | 30   | %             |      |      | 37 | % |               |      |   |      |     |     |    |   |      |      | 34 | % |      |      |   |  |     |     |    | 




|  |                                                                                                                                                                                         
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | See discussion of segment reporting in 21 to the audited
    Consolidated Financial Statements presented elsewhere in this
    Annual Report on
    Form 10-K. (NM =
    Not meaningful)

percentage-of




Government Hosted, Subscriber, and Maintenance Revenue, Cost
of Revenue, and Gross Profit:




Government Services Revenue and Cost of Revenue:




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##### Table of Contents

as Africa and Europe. Most such services are delivered under
time and materials contracts. For fixed price service contracts,
we recognize revenue using the proportional performance method.
We recognize estimated losses on contracts in their entirety
upon discovery. If we did not accurately estimate total labor
hours or costs to complete a contract or do not manage our
contracts within the planned budget, then future margins may be
negatively affected or losses on existing contracts may need to
be recognized.

Services revenues increased to $20.4 million in 2005 from
$15.6 million in 2004 and $13.9 million in 2003. These
increases throughout 2005 and 2004 were generated by new and
expanded-scope contracts resulting from increased sales emphasis
on these types of projects and to a lesser extent, increased
revenue generated from satellite airtime services for use of our
teleport facilities and associated with our systems sales.

Direct cost of government service revenue consists of
compensation, benefits and travel incurred in delivering these
services, and these costs increased as a result of the increased
services volume in 2005.

Our gross profit from government services increased to
$7.2 million 2005 from $6.1 million in 2004 and
$4.1 million in 2003. The increase in gross profit is due
to higher revenue. Gross profit as a percentage of revenue
decreased in 2005 due to a high margin contract which was
primarily delivered in 2004 and completed in early 2005. Gross
profit as a percentage of revenue was lower in 2003 due to the
mix of service contracts at various levels of profitability.

Government Systems Revenue and Cost of Revenue:

We generate Government systems revenue from the design,
development, assembly and deployment of information processing
and communication systems, primarily deployable communications
systems, and integration of those systems into customer
networks. Our principal government systems sales are of our
SwiftLink®
product line, which are lightweight, secure, deployable
communications systems, to units of the U.S. Departments of
State, Justice, and Defense and other agencies. We recognize
contract revenue as billable costs are incurred and for
fixed-price product delivery 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. Labor
hours are used as a measure of progress for projects that
contain a significant amount of third party materials costs.
Systems sales in our Government segment decreased to
$15.5 million in 2005 from $23.6 million in 2004 and
$29.4 million in 2003. The decrease in systems revenues is
primarily due to decreased unit sales of our
SwiftLink®
and deployable communications systems throughout 2005 compared
to 2004 and 2003. We believe that government procurement
patterns for our systems have been affected by the shift from
greater mission-leader flexibility during the acute wartime
environment of 2002 and 2003 to the more budget-conscious
environment in 2005 to date.

The cost of our government systems revenue consists of
compensation, benefits, travel, satellite space
segment and airtime, costs related to purchased equipment
components, and the costs of third-party contractors that we
engage. These equipment and third-party costs are variable for
our various types of products, and margins may fluctuate between
periods based on the respective product mixes.

Our government systems gross profit declined to
$3.5 million in 2005 from $8.2 million in 2004 and
$10.7 million in 2003. The reduction is mainly as a result
of lower systems sales volume.

Operating Expenses:

Research and Development Expense.

|                                 |  |      |      |   |      |               |      |   |  |   |               |   |  |      |     |    |   |   |      |   |  |   |     |  |  |  |    | 
|-------------------------------- |  | ---- | ---- | - | ---- | ------------- | ---- | - |  | - | ------------- | - |  | ---- | --- | -- | - | - | ---- | - |  | - | --- |  |  |  | -- | 
|                                 |  |      |      |   |      | 2005 vs. 2004 |      |   |  |   | 2004 vs. 2003 |  
|                                 |  |      |      |   |      |               |      |   |  |   |               |  
|($ in millions)                  |  | 2005 |      |   | 2004 |               |      | $ |  |   | %             |   |  | 2003 |     |    | $ |   |      | % | 
|                                 |  |      |      |   |      |               |      |   |  |   |               |   |  |      |     |    |   |   |      |   | 
|Research and development expense |  | $    | 13.9 |   |      | $             | 18.0 |   |  | $ | (4.1          | ) |  |      | (23 | %) |   | $ | 16.9 |   |  | $ | 1.1 |  |  |  | 6% | 
|Percent of revenue               |  |      | 14   | % |      |               | 19   | % |  |   |               |   |  |      |     |    |   |   | 18   | % |  |   |     |  |  |  |    | 



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##### Table of Contents

expensed prior to establishing technological feasibility.
Technological feasibility is established for our software
products when a detailed 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 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 such costs as they are incurred
unless technological feasibility has been reached and we believe
that the capitalized costs will be recoverable.

The expenses we incur relate to software applications which are
being marketed to new and existing customers on a global basis.
Throughout 2005 and 2004, respectively, research and development
was primarily focused on cellular and hosted location-based
applications, including Voice over IP
E9-1-1, enhancements to
our hosted location-based applications, blending of technology
of our existing products while incorporating aspects from our
2004 acquisitions, and other feature enhancements. In 2003, we
primarily focused on expanded functionality of our location
platform software. 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. Further, in 2005 we capitalized $2.5 million of
software development costs for certain software projects in
accordance with the above policy. The capitalized costs relate
to our location-based software and our Voice over IP
E9-1-1 service. These
costs will be amortized on a product-by-product basis using the
straight-line method over the products estimated useful
life, which is never greater than three years. Amortization is
also computed using the ratio that current revenue for the
product bears to the total of current and anticipated future
revenue for that product (the revenue curve method). If this
revenue curve method results in amortization greater than the
amount computed using the straight-line method, amortization is
recorded at that greater amount. We believe that these
capitalized costs will be recoverable from future gross profits
generated by these products. Prior to the second quarter of
2005, our estimates did not sufficiently demonstrate future
realizability of our software development costs expended on such
products; and accordingly, all such costs were expensed as
incurred.

Research and development expense decreased 23% in 2005 as
compared with 2004. This decrease is partially due to the
capitalization of approximately $2.5 million and partially
due to developers working on custom development efforts as well
as a slight reduction in headcount associated with our
development efforts. The 6% increase in research and development
spending in 2004 as compared to 2003 is primarily a function of
the costs incurred related to development efforts by the
engineers added via the Kivera acquisition.

Our research and development expenditures have also yielded over
40 patents, primarily for wireless messaging and location
technology, and over 100 pending patent applications. We believe
that the intellectual property represented by these patents is a
valuable asset that will contribute to our operations in 2006
and beyond.

Sales and Marketing Expense:

|                            |  |      |      |   |      |               |     |   |  |   |               |  |  |      |    |   |   |   |     |   |  |   |   |  |  |  |   | 
|--------------------------- |  | ---- | ---- | - | ---- | ------------- | --- | - |  | - | ------------- |  |  | ---- | -- | - | - | - | --- | - |  | - | - |  |  |  | - | 
|                            |  |      |      |   |      | 2005 vs. 2004 |     |   |  |   | 2004 vs. 2003 | 
|                            |  |      |      |   |      |               |     |   |  |   |               | 
|($ in millions)             |  | 2005 |      |   | 2004 |               |     | $ |  |   | %             |  |  | 2003 |    |   | $ |   | %   |  
|                            |  |      |      |   |      |               |     |   |  |   |               |  |  |      |    |   |   |   |     |  
|Sales and marketing expense |  | $    | 10.5 |   |      | $             | 8.9 |   |  | $ | 1.6           |  |  |      | 18 | % |   | $ | 8.9 |   |  | $ |  |  |  |  |  | 
|Percent of revenue          |  |      | 10   | % |      |               | 9   | % |  |   |               |  |  |      |    |   |   |   | 10  | % |  |   |   |  |  |  |   | 



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##### Table of Contents

General and Administrative Expense:

|                                   |  |      |      |   |      |               |      |   |  |   |               |  |  |      |   |   |   |   |      |   |  |   |     |  |  |  |    |  
|---------------------------------- |  | ---- | ---- | - | ---- | ------------- | ---- | - |  | - | ------------- |  |  | ---- | - | - | - | - | ---- | - |  | - | --- |  |  |  | -- | -
|                                   |  |      |      |   |      | 2005 vs. 2004 |      |   |  |   | 2004 vs. 2003 | 
|                                   |  |      |      |   |      |               |      |   |  |   |               | 
|($ in millions)                    |  | 2005 |      |   | 2004 |               |      | $ |  |   | %             |  |  | 2003 |   |   | $ |   |      | % | 
|                                   |  |      |      |   |      |               |      |   |  |   |               |  |  |      |   |   |   |   |      |   | 
|General and administrative expense |  | $    | 14.4 |   |      | $             | 14.1 |   |  | $ | 0.3           |  |  |      | 2 | % |   | $ | 11.3 |   |  | $ | 2.8 |  |  |  | 25 | %
|Percent of total revenue           |  |      | 14   | % |      |               | 14   | % |  |   |               |  |  |      |   |   |   |   | 12   | % |  |   |     |  |  |  |    |  



Non-Cash Stock Compensation Expense:


|                                    |  |      |     |  |      |               |     |   |  |          |      |   |  |      |       |  |   |   |     |   |  |   |      |   |  |  |       | 
|----------------------------------- |  | ---- | --- |  | ---- | ------------- | --- | - |  | -------- | ---- | - |  | ---- | ----- |  | - | - | --- | - |  | - | ---- | - |  |  | ----- | 
|                                    |  |      |     |  |      |               |     |   |  | 2004 vs. |     
|                                    |  |      |     |  |      | 2005 vs. 2004 |     |   |  |          | 2003 |  
|                                    |  |      |     |  |      |               |     |   |  |          |      |  
|($ in millions)                     |  | 2005 |     |  | 2004 |               |     | $ |  |          | %    |   |  | 2003 |       |  | $ |   |     | % | 
|                                    |  |      |     |  |      |               |     |   |  |          |      |   |  |      |       |  |   |   |     |   | 
|Non-cash stock compensation expense |  | $    | 0.7 |  |      | $             | 1.2 |   |  | $        | (0.5 | ) |  |      | (40%) |  |   | $ | 1.5 |   |  | $ | (0.3 | ) |  |  | (20%) | 







10-K,


out-of


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##### Table of Contents

The primary purpose of the accelerated vesting was to eliminate
future compensation expense the Company would otherwise
recognize in its statement of operations with respect to these
options upon the adoption of Statement No. 123(R), which we
are required to adopt on January 1, 2006. Financial
Accounting Standards Board Statement No. 123(R) Share
Based Paymentwill require that compensation expense
associated with stock options be recognized in the statement of
operations rather than as a pro forma footnote disclosure in our
consolidated financial statements. The acceleration of the
vesting of these options will eliminate the future non-cash
stock compensation expense associated with these outstanding
options. We estimate that the related future compensation
expense to be recorded under Statement No. 123(R) that is
eliminated as a result of the acceleration of vesting these
options is approximately $1.2 million.

Depreciation and Amortization of Property and Equipment:

|                                                            |  |      |      |  |      |               |      |   |  |   |               |  |  |      |    |   |   |   |      |   |  |   |     |  |  |  |    |  
|----------------------------------------------------------- |  | ---- | ---- |  | ---- | ------------- | ---- | - |  | - | ------------- |  |  | ---- | -- | - | - | - | ---- | - |  | - | --- |  |  |  | -- | -
|                                                            |  |      |      |  |      | 2005 vs. 2004 |      |   |  |   | 2004 vs. 2003 | 
|                                                            |  |      |      |  |      |               |      |   |  |   |               | 
|($ in millions)                                             |  | 2005 |      |  | 2004 |               |      | $ |  |   | %             |  |  | 2003 |    |   | $ |   |      | % | 
|                                                            |  |      |      |  |      |               |      |   |  |   |               |  |  |      |    |   |   |   |      |   | 
|Depreciation and amortization of
    property and equipment |  | $    | 8.6  |  |      | $             | 7.4  |   |  | $ | 1.2           |  |  |      | 17 | % |   | $ | 6.6  |   |  | $ | 0.8 |  |  |  | 11 | %
|Average gross cost of property and
    equipment            |  | $    | 47.4 |  |      | $             | 38.3 |   |  | $ | 9.1           |  |  |      | 24 | % |   | $ | 29.2 |   |  | $ | 9.1 |  |  |  | 31 | %



Amortization of Acquired Intangible Assets:


|                                               |  |      |     |  |      |               |   |  |  |   |               |  |      |  |    |   |  |   |     |  |  |   |       |  |  |  |    | 
|---------------------------------------------- |  | ---- | --- |  | ---- | ------------- | - |  |  | - | ------------- |  | ---- |  | -- | - |  | - | --- |  |  | - | ----- |  |  |  | -- | 
|                                               |  |      |     |  |      | 2005 vs. 2004 |   |  |  |   | 2004 vs. 2003 | 
|                                               |  |      |     |  |      |               |   |  |  |   |               | 
|($ in millions)                                |  | 2005 |     |  | 2004 |               | $ |  |  | % |               |  | 2003 |  |    | $ |  |   | %   | 
|                                               |  |      |     |  |      |               |   |  |  |   |               |  |      |  |    |   |  |   |     | 
|Amortization of acquired intangible
    assets |  | $    | 0.2 |  |      | $             |  |  |  | $ | 0.2           |  |      |  | NM |   |  | $ | 0.5 |  |  | $ | (0.5) |  |  |  | NM | 



Goodwill and Other Intangible
Assets.


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Interest Expense:

|                                                                                          |                        |      |      |      |      |               |      |      |  |   |               |      |   |      |      |     |    |  |      |      |  |  |        |      |  |  |     |    | 
|----------------------------------------------------------------------------------------- | ---------------------- | ---- | ---- | ---- | ---- | ------------- | ---- | ---- |  | - | ------------- | ---- | - | ---- | ---- | --- | -- |  | ---- | ---- |  |  | ------ | ---- |  |  | --- | -- | 
|                                                                                          |                        |      |      |      |      | 2005 vs. 2004 |      |      |  |   | 2004 vs. 2003 |     
|                                                                                          |                        |      |      |      |      |               |      |      |  |   |               |     
|($ in millions)                                                                           |                        | 2005 |      |      | 2004 |               |      | $    |  |   | %             |      |   | 2003 |      |     | $  |  |      | %    | 
|                                                                                          |                        |      |      |      |      |               |      |      |  |   |               |      |   |      |      |     |    |  |      |      | 
|Interest expense incurred on
    capital lease obligations                                |                        |      | $0.3 |      |      |               | $0.2 |      |  | $ | 0.1           |      |   |      | 16   | %   |    |  | $0.4 |      |  |  | $(0.2) |      |  |  | (44 | %)
|Interest expense incurred on notes
    payable and under our bank credit agreement        |                        |      | 0.5  |      |      |               | 1.2  |      |  |   | (0.8          | )    |   |      | (63  | %)  |    |  | 0.5  |      |  |  | 0.7    |      |  |  | NM  |   
|Amortization of deferred financing
    fees                                               |                        |      | 0.5  |      |      |               | 0.5  |      |  |   |              |      |   |      | (6   | %)  |    |  | 0.2  |      |  |  | 0.3    |      |  |  | NM  |   
|Amortization of deferred debt
    discount related to convertible subordinated debentures |                        |      |     |      |      |               | 1.3  |      |  |   | (1.3          | )    |   |      | (100 | %)  |    |  |     |      |  |  | 1.3    |      |  |  | NM  |   
|Less: Capitalized interest                                                                |                        |      | (0.1 | )    |      |               |     |      |  |   | (0.1          | )    |   |      | NM   |     |    |  |     |      |  |  |       |      |  |  | NM  |   
|                                                                                          |                        |      |      |      |      |               |      |      |  |   |               |      |   |      |      |     |    |  |      |      | 
|                                                                                          | Total Interest Expense |      |      | $1.2 |      |               |      | $3.2 |  |   | $             | (2.0 | ) |      |      | (63 | %) |  |      | $1.1 |  |  |        | $2.1 |  |  |     | NM | 
|                                                                                          |                        |      |      |      |      |               |      |      |  |   |               |      |   |      |      |     |    |  |      |      | 

10-K, .










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2005. The 2004 increase in interest expense versus 2003 is also
due to the interest associated with the Debenture.

Interest expense incurred on the Debenture issued in connection
with the Enterprise Acquisition accrued at the rate of 3% of the
face value of the Debenture prior to the date of the Waiver (see
Item 5. Market for Registrants Common Equity
and Issuer Purchases of Equity Securities and Note 4
to the audited Consolidated Financial Statements appearing
elsewhere in this Annual Report on
Form 10-K). Debt
discount relates to the amount of discount computed as part of
the financing for the Enterprise Acquisition. Such discount was
recorded as a reduction of debt and amortized over the life of
the convertible subordinated debenture. Subsequent to the date
of the Waiver, the discount was recorded ratably to expense as
the Debenture was converted. The amortization of the deferred
financing fees includes $0.2 million related to deferred
financing fees paid to secure the Debenture and related stock
issuance while the remainder of these fees relate to the
up-front payment of fees to secure our notes payable and our
revolving line of credit facility. Subsequent to the date of the
Waiver, the remaining deferred financing fees for the Debenture
were recorded ratably to expense as the Debenture was converted.
All other deferred financing fees 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 in September 2008.

Debt Conversion Expense:

To fund the Enterprise Acquisition in 2004, we issued a
convertible subordinated debenture with a face value of
$15 million due in lump sum on January 13, 2009 in
cash or shares of our Class A Common Stock at our option.
As of August 30, 2004, we entered into a Waiver Agreement
with the holder of the Debenture. The Waiver modified certain
provisions of the Debenture. See Market for
Registrants Common Equity and Issuer Purchases of Equity
Securities and Note 4 to the audited Consolidated
Financial Statements appearing elsewhere in this Annual Report
on Form 10-K.
Subsequent to the date of the Waiver, the excess of the
amortization of the debt discount and deferred financing fees
that was recorded ratably to expense as the Debenture was
converted over the monthly amortization calculated using the
original life of the Debenture was recognized as debt conversion
expense. The $1.0 million cash fee paid as an inducement to
the Waiver and the fair value of the additional shares of our
Class A Common Stock issued upon conversion of the
Debenture were also recorded as debt conversion expense. There
was no such arrangement in either 2005 or 2003.

Other(Expense)/ Income, Net:

|                                                          |  |      |      |   |      |               |      |   |  |   |               |   |  |      |    |   |   |   |     |   |  |   |      |   |  |  |    |  
|--------------------------------------------------------- |  | ---- | ---- | - | ---- | ------------- | ---- | - |  | - | ------------- | - |  | ---- | -- | - | - | - | --- | - |  | - | ---- | - |  |  | -- | -
|                                                          |  |      |      |   |      | 2005 vs. 2004 |      |   |  |   | 2004 vs. 2003 |  
|                                                          |  |      |      |   |      |               |      |   |  |   |               |  
|($ in millions)                                           |  | 2005 |      |   | 2004 |               |      | $ |  |   | %             |   |  | 2003 |    |   | $ |   |     | % | 
|                                                          |  |      |      |   |      |               |      |   |  |   |               |   |  |      |    |   |   |   |     |   | 
|Foreign currency translation/
    transaction (loss)/gain |  | $    | (0.2 | ) |      | $             | 0.1  |   |  | $ | (0.3          | ) |  |      | NM |   |   | $ | 0.5 |   |  | $ | (0.4 | ) |  |  | NM |  
|Miscellaneous other (expense)/
    income                 |  |      | 0.1  |   |      |               | (0.1 | ) |  |   | 0.2           |   |  |      | NM |   |   |   | 1.0 |   |  |   | (1.2 | ) |  |  | NM |  
|                                                          |  |      |      |   |      |               |      |   |  |   |               |   |  |      |    |   |   |   |     |   | 
|Total other (expense)/ income, net                        |  | $    | (0.1 | ) |      | $             | (0.1 | ) |  |   |              |   |  |      | 69 | % |   | $ | 1.5 |   |  | $ | (1.6 | ) |  |  | NM |  
|                                                          |  |      |      |   |      |               |      |   |  |   |               |   |  |      |    |   |   |   |     |   | 
|Revenues billed in foreign currency                       |  | $    | 6.9  |   |      | $             | 6.5  |   |  | $ | 0.4           |   |  |      | 6  | % |   | $ | 3.6 |   |  | $ | 2.9  |   |  |  | 80 | %
|                                                          |  |      |      |   |      |               |      |   |  |   |               |   |  |      |    |   |   |   |     |   | 



Income Taxes:




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audited Consolidated Financial Statements appearing elsewhere in
this Annual Report on
Form 10-K. Our net
operating loss carryforwards from acquired businesses will begin
to expire in 2011 and the net operating loss carryforwards from
our operations will expire from 2019 through 2025.

Discontinued Operations- Enterprise assets

As of December 31, 2005, as a result of
slower-than-anticipated market adoption of key technologies
related to the Enterprise assets and managements strategic
decision to focus on our core technologies, we committed to a
plan to sell the Enterprise assets which we acquired from Aether
Systems, Inc. in 2004. The plan was approved by our Board of
Directors on December 29, 2005, and we have engaged an
investment bank that is actively marketing the Enterprise
assets. Due to the slower-than-anticipated market adoption of
the technologies described above, these assets have not
performed up to managements expectations, leading to an
increase in the loss from discontinued operations in 2005 versus
2004. Management believes that the sale of these assets will
allow us to focus more directly on our core lines of business.
We expect to complete the sale of these assets by the end of
2006.

The following table presents income statement data for the
Enterprise division, currently reported as discontinued
operations. Previously, these results were reported as part of
the results of our Commercial Applications segment.

|                                                                                        |                                              |      |      |      |      |               |      |      |   |   |       |       |   |  |     |     |   
|--------------------------------------------------------------------------------------- | -------------------------------------------- | ---- | ---- | ---- | ---- | ------------- | ---- | ---- | - | - | ----- | ----- | - |  | --- | --- | --
|                                                                                        |                                              |      |      |      |      | 2005 vs. 2004 |     
|                                                                                        |                                              |      |      |      |      |               |     
|($ in millions)                                                                         |                                              | 2005 |      |      | 2004 |               |      | $    |   |   | %     |      
|                                                                                        |                                              |      |      |      |      |               |      |      |   |   |       |      
|Hosted, subscriber, and maintenance
    revenue                                         |                                              | $    | 22.5 |      |      | $             | 38.5 |      |   | $ | (16.0 | )     |   |  | (42 | %) 
|Systems revenue                                                                         |                                              |      | 5.6  |      |      |               | 7.5  |      |   |   | (1.9  | )     |   |  | (25 | %) 
|                                                                                        |                                              |      |      |      |      |               |      |      |   |   |       |      
|                                                                                        | Total Enterprise revenue                     |      |      | 28.1 |      |               |      | 46.0 |   |   |       | (17.9 | ) |  |     | (39 | %)
|                                                                                        |                                              |      |      |      |      |               |      |      |   |   |       |      
|Direct cost of hosted, subscriber,
    and maintenance                                  |                                              |      | 15.7 |      |      |               | 29.9 |      |   |   | (14.2 | )     |   |  | (48 | %) 
|Direct cost of systems                                                                  |                                              |      | 6.3  |      |      |               | 5.4  |      |   |   | 1.0   |       |   |  | 19  | %  
|                                                                                        |                                              |      |      |      |      |               |      |      |   |   |       |      
|                                                                                        | Total Enterprise segment cost of
    revenue |      |      | 22.1 |      |               |      | 35.3 |   |   |       | (13.2 | ) |  |     | (38 | %)
|                                                                                        |                                              |      |      |      |      |               |      |      |   |   |       |      
|Hosted, subscriber, and maintenance
    gross profit                                    |                                              |      | 6.9  |      |      |               | 8.6  |      |   |   | (1.9  | )     |   |  | (20 | %) 
|Systems gross profit                                                                    |                                              |      | (0.8 | )    |      |               | 2.1  |      |   |   | (2.9  | )     |   |  | NM  |    
|                                                                                        |                                              |      |      |      |      |               |      |      |   |   |       |      
|                                                                                        | Total Enterprise gross profit                |      |      | 6.0  |      |               |      | 10.7 |   |   |       | (4.7  | ) |  |     | (43 | %)
|                                                                                        |                                              |      |      |      |      |               |      |      |   |   |       |      
|Research and development, sales,
    marketing, and general and administrative expenses |                                              |      | 9.9  |      |      |               | 10.8 |      |   |   | (0.9  | )     |   |  | (8  | %) 
|                                                                                        |                                              |      |      |      |      |               |      |      |   |   |       |      
|                                                                                        | Subtotal                                     |      |      | (3.9 | )    |               |      | (0.1 | ) |   |       | (3.8  | ) |  |     | NM  |   
|                                                                                        |                                              |      |      |      |      |               |      |      |   |   |       |      
|Depreciation and amortization                                                           |                                              |      | 3.3  |      |      |               | 2.5  |      |   |   | 0.8   |       |   |  | 29  | %  
|                                                                                        |                                              |      |      |      |      |               |      |      |   |   |       |      
|                                                                                        | Loss from discontinued
    operations        |      | $    | (7.2 | )    |               | $    | (2.6 | ) |   | $     | (4.6  | ) |  |     | NM  |   
|                                                                                        |                                              |      |      |      |      |               |      |      |   |   |       |      

Net Loss:


|                                    |          |      |      |       |      |               |       |       |   |   |               |     |  |      |     |     |    |   |       |       |   |   |      |      |   |  |    |    |  
|----------------------------------- | -------- | ---- | ---- | ----- | ---- | ------------- | ----- | ----- | - | - | ------------- | --- |  | ---- | --- | --- | -- | - | ----- | ----- | - | - | ---- | ---- | - |  | -- | -- | -
|                                    |          |      |      |       |      | 2005 vs. 2004 |       |       |   |   | 2004 vs. 2003 |    
|                                    |          |      |      |       |      |               |       |       |   |   |               |    
|($ in millions)                     |          | 2005 |      |       | 2004 |               |       | $     |   |   | %             |     |  | 2003 |     |     | $  |   |       | %     |  
|                                    |          |      |      |       |      |               |       |       |   |   |               |     |  |      |     |     |    |   |       |       |  
|Net loss from continuing operations |          | $    | (4.3 | )     |      | $             | (15.9 | )     |   | $ | 11.6          |     |  |      | (73 | %)  |    | $ | (13.5 | )     |   | $ | (2.4 | )    |   |  | 18 | % 
|Loss from discontinued operations   |          |      | (7.2 | )     |      |               | (2.6  | )     |   |   | (4.6          | )   |  |      | NM  |     |    |   |      |       |   |   | (2.6 | )    |   |  | NM |   
|                                    |          |      |      |       |      |               |       |       |   |   |               |     |  |      |     |     |    |   |       |       |  
|                                    | Net loss |      | $    | (11.5 | )    |               | $     | (18.5 | ) |   | $             | 7.0 |  |      |     | (38 | %) |   | $     | (13.5 | ) |   | $    | (5.0 | ) |  |    | 38 | %
|                                    |          |      |      |       |      |               |       |       |   |   |               |     |  |      |     |     |    |   |       |       |  



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our August 2004 Waiver Agreement, partially offset by
significant increases in gross profit from growing revenue and
an increased gross margin percentage.

Liquidity and Capital Resources

The following table summarizes our comparative statements of
cash flow:

|                                                                                    |                                                         |                      |      |       |      |               |      |       |       |   |               |       |       |      |    |     |     |    |      |       |      |   |     |       |       |   |    |     |    | 
|----------------------------------------------------------------------------------- | ------------------------------------------------------- | -------------------- | ---- | ----- | ---- | ------------- | ---- | ----- | ----- | - | ------------- | ----- | ----- | ---- | -- | --- | --- | -- | ---- | ----- | ---- | - | --- | ----- | ----- | - | -- | --- | -- | 
|                                                                                    |                                                         |                      |      |       |      | 2005 vs. 2004 |      |       |       |   | 2004 vs. 2003 |      
|                                                                                    |                                                         |                      |      |       |      |               |      |       |       |   |               |      
|($ in millions)                                                                     |                                                         | 2005                 |      |       | 2004 |               |      | $     |       |   | %             |       |       | 2003 |    |     | $   |    |      | %     |     
|                                                                                    |                                                         |                      |      |       |      |               |      |       |       |   |               |       |       |      |    |     |     |    |      |       |     
|Net cash and cash equivalents
    provided by (used in):                            |                                                         |                      |      |       |      |               |      |       |       |   |               |       |       |      |    |     |     |    |      |       |      |   |     |       |       |   |    |    
|                                                                                    | Net loss                                                |                      | $    | (11.5 | )    |               | $    | (18.5 | )     |   | $             | 7.1   |       |      |    | 38  | %   |    | $    | (13.5 | )    |   | $   | (5.0  | )     |   |    | (38 | %)
|                                                                                    | Non-cash charges                                        |                      |      | 14.8  |      |               |      | 20.8  |       |   |               | (6.1  | )     |      |    | (29 | %)  |    |      | 18.1  |      |   |     | 2.7   |       |   |    | 15  | % 
|                                                                                    | Net changes in working capital                          |                      |      | 1.5   |      |               |      | (2.1  | )     |   |               | 3.6   |       |      |    | NM  |     |    |      | (8.6  | )    |   |     | 6.5   |       |   |    | 75  | % 
|                                                                                    |                                                         |                      |      |       |      |               |      |       |       |   |               |       |       |      |    |     |     |    |      |       |     
|                                                                                    |                                                         | Operating activities |      |       | 4.8  |               |      |       | 0.2   |   |               |       | 4.6   |      |    |     | NM  |    |      |       | (4.0 | ) |     |       | 4.2   |   |    |     | NM | 
|                                                                                    | Acquisitions, net of cash acquired                      |                      |      | (0.1  | )    |               |      | (24.8 | )     |   |               | 24.7  |       |      |    | NM  |     |    |      |      |      |   |     | (24.8 | )     |   |    | NM  |   
|                                                                                    | Purchases of property and equipment                     |                      |      | (6.1  | )    |               |      | (7.0  | )     |   |               | 0.9   |       |      |    | 13  | %   |    |      | (6.0  | )    |   |     | (1.0  | )     |   |    | (18 | %)
|                                                                                    | Capitalized software development
    costs              |                      |      | (2.5  | )    |               |      |      |       |   |               | (2.5  | )     |      |    | NM  |     |    |      | (1.9  | )    |   |     | 1.9   |       |   |    | NM  |   
|                                                                                    | Other                                                   |                      |      |      |      |               |      | 2.7   |       |   |               | (2.7  | )     |      |    | NM  |     |    |      | (1.7  | )    |   |     | 4.4   |       |   |    | NM  |   
|                                                                                    |                                                         |                      |      |       |      |               |      |       |       |   |               |       |       |      |    |     |     |    |      |       |     
|                                                                                    |                                                         | Investing activities |      |       | (8.7 | )             |      |       | (29.0 | ) |               |       | 20.3  |      |    |     | (68 | %) |      |       | (9.5 | ) |     |       | (19.5 | ) |    |     | NM | 
|                                                                                    | Payments on debt and leases                             |                      |      | (10.5 | )    |               |      | (8.9  | )     |   |               | (1.6  | )     |      |    | 18  | %   |    |      | (5.5  | )    |   |     | (3.4  | )     |   |    | 65  | % 
|                                                                                    | Proceeds from issuance of stock and
    debentures, net |                      |      | (0.1  | )    |               |      | 28.2  |       |   |               | (28.3 | )     |      |    | NM  |     |    |      |      |      |   |     | 28.2  |       |   |    | NM  |   
|                                                                                    | Proceeds from borrowings                                |                      |      | 5.0   |      |               |      | 7.5   |       |   |               | (2.5  | )     |      |    | (33 | %)  |    |      | 9.3   |      |   |     | (1.8  | )     |   |    | (19 | %)
|                                                                                    | Proceeds from employee option
    exercises             |                      |      | 0.8   |      |               |      | 1.4   |       |   |               | (0.7  | )     |      |    | (50 | %)  |    |      | 1.1   |      |   |     | 0.3   |       |   |    | 31  | % 
|                                                                                    |                                                         |                      |      |       |      |               |      |       |       |   |               |       |       |      |    |     |     |    |      |       |     
|                                                                                    |                                                         | Financing activities |      |       | (4.8 | )             |      |       | 28.2  |   |               |       | (33.0 | )    |    |     | NM  |    |      |       | 4.9  |   |     |       | 23.3  |   |    |     | NM | 
|                                                                                    |                                                         |                      |      |       |      |               |      |       |       |   |               |       |       |      |    |     |     |    |      |       |     
|Net change in cash and cash
    equivalents                                         |                                                         | $                    | (8.8 | )     |      | $             | (0.7 | )     |       | $ | (8.1          | )     |       |      | NM |     |     | $  | (8.6 | )     |      | $ | 7.9 |       |       |   | NM |    
|                                                                                    |                                                         |                      |      |       |      |               |      |       |       |   |               |       |       |      |    |     |     |    |      |       |     
|Days revenues outstanding in
    accounts receivable including unbilled receivables |                                                         |                      | 91   |       |      |               | 122  |       |       |   |               |       |       |      |    |     |     |    | 107  |       |      |   |     |       |       |   |    |    

short-term




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stock. On March 10, 2006, the tangible net worth covenant,
as defined, was amended such that the Company will only be
required to maintain at least $23.5 million of tangible net
worth, as defined, through March 31, 2007, at which time
the amount of required tangible net worth, as defined, reverts
back to the $29.5 million. The minimum tangible net worth
amount per the line of credit agreement is adjusted upward for
income, subordinated debt and equity raised and proceeds of any
sale of Enterprise assets.

In 2003 we borrowed $2.5 million under the terms of an
equipment loan secured by purchased equipment for a term of
three years. As of December 31, 2005, approximately
$0.8 million was outstanding under the equipment loan which
will be paid monthly through December 2006. There was
$8.0 million outstanding under our line of credit. We had
approximately $1.9 million of unused availability under our
line of credit and our tangible net worth, as defined, was
$31.1 million as of December 31, 2005. We are in
compliance with our covenants as of December 31, 2005.

We currently believe that we have sufficient capital resources
with cash generated from operations as well as cash on hand to
meet our anticipated cash operating expenses, working capital,
and capital expenditure and debt service needs for the next
twelve months. We expect additional cash in 2006 from sales of
our Enterprise division and surplus patents. We have borrowing
capacity available to us in the form of capital leases as well
as a line of credit arrangement with our bank which expires in
September 2008. We may also consider raising capital in the
public markets as a means to meet our capital needs and to
invest in our business. Although we may need to return to the
capital markets, establish new credit facilities or raise
capital in private transactions in order to meet our capital
requirements, we can offer no assurances that we will be able to
access these potential sources of funds on terms acceptable to
us or at all.

We have incurred net losses in recent years, and our monthly
cash flows are subject to variability. In order to improve our
results of operations and cash flows, we are focusing our
efforts on revenue growth, primarily in the hosted and
subscriber service lines, which provide for more predictable
revenue streams. We have also committed to a plan to sell the
Enterprise assets. In the event that our results of operations
in 2006 are not adequate to fund ongoing obligations, and/or we
are not able to sell the Enterprise assets, we would defer or
avoid cash expenditures in other areas, including research and
development, capital expenditures and/or administrative costs.
We believe that our existing cash resources, including proceeds
received from financings which occurred in March 2006, and
availability under the bank line of credit, coupled with
expected cash from operations, will provide sufficient liquidity
for us to continue to meet our obligations for the next twelve
months. However, there can be no assurance that cash flows from
operations will be sufficient to fund our obligations and, as
discussed below, the provisions of our lending documents create
the possibility that our financing arrangements may not remain
available to us.

Our bank credit agreement contains a tangible net worth covenant
which is required to be met on a monthly basis. In March, 2006
the bank amended our line of credit agreement, reducing the
tangible net worth requirement through March 31, 2007. The
line of credit agreement also contains a subjective acceleration
clause which allows the bank to declare the amounts outstanding
under the line of credit due and payable if certain material
adverse changes occur. Also, the loan document governing the
subordinated debt issued in March 2006 contains a cross-default
provision that would allow the debt holder to accelerate payment
of the subordinated debt if other debt exceeding
$2.5 million is declared due and payable. We believe that
we will continue to comply with our restrictive covenants under
our debt agreements. If our performance does not result in
compliance with any of the restrictive covenants, or if our line
of credit agreement lender seeks to exercise its rights under
the subjective acceleration clause referred to above, we would
seek to further modify our financing arrangements, but there can
be no assurance that our debt holders would not exercise their
rights and remedies under their agreements with us, including
declaring all outstanding debt due and payable. See Note 12
to our audited Consolidated Financial Statements for a more
detailed description of the restrictive covenants under our debt
agreements and Note 25 to our Consolidated Financial
Statements for a more detailed description of the secured notes
entered into in March 2006.

Operating cash flows improved in 2005 primarily as a result of
increased cash provided by lower working capital needs and
improved earnings. A significant favorable change in unbilled
receivables and, to a lesser extent, accounts payable and
accrued expenses, accrued payroll and deferred revenue were
partially offset by

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##### Table of Contents

the unfavorable changes in accounts receivable, inventory and
other current assets. Management increased its focus on its
billing and collection efforts in 2005 which reduced total days
outstanding to 91 from 122 days in 2004. Additionally,
there were fewer long-term projects that remained open in 2005
compared to 2004 and 2003, and therefore unbilled receivables
were lower in 2005.

Net cash used in investing activities was lower in 2005 than
2004 because there were no 2005 acquisitions, like our 2004
Enterprise and Kivera acquisitions (described below). The
acquisitions accounted for approximately $24.8 million of
the cash used for investing activities during 2004. The amount
of capital expenditures in 2005 were $6.1 million and
capitalized software development costs were $2.5 million.
Capital expenditure in 2004 were slightly higher at
$7.0 million and included an increase in capital
expenditures to support our service bureau office move and to
expand our business. There were no capitalized software
development costs in 2004 due to the stage of development
efforts incurred in 2004 and managements judgments as to
the realizability of these costs at that time. Net cash used in
investing activities was lower in 2003 compared to 2004
primarily because of the 2004 acquisitions.

Net cash of $4.8 million was used for financing activities
in 2005 compared to $28.2 million provided by financing
activities in 2004 and $4.9 million provided by financing
activities in 2003. In 2005, we made payments under long-term
debt and capital lease obligations while increasing borrowing
under our line of credit to a lesser extent. The change in 2005
compared to 2004 is primarily due to the January 2004 and August
2004 financings (see below) which did not recur in 2005. These
offerings provided net proceeds of approximately
$28.2 million. These proceeds were used to fund our
acquisitions and for payments under our existing long-term debt
and capital lease obligations. Net cash provided by financing
activities in 2003 included proceeds from increases in long-term
debt obligations used to fund capital expenditures as an
alternative to capital lease obligations.

On September 20, 2004, we acquired substantially all of the
assets of Kivera, Inc., for approximately $5.5 million in
cash. To fund the Kivera acquisition, on August 30, 2004 we
entered a Securities Purchase Agreement with the same third
party investors who purchased our securities used to finance the
Enterprise Acquisition. Pursuant to this agreement, we raised
$10.0 million in cash through the sale of
2,500,000 shares of our Class A Common Stock. Combined
proceeds from both the January and August financings, after
financing fees, were approximately $28.2 million. As of the
same date, we entered into a Waiver Agreement with the holder of
the Debenture. The Waiver modified certain provisions of the
Debenture as follows: (1) the holder of the Debenture was
required to convert the entire $15 million principal amount
into shares of our Class A Common Stock by the end of 2004,
(2) all of the material restrictive covenants contained in
the Debenture were nullified and (3) the conversion price
set forth in the Debenture was decreased from $5.3753 to
$5.01581 as an inducement to enter into the Waiver (an
adjustment such that conversion of the Debenture will yield an
additional 200,000 shares of Class A Common Stock). As
additional consideration, we paid the holder of the Debenture a
$1 million one-time fee in cash. As a result, the entire
face amount of the Debenture had been converted into shares of
our Class A Common Stock as of December 31, 2004.

On March 10, 2006, pursuant to a note purchase agreement
dated the same date, we issued and sold to two institutional
lenders (i) $10 million in aggregate principal amount of
secured notes due March 10, 2009, which bear cash interest
at the rate of 14% per annum, or non-cash interest, in the form
of additional notes, at the rate of 16% per annum, at our
option, and (ii) warrants to purchase an aggregate of
1.75 million shares of our Class A Common Stock at an
exercise price of $2.40 per share. We received net cash proceeds
of approximately $9.3 million from this transaction, which
are intended to be used for general corporate purposes.

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##### Table of Contents

The warrants issued in the January 2004 financing described
above contain provisions requiring an adjustment in both the
warrant price and the number of warrants outstanding as a
consequence of the issuance of the new warrants in March 2006.
Consequently, the warrants from 2004 have been adjusted to a
purchase price of $2.50 per share and the total number of
January 2004 warrants now outstanding has been adjusted to
886,787. The note purchase agreement includes a provision such
that if we default on any of our debt obligations exceeding
$2.5 million, the secured subordinated notes shall become
due and payable at the election of the holders of the notes.

Off-Balance Sheet Arrangements

We had standby letters of credit totaling approximately
$0.9 million at
year-end 2005 and
$0.8 million at
year-end 2004. The
standby letters of credit are in support of processing credit
card payments from our customers, as collateral with a vendor
and security for office space. In March 2006, an additional
$2.5 million standby letter of credit has been issued in
accordance with a contracting requirement for a project being
performed by our Government segment.

Contractual Commitments

As of December 31, 2005, 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, 2005 our commitments consisted of the
following:

|                                                 |                               |      |     |      |           |   |     |           |  |   |        |     |       |   |   |   |  |   |      |      | 
|------------------------------------------------ | ----------------------------- | ---- | --- | ---- | --------- | - | --- | --------- |  | - | ------ | --- | ----- | - | - | - |  | - | ---- | ---- | 
|($ in millions)                                  |                               | 2006 |     |      | 2007-2008 |   |     | 2009-2010 |  |   | Beyond |     | Total |  
|                                                 |                               |      |     |      |           |   |     |           |  |   |        |     |       |  
|Notes payable                                    |                               | $    | 2.2 |      |           | $ | 0.5 |           |  | $ |       |     |       | $ |  |   |  | $ | 2.7  |     
|Line of credit                                   |                               |      | 8.0 |      |           |   |    |           |  |   |       |     |       |   |  |   |  |   | 8.0  |     
|Capital lease obligations                        |                               |      | 3.2 |      |           |   | 3.0 |           |  |   |       |     |       |   |  |   |  |   | 6.2  |     
|Operating leases, primarily for
    office space |                               |      | 3.4 |      |           |   | 5.7 |           |  |   | 2.7    |     |       |   |  |   |  |   | 11.8 |     
|                                                 |                               |      |     |      |           |   |     |           |  |   |        |     |       |   |  
|                                                 | Total contractual commitments |      | $   | 16.8 |           |   | $   | 9.2       |  |   | $      | 2.7 |       |   | $ |  |  |   | $    | 28.7 | 
|                                                 |                               |      |     |      |           |   |     |           |  |   |        |     |       |   |  

Related Party Transactions









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

Interest Rate Risk




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##### Table of Contents

At December 31, 2005, we had cash and cash equivalents of
$9.3 million. Cash and cash equivalents consisted of demand
deposits and money market accounts that are interest rate
sensitive. However, these investments have short maturities
mitigating their sensitivity to interest rates. A hypothetical
100 basis point adverse movement (decrease) in interest
rates would have increased our net loss for 2005 by
approximately $0.1 million, resulting in no significant
impact on our consolidated financial position, results of
operations or cash flows.

Foreign Currency Risk

For the year ended December 31, 2005, we generated
$6.9 million of revenue outside the U.S. A majority of
our transactions generated outside the U.S. are denominated
in U.S. dollars, and a change in exchange rates would not
have a material impact on our Consolidated Financial Statements.
As of December 31, 2005, we had approximately
$0.2 million in accounts receivable and $0.1 million
in unbilled receivables that are denominated in foreign
currencies and would be exposed to foreign currency exchange
risk. During 2005, our average receivables and unbilled
receivables subject to foreign currency exchange risk were
$1.4 million and $0.2 million, respectively. We
recorded transaction losses of $0.2 million on foreign
currency denominated receivables for the year ended
December 31, 2005.







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







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







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

As of the end of the period covered by this Annual Report on
Form 10-K, we
carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures.
Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Companys
disclosure controls and procedures (as defined in
Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act
of 1934, as amended) are effective at a reasonable assurance
level in ensuring that all information required in the reports
it files or submits under the Act was accumulated and
communicated to the Companys management, including its
Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required
disclosures and that information was recorded, processed,
summarized and reported within the time period required by the
rules and regulations of the Securities and Exchange Commission.

Managements Report on Internal Control over Financial
Reporting

Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act
Rules 13a-15(f)
and 15d-15(f). Under
the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial
Officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting as of
December 31, 2005 based on the framework in Internal
Control  Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
Based on that evaluation, our management concluded that our
internal control over financial reporting was effective as of
December 31, 2005.

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##### Table of Contents

Managements assessment of the effectiveness of our
internal control over financial reporting as of
December 31, 2005 has been audited by Ernst &
Young LLP, an independent registered public accounting firm,
which has issued an attestation report thereon included herein.

Changes in Internal Control over Financial Reporting

In closing the third quarter of 2005, the Company became aware
of problems with its documentation and procedures regarding
revenue recognition of contracts with multiple element
arrangements. We implemented improvements that remediated these
issues prior to December 31, 2005. There were no other
changes in internal control over financial reporting during the
quarter ended December 31, 2005 that materially affected,
or are reasonably likely to materially affect, the
Companys internal control over financial reporting.

45



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##### Table of Contents

Report of Independent Registered Public Accounting
Firm 

Internal Control Over Financial Reporting

The Board of Directors and Stockholders

of TeleCommunication Systems, Inc.

We have audited managements assessment, included in the
accompanying Managements Report on Internal Control over
Financial Reporting, that TeleCommunication Systems, Inc.
maintained effective internal control over financial reporting
as of December 31, 2005, based on criteria established in
Internal Control  Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). TeleCommunication Systems, Inc.s
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on managements
assessment and an opinion on the effectiveness of the
companys internal control over financial reporting based
on our audit.

We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.

A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.

Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.

In our opinion, managements assessment that
TeleCommunication Systems, Inc. maintained effective internal
control over financial reporting as of December 31, 2005,
is fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, TeleCommunication Systems, Inc.
maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2005, based on
the COSO criteria.

We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of TeleCommunication Systems, Inc.
as of December 31, 2005 and 2004, and the related
consolidated statements of operations, stockholders
equity, and cash flows for each of the three years in the period
ended December 31, 2005 of TeleCommunication Systems, Inc.
and our report dated March 16, 2006 expressed an unqualified
opinion thereon.



/s/ Ernst & Young LLPBaltimore, Maryland

March 16, 2006

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##### Table of Contents

Part III







Item 10.
    Directors and Executive Officers of the
    RegistrantThe information required by this Item 10 is incorporated by
reference from the information captioned Board of
Directors and Security Ownership of Certain
Beneficial Owners and Management to be included in the
Companys definitive proxy statement to be filed in
connection with the Annual Meeting of Stockholders, to be held
on June 8, 2006 (the Proxy Statement).







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







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







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







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

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##### Table of Contents

Part IV







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

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

(a)(2) Financial Statement Schedules

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

Exhibits

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

48



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##### Table of Contents

Index to Consolidated Financial Statements

|                                                                                                                          |  |  |     | 
|------------------------------------------------------------------------------------------------------------------------- |  |  | --- | 
|Report of
    Independent Registered Public Accounting Firm                                                               |  |  | F-2 | 
|Consolidated
    Balance Sheets as of December 31, 2005 and 2004                                                          |  |  | F-3 | 
|Consolidated
    Statements of Operations for each of the three years in the
    period ended December 31, 2005           |  |  | F-4 | 
|Consolidated
    Statements of Stockholders Equity for each of the three
    years in the period ended December 31, 2005 |  |  | F-5 | 
|Consolidated
    Statements of Cash Flows for each of the three years in the
    period ended December 31, 2005           |  |  | F-7 | 
|Notes to
    Consolidated Financial Statements                                                                            |  |  | F-8 | 

F-1



---



##### Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

TeleCommunication Systems, Inc.

We have audited the accompanying consolidated balance sheets of
TeleCommunication Systems, Inc. and subsidiaries as of
December 31, 2005 and 2004, and the related consolidated
statements of operations, stockholders equity, and cash
flows for each of the three years in the period ended
December 31, 2005. Our audits also included the financial
statement schedule listed in the Index at Item 15. These
financial statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audits. As of December 31, 2005 and for the year then
ended, we did not audit the financial statements of
TeleCommunication Systems (Holdings) Ltd, a wholly-owned
subsidiary, which statements reflect total assets of
5 percent of the consolidated total as of December 31,
2005 and a net loss, which represents 25% of the consolidated
loss from discontinued operations for the year then ended. Those
statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the
amounts included for TeleCommunication Systems (Holdings) Ltd,
is based solely on the report of the other auditors

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

In our opinion, based on our audits and the report of the other
auditors, the financial statements referred to above present
fairly, in all material respects, the consolidated financial
position of TeleCommunication Systems, Inc. at December 31,
2005 and 2004, and the consolidated results of its operations
and its cash flows for each of the three years in the period
ended December 31, 2005, in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.

We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of TeleCommunication Systems, Inc.s internal
control over financial reporting as of December 31, 2005,
based on criteria established in Internal Control-Integrated
Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated
March 16, 2006 expressed an unqualified opinion thereon.



/s/ Ernst & Young LLPBaltimore, Maryland

March 16, 2006

F-2



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##### Table of Contents

TeleCommunication Systems, Inc.

Consolidated Balance Sheets

(amounts in thousands, except share data)

|                                         |                                                                                                                         |                                                                            |                                                                                                                     |                                                |              |     |        |        |          |     |         | 
|---------------------------------------- | ----------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | ------------ | --- | ------ | ------ | -------- | --- | ------- | 
|                                         |                                                                                                                         | December 31,                                                               |                                                                                                                     |                                                | December 31, |    
|                                         |                                                                                                                         | 2005                                                                       |                                                                                                                     |                                                | 2004         |    
|                                         |                                                                                                                         |                                                                            |                                                                                                                     |                                                |              |    
|Assets                                   |                                                                                                                         |                                                                            |                                                                                                                     |                                                |              |     |        |       
|                                         | Current assets:                                                                                                         |                                                                            |                                                                                                                     |                                                |              |     |        |        |         
|                                         |                                                                                                                         | Cash and cash equivalents                                                  |                                                                                                                     | $                                              | 9,320        |     |        | $      | 18,251   |    
|                                         |                                                                                                                         | Accounts receivable, net of
    allowance of $233 in 2005 and $690 in 2004 |                                                                                                                     |                                                | 20,886       |     |        |        | 18,295   |    
|                                         |                                                                                                                         | Unbilled receivables                                                       |                                                                                                                     |                                                | 6,361        |     |        |        | 9,885    |    
|                                         |                                                                                                                         | Inventory                                                                  |                                                                                                                     |                                                | 3,197        |     |        |        | 3,427    |    
|                                         |                                                                                                                         | Other current assets                                                       |                                                                                                                     |                                                | 2,970        |     |        |        | 1,830    |    
|                                         |                                                                                                                         | Current assets of discontinued
    operations                              |                                                                                                                     |                                                | 22,891       |     |        |        | 7,758    |    
|                                         |                                                                                                                         |                                                                            |                                                                                                                     |                                                |              |    
|                                         |                                                                                                                         |                                                                            |                                                                                                                     | Total current assets                           |              |     | 65,625 |        |          |     | 59,446  | 
|                                         | Property and equipment, net of
    accumulated depreciation and amortization of $34,134 in 2005 and
    $27,504 in 2004 |                                                                            |                                                                                                                     | 16,323                                         |              |     |        | 16,810 |         
|                                         | Software development costs, net of
    accumulated amortization of $1,990 in 2005 and $1,204 in 2004                    |                                                                            |                                                                                                                     | 3,825                                          |              |     |        | 2,651  |         
|                                         | Acquired intangible assets, net of
    accumulated amortization of $214 in 2005 and $37 in 2004                         |                                                                            |                                                                                                                     | 1,004                                          |              |     |        | 1,151  |         
|                                         | Goodwill                                                                                                                |                                                                            |                                                                                                                     | 1,813                                          |              |     |        | 1,761  |         
|                                         | Other assets                                                                                                            |                                                                            |                                                                                                                     | 1,982                                          |              |     |        | 1,570  |         
|                                         | Noncurrent assets of discontinued
    operations                                                                        |                                                                            |                                                                                                                     |                                               |              |     |        | 18,993 |         
|                                         |                                                                                                                         |                                                                            |                                                                                                                     |                                                |              |    
|                                         |                                                                                                                         |                                                                            |                                                                                                                     | Total assets                                   |              | $   | 90,572 |        |          | $   | 102,382 | 
|                                         |                                                                                                                         |                                                                            |                                                                                                                     |                                                |              |    
|Liabilities and
    stockholders equity |                                                                                                                         |                                                                            |                                                                                                                     |                                                |              |     |        |       
|                                         | Current liabilities:                                                                                                    |                                                                            |                                                                                                                     |                                                |              |     |        |        |         
|                                         |                                                                                                                         | Accounts payable and accrued
    expenses                                  |                                                                                                                     | $                                              | 10,175       |     |        | $      | 8,702    |    
|                                         |                                                                                                                         | Accrued payroll and related
    liabilities                                |                                                                                                                     |                                                | 3,971        |     |        |        | 3,526    |    
|                                         |                                                                                                                         | Deferred revenue                                                           |                                                                                                                     |                                                | 4,123        |     |        |        | 3,365    |    
|                                         |                                                                                                                         | Current portion of notes payable,
    including line of credit             |                                                                                                                     |                                                | 10,180       |     |        |        | 11,993   |    
|                                         |                                                                                                                         | Current portion of capital lease
    obligations                           |                                                                                                                     |                                                | 3,001        |     |        |        | 2,765    |    
|                                         |                                                                                                                         | Current liabilities of discontinued
    operations                         |                                                                                                                     |                                                | 6,719        |     |        |        | 8,891    |    
|                                         |                                                                                                                         |                                                                            |                                                                                                                     |                                                |              |    
|                                         |                                                                                                                         |                                                                            |                                                                                                                     | Total current liabilities                      |              |     | 38,169 |        |          |     | 39,242  | 
|                                         | Capital lease obligations and notes
    payable, less current portion                                                   |                                                                            |                                                                                                                     | 3,341                                          |              |     |        | 3,634  |         
|                                         | Stockholders equity:                                                                                                   |                                                                            |                                                                                                                     |                                                |              |     |        |        |         
|                                         |                                                                                                                         | Class A Common Stock;
    $0.01 par value:                                 |                                                                                                                     |                                                |              |     |        |        |          |    
|                                         |                                                                                                                         |                                                                            | Authorized shares 
    225,000,000; issued and outstanding shares of 31,381,575 in 2005
    and 30,626,454 in 2004 |                                                |              | 314 |        |        |          | 306 |        
|                                         |                                                                                                                         | Class B Common Stock;
    $0.01 par value:                                 |                                                                                                                     |                                                |              |     |        |        |          |    
|                                         |                                                                                                                         |                                                                            | Authorized shares 
    75,000,000; issued and outstanding shares of 8,035,963 in 2005
    and 8,409,001 in 2004    |                                                |              | 80  |        |        |          | 84  |        
|                                         |                                                                                                                         | Deferred compensation                                                      |                                                                                                                     |                                                | (231         | )   |        |        | (787     | )  
|                                         |                                                                                                                         | Additional paid-in capital                                                 |                                                                                                                     |                                                | 210,275      |     |        |        | 209,778  |    
|                                         |                                                                                                                         | Accumulated other comprehensive
    loss:                                  |                                                                                                                     |                                                |              |     |        |        |          |    
|                                         |                                                                                                                         |                                                                            | Cumulative foreign currency
    translation adjustment                                                              |                                                |              | (40 | )      |        |          | (6  | )      
|                                         |                                                                                                                         | Accumulated deficit                                                        |                                                                                                                     |                                                | (161,336     | )   |        |        | (149,869 | )  
|                                         |                                                                                                                         |                                                                            |                                                                                                                     |                                                |              |    
|                                         |                                                                                                                         |                                                                            |                                                                                                                     | Total stockholders equity                     |              |     | 49,062 |        |          |     | 59,506  | 
|                                         |                                                                                                                         |                                                                            |                                                                                                                     |                                                |              |    
|                                         |                                                                                                                         |                                                                            |                                                                                                                     | Total liabilities and
    stockholders equity |              | $   | 90,572 |        |          | $   | 102,382 | 
|                                         |                                                                                                                         |                                                                            |                                                                                                                     |                                                |              |    



F-3



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##### Table of Contents

TeleCommunication Systems, Inc.

Consolidated Statements of Operations

(amounts in thousands, except per share data)

|                                                          |                                                                                                                                                            |                         |                                               |        |         |        |         |        |        |        |         |        |        |        | 
|--------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------- | --------------------------------------------- | ------ | ------- | ------ | ------- | ------ | ------ | ------ | ------- | ------ | ------ | ------ | 
|                                                          |                                                                                                                                                            | Year ended December 31, |                                              
|                                                          |                                                                                                                                                            |                         |                                              
|                                                          |                                                                                                                                                            | 2005                    |                                               |        | 2004    |        |         | 2003   |       
|                                                          |                                                                                                                                                            |                         |                                               |        |         |        |         |        |       
|Revenue                                                   |                                                                                                                                                            |                         |                                               |        |         |        |         |        |        |        |         |       
|                                                          | Hosted, subscriber, and maintenance                                                                                                                        |                         | $                                             | 52,867 |         |        | $       | 44,256 |        |        | $       | 37,656 |       
|                                                          | Services                                                                                                                                                   |                         |                                               | 22,105 |         |        |         | 15,978 |        |        |         | 13,923 |       
|                                                          | Systems                                                                                                                                                    |                         |                                               | 27,181 |         |        |         | 36,678 |        |        |         | 40,486 |       
|                                                          |                                                                                                                                                            |                         |                                               |        |         |        |         |        |       
|                                                          |                                                                                                                                                            | Total revenue           |                                               |        | 102,153 |        |         |        | 96,912 |        |         |        | 92,065 |       
|                                                          |                                                                                                                                                            |                         |                                               |        |         |        |         |        |       
|Direct costs of
    revenue                               |                                                                                                                                                            |                         |                                               |        |         |        |         |        |        |        |         |       
|                                                          | Direct cost of hosted, subscriber,
    and maintenance revenue, including amortization of software
    development costs of $0, $0, and $161, respectively |                         |                                               | 25,233 |         |        |         | 21,257 |        |        |         | 18,082 |       
|                                                          | Direct cost of services                                                                                                                                    |                         |                                               | 13,981 |         |        |         | 9,669  |        |        |         | 9,835  |       
|                                                          | Direct cost of systems, including
    amortization of software development costs of $786, $445, and
    $8,874, respectively                               |                         |                                               | 17,719 |         |        |         | 21,227 |        |        |         | 32,299 |       
|                                                          |                                                                                                                                                            |                         |                                               |        |         |        |         |        |       
|                                                          |                                                                                                                                                            |                         | Total direct cost of revenue                  |        |         | 56,933 |         |        |        | 52,153 |         |        |        | 60,216 | 
|                                                          |                                                                                                                                                            |                         |                                               |        |         |        |         |        |       
|Hosted, subscriber, and maintenance
    gross profit      |                                                                                                                                                            |                         | 27,634                                        |        |         |        | 22,999  |        |        |        | 19,574  |       
|Services gross profit                                     |                                                                                                                                                            |                         | 8,124                                         |        |         |        | 6,309   |        |        |        | 4,088   |       
|Systems gross profit                                      |                                                                                                                                                            |                         | 9,462                                         |        |         |        | 15,451  |        |        |        | 8,187   |       
|                                                          |                                                                                                                                                            |                         |                                               |        |         |        |         |        |       
|                                                          |                                                                                                                                                            |                         | Total gross profit                            |        |         | 45,220 |         |        |        | 44,759 |         |        |        | 31,849 | 
|                                                          |                                                                                                                                                            |                         |                                               |        |         |        |         |        |       
|Operating costs and
    expenses                          |                                                                                                                                                            |                         |                                               |        |         |        |         |        |        |        |         |       
|                                                          | Research and development expense                                                                                                                           |                         |                                               | 13,852 |         |        |         | 17,966 |        |        |         | 16,932 |       
|                                                          | Sales and marketing expense                                                                                                                                |                         |                                               | 10,517 |         |        |         | 8,917  |        |        |         | 8,917  |       
|                                                          | General and administrative expense                                                                                                                         |                         |                                               | 14,369 |         |        |         | 14,050 |        |        |         | 11,251 |       
|                                                          | Non-cash stock compensation expense                                                                                                                        |                         |                                               | 720    |         |        |         | 1,195  |        |        |         | 1,501  |       
|                                                          | Depreciation and amortization of
    property and equipment                                                                                                |                         |                                               | 8,625  |         |        |         | 7,353  |        |        |         | 6,612  |       
|                                                          | Amortization of acquired intangible
    assets                                                                                                             |                         |                                               | 177    |         |        |         | 37     |        |        |         | 531    |       
|                                                          |                                                                                                                                                            |                         |                                               |        |         |        |         |        |       
|                                                          |                                                                                                                                                            |                         | Total operating costs and expenses            |        |         | 48,260 |         |        |        | 49,518 |         |        |        | 45,744 | 
|                                                          |                                                                                                                                                            |                         |                                               |        |         |        |         |        |       
|Loss from operations                                      |                                                                                                                                                            |                         | (3,040                                        | )      |         |        | (4,759  | )      |        |        | (13,895 | )     
|Interest expense                                          |                                                                                                                                                            |                         | (1,172                                        | )      |         |        | (3,196  | )      |        |        | (1,088  | )     
|Debt conversion expense                                   |                                                                                                                                                            |                         |                                              |        |         |        | (7,886  | )      |        |        |        |       
|Other (expense)/income, net                               |                                                                                                                                                            |                         | (104                                          | )      |         |        | (61     | )      |        |        | 1,497   |       
|                                                          |                                                                                                                                                            |                         |                                               |        |         |        |         |        |       
|Loss from continuing
    operations                       |                                                                                                                                                            |                         | (4,316                                        | )      |         |        | (15,902 | )      |        |        | (13,486 | )     
|Loss from discontinued operations                         |                                                                                                                                                            |                         | (7,151                                        | )      |         |        | (2,646  | )      |        |        |        |       
|                                                          |                                                                                                                                                            |                         |                                               |        |         |        |         |        |       
|Net loss                                                  |                                                                                                                                                            | $                       | (11,467                                       | )      |         | $      | (18,548 | )      |        | $      | (13,486 | )     
|                                                          |                                                                                                                                                            |                         |                                               |        |         |        |         |        |       
|Loss per share:                                           |                                                                                                                                                            |                         |                                               |        |         |        |         |        |        |        |         |       
|Loss per share from continuing
    operations             |                                                                                                                                                            |                         | (0.11                                         | )      |         |        | (0.48   | )      |        |        | (0.45   | )     
|Loss per share from discontinued
    operations           |                                                                                                                                                            |                         | (0.19                                         | )      |         |        | (0.08   | )      |        |        |        |       
|                                                          |                                                                                                                                                            |                         |                                               |        |         |        |         |        |       
|Net loss per share-basic and
    diluted                  |                                                                                                                                                            | $                       | (0.30                                         | )      |         | $      | (0.56   | )      |        | $      | (0.45   | )     
|                                                          |                                                                                                                                                            |                         |                                               |        |         |        |         |        |       
|Weighted average shares
    outstanding-basic and diluted |                                                                                                                                                            |                         | 38,823                                        |        |         |        | 33,381  |        |        |        | 29,796  |       
|                                                          |                                                                                                                                                            |                         |                                               |        |         |        |         |        |       
|Composition of non-cash stock
    compensation expense:   |                                                                                                                                                            |                         |                                               |        |         |        |         |        |        |        |         |       
|                                                          | Direct costs of revenue                                                                                                                                    |                         | $                                             | 16     |         |        | $       | 53     |        |        | $       | 93     |       
|                                                          | Research and development expense                                                                                                                           |                         |                                               | 11     |         |        |         | 140    |        |        |         | 245    |       
|                                                          | Sales and marketing expense                                                                                                                                |                         |                                               | 18     |         |        |         | 56     |        |        |         | 171    |       
|                                                          | General and administrative expense                                                                                                                         |                         |                                               | 675    |         |        |         | 946    |        |        |         | 992    |       
|                                                          |                                                                                                                                                            |                         |                                               |        |         |        |         |        |       
|                                                          |                                                                                                                                                            |                         | Total non-cash stock compensation
    expense |        | $       | 720    |         |        | $      | 1,195  |         |        | $      | 1,501  | 
|                                                          |                                                                                                                                                            |                         |                                               |        |         |        |         |        |       



F-4



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##### Table of Contents

TeleCommunication Systems, Inc.

Consolidated Statements of Stockholders Equity

(amounts in thousands, except share data)

|                                                                                                                                                        |  |         |     |   |         |   |    |              |  |             |         |   |       |               |         |             |  |   |       |  |  |   |          |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------- | --- | - | ------- | - | -- | ------------ |  | ----------- | ------- | - | ----- | ------------- | ------- | ----------- |  | - | ----- |  |  | - | -------- | - |  | - | ------- | -
|                                                                                                                                                        |  |         |     |   |         |   |    |              |  | Accumulated |         |   |       |              
|                                                                                                                                                        |  | Class A |     |   | Class B |   |    |              |  | Additional  |         |   | Other |               |         |             | 
|                                                                                                                                                        |  | Common  |     |   | Common  |   |    | Deferred     |  |             | Paid-In |   |       | Comprehensive |         | Accumulated |  |   |      
|                                                                                                                                                        |  | Stock   |     |   | Stock   |   |    | Compensation |  |             | Capital |   |       | Loss          |         | Deficit     |  |   | Total | 
|                                                                                                                                                        |  |         |     |   |         |   |    |              |  |             |         |   |       |               |         |             |  |   |       | 
|Balance at January 1,
    2003                                                                                                                          |  | $       | 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  |  
|Options exercised for the purchase
    of 537,333 shares of Class A Common Stock                                                                        |  |         | 5   |   |         |   |   |              |  |             |        |   |       |               | 1,053   |             |  |   |      |  |  |   |         |   |  |   | 1,058   |  
|Issuance of 85,901 shares of
    Class A Common Stock under Employee Stock Purchase Plan                                                                |  |         | 1   |   |         |   |   |              |  |             |        |   |       |               | 344     |             |  |   |      |  |  |   |         |   |  |   | 345     |  
|Issuance of 1,568,308 shares
    of Class A Common Stock in connection with the Enterprise
    acquisition and related financing, net of issuance costs |  |         | 16  |   |         |   |   |              |  |             |        |   |       |               | 8,366   |             |  |   |      |  |  |   |         |   |  |   | 8,382   |  
|Issuance of 2,500,000 shares
    of Class A Common Stock in connection with a private
    financing, net of issuance costs                              |  |         | 25  |   |         |   |   |              |  |             |        |   |       |               | 9,317   |             |  |   |      |  |  |   |         |   |  |   | 9,342   |  
|Issuance of 2,990,544 shares
    of Class A Common Stock for the conversion of the
    convertible subordinated debentures                              |  |         | 29  |   |         |   |   |              |  |             |        |   |       |               | 15,871  |             |  |   |      |  |  |   |         |   |  |   | 15,900  |  
|Issuance of 45,376 shares of
    Class A Common Stock for accrued interest for convertible
    subordinated debentures                                  |  |         |    |   |         |   |   |              |  |             |        |   |       |               | 209     |             |  |   |      |  |  |   |         |   |  |   | 209     |  
|Surrender of 79,563 restricted
    shares of Class A Common Stock as payment for payroll tax
    withholdings                                           |  |         | (1  | ) |         |   |   |              |  |             |        |   |       |               | (449    | )           |  |   |      |  |  |   |         |   |  |   | (450    | )
|Fair value of beneficial conversion
    feature of convertible subordinated debentures                                                                  |  |         |    |   |         |   |   |              |  |             |        |   |       |               | 3,662   |             |  |   |      |  |  |   |         |   |  |   | 3,662   |  

|                                            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|------------------------------------------- |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|                                           
|(statement continued on
    following page)

F-5



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##### Table of Contents

TeleCommunication Systems, Inc.

Consolidated Statements of Stockholders
Equity  (Continued)

(amounts in thousands, except share data)

|                                                                                                                  |  |         |     |   |         |   |     |              |  |             |         |   |       |               |         |   |             |   |     |       |  |   |          |   |  |   |         |  
|----------------------------------------------------------------------------------------------------------------- |  | ------- | --- | - | ------- | - | --- | ------------ |  | ----------- | ------- | - | ----- | ------------- | ------- | - | ----------- | - | --- | ----- |  | - | -------- | - |  | - | ------- | -
|                                                                                                                  |  |         |     |   |         |   |     |              |  | Accumulated |         |   |       |               |        
|                                                                                                                  |  | Class A |     |   | Class B |   |     |              |  | Additional  |         |   | Other |               |         |   |             |  
|                                                                                                                  |  | Common  |     |   | Common  |   |     | Deferred     |  |             | Paid-In |   |       | Comprehensive |         |   | Accumulated |   |     |      
|                                                                                                                  |  | Stock   |     |   | Stock   |   |     | Compensation |  |             | Capital |   |       | Loss          |         |   | Deficit     |   |     | Total | 
|                                                                                                                  |  |         |     |   |         |   |     |              |  |             |         |   |       |               |         |   |             |   |     |       | 
|Issuance of warrants to
    purchase 341,072 shares of Class A Common Stock                                       |  |         |    |   |         |   |    |              |  |             |        |   |       |               | 1,395   |   |             |   |    |       |  |   |         |   |  |   | 1,395   |  
|Conversion of 954,687 shares
    of Class B Common Stock to Class A Common Stock                                  |  |         | 10  |   |         |   | (10 | )            |  |             |        |   |       |               |        |   |             |   |    |       |  |   |         |   |  |   |        |  
|Stock compensation expense for
    issuance of Class A Common Stock options at below fair
    market value        |  |         |    |   |         |   |    |              |  |             |        |   |       |               | 583     |   |             |   |    |       |  |   |         |   |  |   | 583     |  
|Amortization of deferred
    compensation expense                                                                 |  |         |    |   |         |   |    |              |  |             | 612     |   |       |               |        |   |             |   |    |       |  |   |         |   |  |   | 612     |  
|Fair value of stock options issued
    to non-employees for service                                               |  |         |    |   |         |   |    |              |  |             |        |   |       |               | 171     |   |             |   |    |       |  |   |         |   |  |   | 171     |  
|Foreign currency translation
    adjustment                                                                       |  |         |    |   |         |   |    |              |  |             |        |   |       |               |        |   |             |   | (6  | )     |  |   |         |   |  |   | (6      | )
|Net loss for 2004                                                                                                 |  |         |    |   |         |   |    |              |  |             |        |   |       |               |        |   |             |   |    |       |  |   | (18,548  | ) |  |   | (18,548 | )
|                                                                                                                  |  |         |     |   |         |   |     |              |  |             |         |   |       |               |         |   |             |   |     |       | 
|Balance at December 31,
    2004                                                                                  |  | $       | 306 |   |         | $ | 84  |              |  | $           | (787    | ) |       | $             | 209,778 |   |             | $ | (6  | )     |  | $ | (149,869 | ) |  | $ | 59,506  |  
|Options exercised for the purchase
    of 290,980 shares of Class A Common Stock                                  |  |         | 3   |   |         |   |    |              |  |             |        |   |       |               | 310     |   |             |   |    |       |  |   |         |   |  |   | 313     |  
|Issuance of 176,851 shares of
    Class A Common Stock under Employee Stock Purchase Plan                         |  |         | 2   |   |         |   |    |              |  |             |        |   |       |               | 380     |   |             |   |    |       |  |   |         |   |  |   | 382     |  
|Issuance of 14,816 restricted
    shares of Class A Common Stock to directors and key
    executives              |  |         |    |   |         |   |    |              |  |             | (41     | ) |       |               | 41      |   |             |   |    |       |  |   |         |   |  |   |        |  
|Issuance costs related to
    2,500,000 shares of Class A Common Stock in connection
    with a private financing |  |         |    |   |         |   |    |              |  |             |        |   |       |               | (81     | ) |             |   |    |       |  |   |         |   |  |   | (81     | )
|Surrender of 100,564 restricted
    shares of Class A Common Stock as payment for payroll tax
    withholdings    |  |         | (1  | ) |         |   |    |              |  |             |        |   |       |               | (249    | ) |             |   |    |       |  |   |         |   |  |   | (250    | )
|Conversion of 373,038 shares
    of Class B Common Stock to Class A Common Stock                                  |  |         | 4   |   |         |   | (4  | )            |  |             |        |   |       |               |        |   |             |   |    |       |  |   |         |   |  |   |        |  
|Stock compensation expense for
    issuance of Class A Common Stock options at below fair
    market value        |  |         |    |   |         |   |    |              |  |             |        |   |       |               | 123     |   |             |   |    |       |  |   |         |   |  |   | 123     |  
|Amortization of deferred
    compensation expense                                                                 |  |         |    |   |         |   |    |              |  |             | 597     |   |       |               |        |   |             |   |    |       |  |   |         |   |  |   | 597     |  
|Valuation adjustment to stock
    options issued to non-employees for service                                     |  |         |    |   |         |   |    |              |  |             |        |   |       |               | (27     | ) |             |   |    |       |  |   |         |   |  |   | (27     | )
|Foreign currency translation
    adjustment                                                                       |  |         |    |   |         |   |    |              |  |             |        |   |       |               |        |   |             |   | (34 | )     |  |   |         |   |  |   | (34     | )
|Net loss for 2005                                                                                                 |  |         |    |   |         |   |    |              |  |             |        |   |       |               |        |   |             |   |    |       |  |   | (11,467  | ) |  |   | (11,467 | )
|                                                                                                                  |  |         |     |   |         |   |     |              |  |             |         |   |       |               |         |   |             |   |     |       | 
|Balance at December 31,
    2005                                                                                  |  | $       | 314 |   |         | $ | 80  |              |  | $           | (231    | ) |       | $             | 210,275 |   |             | $ | (40 | )     |  | $ | (161,336 | ) |  | $ | 49,062  |  
|                                                                                                                  |  |         |     |   |         |   |     |              |  |             |         |   |       |               |         |   |             |   |     |       | 



F-6



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##### Table of Contents

TeleCommunication Systems, Inc.

Consolidated Statements of Cash Flows

(amounts in thousands)

|                                                                                                           |                                                                          |                                             |         |       |        |   |         |       |        |   |         |       |        |  
|---------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | ------------------------------------------- | ------- | ----- | ------ | - | ------- | ----- | ------ | - | ------- | ----- | ------ | -
|                                                                                                           |                                                                          | Year ended December 31,                     |        
|                                                                                                           |                                                                          |                                             |        
|                                                                                                           |                                                                          | 2005                                        |         |       | 2004   |   |         | 2003  |       
|                                                                                                           |                                                                          |                                             |         |       |        |   |         |       |       
|Operating activities:                                                                                      |                                                                          |                                             |         |       |        |   |         |       |        |   |         |      
|Net loss                                                                                                   |                                                                          | $                                           | (11,467 | )     |        | $ | (18,548 | )     |        | $ | (13,486 | )    
|Adjustments to reconcile net loss
    to net cash used in operating activities:                            |                                                                          |                                             |         |       |        |   |         |       |        |   |         |      
|                                                                                                           | Depreciation and amortization of
    property and equipment              |                                             |         | 9,310 |        |   |         | 7,795 |        |   |         | 6,612 |       
|                                                                                                           | Amortization of acquired intangible
    assets                           |                                             |         | 2,817 |        |   |         | 2,165 |        |   |         | 531   |       
|                                                                                                           | Non-cash stock compensation expense                                      |                                             |         | 720   |        |   |         | 1,195 |        |   |         | 1,501 |       
|                                                                                                           | Amortization of software
    development costs                           |                                             |         | 945   |        |   |         | 597   |        |   |         | 9,035 |       
|                                                                                                           | Non-cash debt conversion expense                                         |                                             |         |      |        |   |         | 6,886 |        |   |         |      |       
|                                                                                                           | Amortization of debt discount                                            |                                             |         |      |        |   |         | 1,344 |        |   |         |      |       
|                                                                                                           | Amortization of deferred financing
    fees included in interest expense |                                             |         | 470   |        |   |         | 464   |        |   |         | 69    |       
|                                                                                                           | Other non-cash expenses                                                  |                                             |         | 484   |        |   |         | 501   |        |   |         | 403   |       
|                                                                                                           | State of Maryland loan forgiveness                                       |                                             |         |      |        |   |         | (100  | )      |   |         | (100  | )     
|                                                                                                           | Changes in operating assets and
    liabilities:                         |                                             |         |       |        |   |         |       |        |   |         |       |       
|                                                                                                           |                                                                          | Accounts receivable, net                    |         |       | (428   | ) |         |       | 3,440  |   |         |       | 2,310  |  
|                                                                                                           |                                                                          | Unbilled receivables                        |         |       | 3,882  |   |         |       | (1,087 | ) |         |       | (1,482 | )
|                                                                                                           |                                                                          | Inventory                                   |         |       | (634   | ) |         |       | (2,924 | ) |         |       |       |  
|                                                                                                           |                                                                          | Other assets                                |         |       | (2,029 | ) |         |       | 275    |   |         |       | (705   | )
|                                                                                                           |                                                                          | Accounts payable and accrued
    expenses   |         |       | 253    |   |         |       | (2,410 | ) |         |       | (7,457 | )
|                                                                                                           |                                                                          | Accrued payroll and related
    liabilities |         |       | 72     |   |         |       | 123    |   |         |       | (64    | )
|                                                                                                           |                                                                          | Deferred revenue                            |         |       | 359    |   |         |       | 479    |   |         |       | (1,163 | )
|                                                                                                           |                                                                          |                                             |         |       |        |   |         |       |       
|Net cash provided by/(used in)
    operating activities                                                    |                                                                          |                                             | 4,754   |       |        |   | 195     |       |        |   | (3,996  | )    
|                                                                                                           |                                                                          |                                             |         |       |        |   |         |       |       
|Investing activities:                                                                                      |                                                                          |                                             |         |       |        |   |         |       |        |   |         |      
|Acquisitions, net of cash acquired                                                                         |                                                                          |                                             | (124    | )     |        |   | (24,751 | )     |        |   |        |      
|Purchases of property and equipment                                                                        |                                                                          |                                             | (6,077  | )     |        |   | (7,000  | )     |        |   | (5,951  | )    
|Capitalized software development
    costs                                                                 |                                                                          |                                             | (2,512  | )     |        |   |        |       |        |   | (1,865  | )    
|Other                                                                                                      |                                                                          |                                             |        |       |        |   | 2,713   |       |        |   | (1,690  | )    
|                                                                                                           |                                                                          |                                             |         |       |        |   |         |       |       
|Net cash used in investing
    activities                                                                  |                                                                          |                                             | (8,713  | )     |        |   | (29,038 | )     |        |   | (9,506  | )    
|                                                                                                           |                                                                          |                                             |         |       |        |   |         |       |       
|Financing activities:                                                                                      |                                                                          |                                             |         |       |        |   |         |       |        |   |         |      
|Payments on long-term debt and
    capital lease obligations                                               |                                                                          |                                             | (10,451 | )     |        |   | (8,985  | )     |        |   | (5,450  | )    
|Proceeds from issuance of
    Class A Common Stock and Convertible subordinated debentures                 |                                                                          |                                             |        |       |        |   | 31,000  |       |        |   |        |      
|Payment to induce conversion of
    convertible subordinated debenture                                     |                                                                          |                                             |        |       |        |   | (1,000  | )     |        |   |        |      
|Financing fees related to issuance
    of Class A Common Stock and Convertible subordinated
    debentures |                                                                          |                                             | (81     | )     |        |   | (1,758  | )     |        |   |        |      
|Proceeds from draws on revolving
    line of credit, net                                                   |                                                                          |                                             | 3,004   |       |        |   | 5,000   |       |        |   |        |      
|Proceeds from issuance of long-term
    debt                                                               |                                                                          |                                             | 2,000   |       |        |   | 2,500   |       |        |   | 9,266   |      
|Proceeds from exercise of employee
    stock options and sale of stock                                     |                                                                          |                                             | 696     |       |        |   | 1,403   |       |        |   | 1,069   |      
|                                                                                                           |                                                                          |                                             |         |       |        |   |         |       |       
|Net cash (used in)/provided by
    financing activities                                                    |                                                                          |                                             | (4,832  | )     |        |   | 28,160  |       |        |   | 4,885   |      
|                                                                                                           |                                                                          |                                             |         |       |        |   |         |       |       
|Net decrease in cash                                                                                       |                                                                          |                                             | (8,791  | )     |        |   | (683    | )     |        |   | (8,617  | )    
|Effect of exchange rates on cash
    and cash equivalents                                                  |                                                                          |                                             | (140    | )     |        |   | 149     |       |        |   |        |      
|Cash and cash equivalents at the
    beginning of the period                                               |                                                                          |                                             | 18,251  |       |        |   | 18,785  |       |        |   | 27,402  |      
|                                                                                                           |                                                                          |                                             |         |       |        |   |         |       |       
|Cash and cash equivalents at the
    end of the period                                                     |                                                                          | $                                           | 9,320   |       |        | $ | 18,251  |       |        | $ | 18,785  |      
|                                                                                                           |                                                                          |                                             |         |       |        |   |         |       |       



F-7



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##### Table of Contents

TeleCommunication Systems, Inc.





Notes to Consolidated Financial Statements

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



1.
    Significant Accounting PoliciesDescription
of Business

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



Commercial Applications Segment. Our carrier software
    system products enable wireless carriers to deliver short text
    messages, location information, internet content, and other
    enhanced communication services to and from wireless phones. We
    provide enhanced 9-1-1
    (E9-1-1) services,
    commercial location-based services, and inter-carrier text
    message distribution services on a hosted, or service bureau
    basis. As of December 31, 2005, we provide hosted services
    under contracts with 36 wireless carrier networks as well as
    Voice-over-Internet-Protocol (VoIP) service providers. We also
    earn subscriber revenue through wireless applications including
    our Rand
    McNallytm
    Traffic application which is available via all major US wireless
    carriers. We earn carrier software-based systems revenue through
    the sale of licenses, deployment and customization fees and
    maintenance fees. Pricing is generally based on the volume of
    capacity purchased from us by the carrier. As of
    December 31, 2005, we had deployed 85 software systems for
    our customers in wireless carrier networks around the world,
    including those of Verizon Wireless, Vodafone,
    T-Mobile, Telefonica
    and its affiliate Vivo, Alltel, and Hutchison Whampoas
    3tm-brand
    third generation networks. We also provide carrier technology on
    a hosted, i.e., service bureau basis; that is, customers use our
    software functionality through connections to and from our
    network operations centers, paying us monthly based on the
    number of subscribers, cell sites, or call center circuits, or
    message volume. As set forth in Note 3, we acquired
    substantially all of the assets of Kivera, Inc. (Kivera), a
    provider of Internet-based location application software and
    geo-data professional services, on September 20, 2004. The
    acquired operations are included in our Commercial Applications
    segment beginning on the effective date of the acquisitions.Government Segment. We design, furnish, install and
    operate wireless and data network communication systems,
    including our
    SwiftLink®
    deployable communication systems which incorporate high speed,
    satellite, and internet protocol technology. More than 600 of
    our
    SwiftLink®
    deployable communication systems are in use for security,
    defense, and law enforcement around the world. We also own and
    operate secure satellite teleport facilities, and resell access
    to satellite airtime (known as space segment).Enterprise Assets. As set forth in Note 2, we
    acquired the Enterprise Mobility Solutions (Enterprise) division
    of Aether Systems, Inc. on January 13, 2004, with an
    effective date of January 1, 2004. Prior to
    December 31, 2005, we adopted a plan to sell the Enterprise
    division. These assets and the related operations are classified
    as discontinued operations as of December 31, 2005.Capital Resource Risks. We have incurred net losses in
recent years, and our monthly cash flows are subject to
variability. In order to improve our results of operations and
cash flows, we are focusing our efforts on revenue growth,
primarily in the hosted and subscriber service lines, which
provide for more predictable revenue streams. We have also
committed to a plan to sell the Enterprise assets, as discussed
in Note 2. In the event that our results of operations in
2006 are not adequate to fund ongoing obligations, and/or we are
not able to sell the Enterprise assets, we would defer or avoid
cash expenditures in other areas, including research and
development, capital expenditures and/or administrative costs.
We believe that our existing cash resources, including proceeds
received from financings which occurred in March 2006 (see
Note 25), and availability under the bank line of credit
(see Note 12), coupled with expected cash from operations,
will provide sufficient liquidity for us to continue to meet our
obligations through at least January 1, 2007.

F-8



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##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated Financial
Statements  (Continued)

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

However, there can be no assurance that cash flows from
operations will be sufficient to fund our obligations and, as
discussed below, the provisions of our lending documents create
the possibility that our financing arrangements may not remain
available to us.

Our bank credit agreement contains a tangible net worth covenant
which is required to be met on a monthly basis. In March, 2006
the bank amended our line of credit agreement, reducing the
tangible net worth requirement through March 31, 2007, as
discussed in Note 12 to the financial statements. The line
of credit agreement also contains a subjective acceleration
clause which allows the bank to declare the amounts outstanding
under the line of credit due and payable if certain material
adverse changes occur, as described in Note 12. Also, the
loan document governing the subordinated debt issued in March
2006 (see Note 25) contains a cross-default provision that
would allow the debt holder to accelerate payment of the
subordinated debt if other debt exceeding $2,500 is declared due
and payable. We believe that we will continue to comply with our
restrictive covenants under our debt agreements. If our
performance does not result in compliance with any of the
restrictive covenants, or if our line of credit agreement lender
seeks to exercise its rights under the subjective acceleration
clause referred to above, we would seek to further modify our
financing arrangements, but there can be no assurance that our
debt holders would not exercise their rights and remedies under
their agreements with us, including declaring all outstanding
debt due and payable.

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

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

Reclassifications. We have reclassified certain
prior-year amounts for comparative purposes. These
reclassifications did not affect our results of operations for
the years presented. In connection with the classification of
our Enterprise assets as discontinued operations, as discussed
in Note 2, we reclassified prior period financial data for
these assets to reflect this classification as of
December 31, 2005. In connection with the realignment of
our segments during 2004, discussed in Note 21, we also
reclassified our revenue categories, consistent with the manner
in which we monitor our business. Our current revenue categories
include hosted, subscriber and maintenance revenue, systems
revenue and services revenue. Current and prior year amounts for
revenues, direct costs of revenue and gross profit have been
reclassified to conform with these classifications.

Cash and Cash Equivalents. Cash and cash equivalents
include cash and highly liquid investments with a maturity of
three months or less when purchased. Cash equivalents are
reported at fair value, which approximates cost. Our line of
credit requires us to maintain a cash balance of at least
$5 million. See Note 12 for additional information.

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

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##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated Financial
Statements  (Continued)

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

Inventory. We maintain inventory of component parts and
finished product for our Government deployable communications
systems. Inventory is stated at the lower of cost or market.
Cost is based on the weighted average method. Cost basis for
finished units includes manufacturing cost. During 2005, based
upon our review of the components of our inventory, the most
recent sales history and the prospects for future sales, we
established a reserve in order to state certain inventory units
at their estimated net realizable value.

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

Goodwill. Goodwill represents the excess of cost over the
fair value of assets of acquired businesses. Goodwill acquired
in a purchase business combination is not amortized, but instead
is evaluated at least annually for impairment using a discounted
cash flow model in accordance with the provisions of Statement
of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets. A majority of our goodwill balance
was reclassified to assets of discontinued operations in
connection with our plan of sale of our Enterprise Assets (see
Note 2, Enterprise Assets  Discontinued
Operations).

Software Development Costs. We capitalize software
development costs after we establish technological feasibility,
and amortize those costs over the estimated useful lives of the
software beginning on the date when the software is first
installed and used. Acquired technology, representing the
estimated value of the proprietary technology acquired in the
2004 acquisitions, has also been recorded as capitalized
software development costs.

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

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

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##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated Financial
Statements  (Continued)

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

For the year ended December 31, 2005, we capitalized $2,512
of software development costs for certain software projects
after the point of technological feasibility had been reached
but before the products were available for general release.
Accordingly, these costs have been capitalized and are being
amortized over their estimated useful lives beginning when the
products are available for general release. The capitalized
costs relate to our location-based software, which is part of
our continuing operations.

We believe that these capitalized costs will be recoverable from
future gross profits generated by these products. Prior to the
second quarter of 2005, our estimates did not sufficiently
demonstrate future realizability of our software development
costs expended on such products; and accordingly, all such costs
were expensed as incurred.

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

Acquired Intangible Assets. In conjunction with the
Kivera acquisition in 2004, we acquired customer lists,
developed technology, and patents that will be amortized over
their respective estimated useful lives.

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

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. Assets to
be disposed of are reported at the lower of carrying values or
fair values, less estimated costs of disposal.

Other Comprehensive Income/loss. Comprehensive
income/loss includes changes in the equity of a business during
a period from transactions and other events and circumstances
from non-owner sources. Other comprehensive income/loss refers
to revenue, expenses, gains and losses that under
U.S. generally accepted accounting principles are included
in comprehensive income, but excluded from net income. For
operations outside the U.S. that prepare financial
statements in currencies other than the U.S. dollar,
results of operations and cash flows are translated at average
exchange rates during the period, and assets and liabilities are
translated at
end-of-period exchange
rates. Translation adjustments for our international
subsidiaries are included as a separate component of accumulated
other comprehensive loss in stockholders equity. Total
comprehensive loss for the three years ended December 31,
2005 was not materially different than consolidated net loss.

Revenue Recognition. Revenue is generated from our two
segments as described below and as discussed more fully in
Note 21.

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

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##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated Financial
Statements  (Continued)

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

and recognized ratably over the annual maintenance period. Any
unearned revenue, including unrecognized maintenance fees, is
included in deferred revenue.

Services Revenue. We recognize services revenue primarily
from the design, development and deployment of information
processing and communication systems primarily for government
enterprises. These services are provided under time and
materials contracts, cost plus fee contracts, or fixed price
contracts. Revenue is recognized under time and materials
contracts and cost plus fee contracts as billable costs are
incurred. Fixed-price service contracts are accounted for using
the proportional performance method.

These contracts generally allow for monthly billing or billing
upon achieving certain specified milestones. Any estimated
losses on contracts are recognized in their entirety at the date
that they become evident.

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

Systems revenue is also derived from fees for the development,
implementation and maintenance of custom applications. Fees from
the development and implementation of custom applications are
generally performed under time and materials and fixed fee
contracts. Revenue is recognized under time and materials
contracts and cost plus fee contracts as billable costs are
incurred. Fixed-price product delivery contracts are accounted
for using the
percentage-of-completion
or proportional performance 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 under long-term contracts are
recognized in their entirety at the date that they become
evident. Revenue from hardware sales to our monthly subscriber
customers is recognized as systems revenue.

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

Revenues included in any of the three of our financial reporting
categories may contain multiple elements. We evaluate these
revenues following the guidance of Emerging Issues Task Force
00-21 Revenue Arrangements with Multiple
Deliverables
(EITF 00-21). This
authoritative literature provides guidance on the determination
of the number of units of accounting and the allocation of the
total fair value among the multiple elements.

Deferral of Costs Incurred. We defer costs incurred in
certain situations as dictated by authoritative accounting
literature. We defer costs for long term contracts being
accounted for under the proportional performance method so that
the total costs recognized at any point are indicative of the
level of effort

F-12



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##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated Financial
Statements  (Continued)

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

expended. In addition, under the provisions of EITF 00-21, if
the revenue for a delivered item is not recognized because it is
not separable from the arrangement, then we defer incremental
costs relating to that delivered but unrecognized element.

Advertising Costs. Advertising is expensed as incurred.
Advertising expense totaled $268, $473, and $98, for the years
ended December 31, 2005, 2004 and 2003, respectively.

Capitalized Interest. Total interest incurred was $1,312,
$3,196, and $1,088 for the years ended December 31, 2005,
2004, and 2003, respectively. Approximately $140 of total
interest incurred was capitalized as a component of software
development costs and construction in progress during the year
ended December 31, 2005. No interest was capitalized during
the years ended December 31, 2004 or 2003.

Stock-Based Compensation and Deferred Compensation. We
have two stock-based employee compensation plans, which are
described more fully in Note 18. We record compensation
expense for all stock-based compensation plans using the
intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, (Accounting for Stock Issued to
Employees)(APB No. 25) and related
interpretations. Under APB No. 25, compensation expense is
recorded pro-rata over the vesting period to the extent that the
fair value of the underlying stock on the date of grant exceeds
the exercise or acquisition price of the stock or stock-based
award. The related compensation constitutes portions of our
direct cost of revenue, research and development expense, sales
and marketing expense, and general and administrative expense as
detailed in the table presented with our Consolidated Statements
of Operations.

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

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

|                                                                                                                        |             |                                  |         |       |      |   |         |       |   |   |         |       |  
|----------------------------------------------------------------------------------------------------------------------- | ----------- | -------------------------------- | ------- | ----- | ---- | - | ------- | ----- | - | - | ------- | ----- | -
|                                                                                                                        |             | For the Years Ended December 31, |        
|                                                                                                                        |             |                                  |        
|                                                                                                                        |             | 2005                             |         |       | 2004 |   |         | 2003  |  
|                                                                                                                        |             |                                  |         |       |      |   |         |       |  
|Net loss attributable to common
    stockholders, as reported                                                           |             | $                                | (11,467 | )     |      | $ | (18,548 | )     |   | $ | (13,486 | )    
|Add: Stock-based employee
    compensation expense included in reported net loss                                        |             |                                  | 720     |       |      |   | 1,195   |       |   |   | 1,501   |      
|Deduct: Total stock-based employee
    compensation expense determined under fair value based method
    for all awards |             |                                  | (4,898  | )     |      |   | (8,477  | )     |   |   | (5,102  | )    
|                                                                                                                        |             |                                  |         |       |      |   |         |       |  
|Pro forma net loss attributable to
    common stockholders                                                              |             | $                                | (15,646 | )     |      | $ | (25,830 | )     |   | $ | (17,087 | )    
|                                                                                                                        |             |                                  |         |       |      |   |         |       |  
|Loss per share  basic
    and diluted:                                                                                 |             |                                  |         |       |      |   |         |       |   |   |         |      
|                                                                                                                        | As reported |                                  | $       | (0.30 | )    |   | $       | (0.56 | ) |   | $       | (0.45 | )
|                                                                                                                        |             |                                  |         |       |      |   |         |       |  
|                                                                                                                        | Pro forma   |                                  | $       | (0.40 | )    |   | $       | (0.77 | ) |   | $       | (0.57 | )
|                                                                                                                        |             |                                  |         |       |      |   |         |       |  

F-13



---



##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated Financial
Statements  (Continued)

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

In calculating the fair value of our stock options using
Black-Scholes for the years ended December 31, 2005, 2004,
and 2003, respectively, our assumptions were as follows:

|                           |  |                     |      |   |      |  |      |      |  |  |      |  
|-------------------------- |  | ------------------- | ---- | - | ---- |  | ---- | ---- |  |  | ---- | -
|                           |  | For the Years Ended |     
|                           |  | December 31,        |     
|                           |  |                     |     
|                           |  | 2005                |      |   | 2004 |  |      | 2003 | 
|                           |  |                     |      |   |      |  |      |      | 
|Expected life (in years)   |  |                     | 5.5  |   |      |  | 5.5  |      |  |  | 5.0  |  
|Risk-free interest rate(%) |  |                     | 4.25 | % |      |  | 3.35 | %    |  |  | 3.00 | %
|Volatility(%)              |  |                     | 105  | % |      |  | 114  | %    |  |  | 124  | %
|Dividend yield(%)          |  |                     | 0    | % |      |  | 0    | %    |  |  | 0    | %

Research and Development Expense.


Income Taxes.


Recent Accounting Pronouncements. Share Based Payment






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The modified prospective method which requires companies to
    recognize compensation cost beginning with the effective date of
    adoption based on (a) the requirements of Statement
    No. 123(R) for all share-based payments granted after the
    effective date of adoption and (b) the requirements of
    Statement No. 123(R) for all awards granted to employees
    prior to the effective date of adoption that remain unvested on
    the date of adoption; or
|
| |  | The modified retrospective method which includes the
    requirements of the modified prospective method described above,
    but also requires restatement of prior period financial
    statements using amounts previously disclosed under the pro
    forma provisions of Statement No. 123.                                                                                                                                                                               

out-of




F-14



---



##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated Financial
Statements  (Continued)

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

compensation expense to be recorded Statement No. 123(R)
that is eliminated as a result of the acceleration of vesting
these options is approximately $1,200.

We expect to adopt Statement No. 123(R) effective
January 1, 2006 using the modified prospective method. The
impact of adoption of Statement No. 123(R) will depend on
levels of share-based payments granted in the future. However,
had we adopted Statement No. 123(R) in prior periods, the
impact of that standard would have approximated the impact of
Statement No. 123 as described in the disclosure of pro
forma net loss and loss per share above. The Company currently
anticipates that the impact of adopting Statement
No. 123(R) will result in recording approximately $2,200 of
stock compensation expense in 2006, but such amount could
fluctuate depending on the levels of share-based payments
granted.

In November 2004, the FASB issued Statement No. 151,
Inventory Costs  an amendment of ARB No. 43,
Chapter 4(Statement No. 151.) Statement
No. 151 clarifies the accounting for certain types of
inventory costs. Statement No. 151 requires idle facility
expense, freight, handling costs, and spoilage to be recognized
in the period incurred. Statement No. 151 is effective for
the first fiscal period beginning after June 15, 2005. We
do not expect the implementation of Statement No. 151 to
have a significant impact on our consolidated financial
statements

In May 2005, the FASB issued Statement No. 154,
Accounting Changes and Error Corrections  A
Replacement of APB Opinion No. 20 and FASB Statement
No. 3(Statement No. 154.) Statement No. 154
changes the requirements for the accounting for and reporting of
a change in accounting principle. Statement No. 154
requires retrospective application of any change in accounting
principle to prior periods financial statements. Statement
No. 154 is effective for the first fiscal period beginning
after December 15, 2005. We do not expect the
implementation of Statement No. 154 to have a significant
impact on our consolidated financial statements.



2.
    Enterprise Assets-Discontinued OperationsAs of December 31, 2005, as a result of
slower-than-anticipated market adoption of key technologies
related to the Enterprise assets and managements strategic
decision to focus on our core technologies, we committed to a
plan to sell the Enterprise assets which we acquired from Aether
Systems, Inc. in 2004. The plan was approved by our Board of
Directors on December 29, 2005. Also in December 2005, we
engaged an investment bank that is actively marketing the
Enterprise assets. The operations and cash flows of the business
will be eliminated from ongoing operations as a result of the
sale, and the company does not expect to have any significant
involvement in the operations after the disposal transaction. We
expect to complete the sale of these assets by the end of 2006.
Accordingly, the assets, liabilities, and results of operations
for the Enterprise assets have been reclassified to discontinued
operations for all periods presented in the Consolidated
Financial Statements included in this Annual Report on
Form 10-K. The
operations of the Enterprise assets had previously been included
in our Commercial Applications segment.

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

The aggregate purchase price for the Enterprise assets was
$22,300, consisting of cash payments of $18,150, a note payable
in the amount of $1,000, bearing interest at the prime interest
rate, and 204,020 shares of our Class A Common Stock,
valued at $1,056, based on the average closing price for the
five days immediately preceding the closing of the Enterprise
Acquisition. In addition, management incurred approximately
$2,094 of costs directly related to the acquisition. The total
purchase price has been allocated

F-15



---



##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated Financial
Statements  (Continued)

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

based on the estimated fair value of the acquired tangible and
intangible assets and assumed liabilities, with the excess of
the purchase price over the assets acquired and liabilities
assumed being allocated to goodwill. The valuation has resulted
in the recognition of $12,633 of goodwill. As a result of the
classification of these assets as discontinued operations, we
performed an additional review of the associated goodwill and
other long lived assets for impairment as of December 31,
2005. We concluded that no impairment existed as of that date.

The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed on January 1, 2004
at the date of the acquisition:

|                    |                                               |                   |        |        |        | 
|------------------- | --------------------------------------------- | ----------------- | ------ | ------ | ------ | 
|Assets:             |                                               |                   |        |       
|                    | Tangible assets                               |                   | $      | 11,573 |       
|                    | Acquired technology and intangible
    assets |                   |        | 7,612  |       
|                    | Goodwill                                      |                   |        | 12,633 |       
|                    |                                               |                   |       
|                    |                                               | Total assets      |        |        | 31,818 | 
|                    |                                               |                   |       
|                   
|Liabilities:        |                                               |                   |        |       
|                    | Current liabilities                           |                   |        | 9,518  |       
|                    |                                               |                   |       
|                    |                                               | Total liabilities |        |        | 9,518  | 
|                    |                                               |                   |       
|Net assets acquired |                                               | $                 | 22,300 |       
|                    |                                               |                   |       



F-16



---



##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated Financial
Statements  (Continued)

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

Enterprise assets and liabilities classified as discontinued
operations in the accompanying Consolidated Balance Sheets are
as follows:

|                                          |                                                                 |                                            |        |        |              |   |        |        |        | 
|----------------------------------------- | --------------------------------------------------------------- | ------------------------------------------ | ------ | ------ | ------------ | - | ------ | ------ | ------ | 
|                                          |                                                                 | December 31,                               |        |        | December 31, |  
|                                          |                                                                 | 2005                                       |        |        | 2004         |  
|                                          |                                                                 |                                            |        |        |              |  
|Assets:                                   |                                                                 |                                            |        |        |              |   |        |       
|                                          | Accounts receivable                                             |                                            | $      | 3,263  |              |   | $      | 5,657  |       
|                                          | Unbilled receivables                                            |                                            |        | 260    |              |   |        | 618    |       
|                                          | Inventory                                                       |                                            |        | 558    |              |   |        | 558    |       
|                                          | Other current assets                                            |                                            |        | 1,225  |              |   |        | 925    |       
|                                          | Property and equipment, net of
    accumulated depreciation     |                                            |        | 1,863  |              |   |        | 1,107  |       
|                                          | Software development costs, net of
    accumulated amortization |                                            |        | 533    |              |   |        | 140    |       
|                                          | Acquired intangible assets, net of
    accumulated amortization |                                            |        | 2,516  |              |   |        | 4,691  |       
|                                          | Goodwill                                                        |                                            |        | 12,633 |              |   |        | 13,037 |       
|                                          | Other assets                                                    |                                            |        | 40     |              |   |        | 18     |       
|                                          |                                                                 |                                            |        |        |              |  
|                                          |                                                                 | Assets of discontinued operations          |        |        | 22,891       |   |        |        | 26,751 | 
|                                          |                                                                 |                                            |        |        |              |  
|                                         
|Liabilities:                              |                                                                 |                                            |        |        |              |   |        |       
|                                          | Accounts payable and accrued
    expenses                       |                                            |        | 4,514  |              |   |        | 6,047  |       
|                                          | Accrued payroll and related
    liabilities                     |                                            |        | 844    |              |   |        | 981    |       
|                                          | Deferred revenue                                                |                                            |        | 1,361  |              |   |        | 1,863  |       
|                                          |                                                                 |                                            |        |        |              |  
|                                          |                                                                 | Liabilities of discontinued
    operations |        |        | 6,719        |   |        |        | 8,891  | 
|                                          |                                                                 |                                            |        |        |              |  
|Net assets of discontinued
    operations |                                                                 | $                                          | 16,172 |        |              | $ | 17,860 |       
|                                          |                                                                 |                                            |        |        |              |  



|                                                              |                    |                   |     |       |                   |  |       |       |       |          |        |       |             |              |     |       |       |  |     |       |       |  |     |       |       | 
|------------------------------------------------------------- | ------------------ | ----------------- | --- | ----- | ----------------- |  | ----- | ----- | ----- | -------- | ------ | ----- | ----------- | ------------ | --- | ----- | ----- |  | --- | ----- | ----- |  | --- | ----- | ----- | 
|                                                              |                    | December 31, 2005 |     |       | December 31, 2004 | 
|                                                              |                    |                   |     |       |                   | 
|                                                              |                    | Gross             |     |       |                   |  | Gross |       |       |         
|                                                              |                    | Carrying          |     |       | Accumulated       |  |       |       |       | Carrying |        |       | Accumulated |              |     |      
|                                                              |                    | Amount            |     |       | Amortization      |  |       | Net   |       |          | Amount |       |             | Amortization |     |       | Net   | 
|                                                              |                    |                   |     |       |                   |  |       |       |       |          |        |       |             |              |     |       |       | 
|Acquired intangible assets:                                   |                    |                   |     |       |                   |  |       |       |       |          |        |       |             |              |     |       |       |  |     |       |       |  |     |      
|                                                              | Customer Contracts |                   | $   | 4,519 |                   |  | $     | 3,043 |       |          | $      | 1,476 |             |              | $   | 4,208 |       |  | $   | 1,382 |       |  | $   | 2,826 |      
|                                                              | Customer Lists     |                   |     | 2,165 |                   |  |       | 1,458 |       |          |        | 707   |             |              |     | 1,942 |       |  |     | 637   |       |  |     | 1,305 |      
|                                                              | Trademarks         |                   |     | 630   |                   |  |       | 297   |       |          |        | 333   |             |              |     | 669   |       |  |     | 109   |       |  |     | 560   |      
|Software development costs,
    including acquired technology |                    |                   | 844 |       |                   |  | 311   |       |       |          | 533    |       |             |              | 287 |       |       |  | 147 |       |       |  | 140 |      
|                                                              |                    |                   |     |       |                   |  |       |       |       |          |        |       |             |              |     |       |       | 
|                                                              |                    | Total             |     | $     | 8,158             |  |       | $     | 5,109 |          |        | $     | 3,049       |              |     | $     | 7,106 |  |     | $     | 2,275 |  |     | $     | 4,831 | 
|                                                              |                    |                   |     |       |                   |  |       |       |       |          |        |       |             |              |     |       |       | 



F-17



---



##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated Financial
Statements  (Continued)

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

Summarized results of operations for the Enterprise assets
included in the accompanying Consolidated Statement of
Operations were as follows:

|                                                                                        |                    |                         |        |        |      |   |        |        | 
|--------------------------------------------------------------------------------------- | ------------------ | ----------------------- | ------ | ------ | ---- | - | ------ | ------ | 
|                                                                                        |                    | Year ended December 31, |       
|                                                                                        |                    |                         |       
|                                                                                        |                    | 2005                    |        |        | 2004 |  
|                                                                                        |                    |                         |        |        |      |  
|Hosted, subscriber and maintenance
    revenue                                          |                    | $                       | 22,505 |        |      | $ | 38,537 |       
|Systems revenue                                                                         |                    |                         | 5,622  |        |      |   | 7,476  |       
|                                                                                        |                    |                         |        |        |      |  
|                                                                                        | Total revenue      |                         |        | 28,127 |      |   |        | 46,013 | 
|                                                                                        |                    |                         |        |        |      |  
|Hosted, subscriber and maintenance
    gross profit                                     |                    |                         | 6,850  |        |      |   | 8,597  |       
|Systems gross (loss)/profit                                                             |                    |                         | (825   | )      |      |   | 2,082  |       
|                                                                                        |                    |                         |        |        |      |  
|                                                                                        | Total gross profit |                         |        | 6,025  |      |   |        | 10,679 | 
|                                                                                        |                    |                         |        |        |      |  
|Research and development, sales,
    marketing, and general and administrative expenses |                    |                         | 9,851  |        |      |   | 10,755 |       
|Depreciation and amortization                                                           |                    |                         | 3,325  |        |      |   | 2,570  |       
|                                                                                        |                    |                         |        |        |      |  
|Loss from discontinued operations                                                       |                    | $                       | (7,151 | )      |      | $ | (2,646 | )     
|                                                                                        |                    |                         |        |        |      |  











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

®


F-18



---



##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated Financial
Statements  (Continued)

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

The purchase price has been allocated to the tangible and
intangible assets acquired and liabilities assumed. The purchase
price allocation resulted in the excess $1,813 of the purchase
price over net assets acquired being allocated to goodwill. This
goodwill has been allocated to the Commercial Applications
segment, and we expect it to be deductible for tax purposes.

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

|                    |                            |                   |       |       |       | 
|------------------- | -------------------------- | ----------------- | ----- | ----- | ----- | 
|Assets:             |                            |                   |       |      
|                    | Tangible assets            |                   | $     | 590   |      
|                    | Acquired intangible assets |                   |       | 3,771 |      
|                    | Goodwill                   |                   |       | 1,813 |      
|                    |                            |                   |      
|                    |                            | Total assets      |       |       | 6,174 | 
|                    |                            |                   |      
|Liabilities:        |                            |                   |       |      
|                    | Current liabilities        |                   |       | 639   |      
|                    |                            |                   |      
|                    |                            | Total liabilities |       |       | 639   | 
|                    |                            |                   |      
|Net assets acquired |                            | $                 | 5,535 |      
|                    |                            |                   |      





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







F-19



---



##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated Financial
Statements  (Continued)

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

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



5.
    Loss Per Common ShareBasic loss per common share is based upon the average number of
shares of common stock outstanding during the period. Because we
incurred a loss from continuing operations in 2005, 2004, and
2003 potentially dilutive securities were excluded from the
computation because the result would be anti-dilutive. These
potentially dilutive securities consist of stock options,
restricted stock, and warrants as discussed in Note 1,
Note 18, and Note 25.



6.
    Supplemental Disclosure of Cash Flow InformationProperty and equipment acquired under capital leases totaled
$3,761, $6,274, and $568 during the years ended
December 31, 2005, 2004, and 2003, respectively.

Interest paid totaled $843, $1,179, and $918 during the years
ended December 31, 2005, 2004, and 2003, respectively.



7.
    Unbilled ReceivablesUnbilled receivables consisted of the following at
December 31:

|                                                      |  |      |       |  |      |   |       | 
|----------------------------------------------------- |  | ---- | ----- |  | ---- | - | ----- | 
|                                                      |  | 2005 |       |  | 2004 |  
|                                                      |  |      |       |  |      |  
|Amounts billable at specified
    contract milestones |  | $    | 6,060 |  |      | $ | 9,272 | 
|Contract retentions                                   |  |      | 28    |  |      |   | 142   | 
|Rate variances                                        |  |      | 273   |  |      |   | 471   | 
|                                                      |  |      |       |  |      |  
|                                                      |  | $    | 6,361 |  |      | $ | 9,885 | 
|                                                      |  |      |       |  |      |  





|   |          
|-- | ---------
|8. | Inventory



|                |                             |      |       |       |      |   |       |       | 
|--------------- | --------------------------- | ---- | ----- | ----- | ---- | - | ----- | ----- | 
|                |                             | 2005 |       |       | 2004 |  
|                |                             |      |       |       |      |  
|Component parts |                             | $    | 1,934 |       |      | $ | 1,928 |      
|Finished goods  |                             |      | 1,263 |       |      |   | 1,499 |      
|                |                             |      |       |       |      |  
|                | Total inventory at year end |      | $     | 3,197 |      |   | $     | 3,427 | 
|                |                             |      |       |       |      |  

F-20



---



##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated Financial
Statements  (Continued)

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



9.
    Property and EquipmentProperty and equipment consisted of the following at
December 31:

|                                                    |                                                      |      |         |        |      |   |         |        | 
|--------------------------------------------------- | ---------------------------------------------------- | ---- | ------- | ------ | ---- | - | ------- | ------ | 
|                                                    |                                                      | 2005 |         |        | 2004 |  
|                                                    |                                                      |      |         |        |      |  
|Computer equipment                                  |                                                      | $    | 31,487  |        |      | $ | 26,997  |       
|Computer software                                   |                                                      |      | 13,257  |        |      |   | 11,024  |       
|Furniture and fixtures                              |                                                      |      | 2,140   |        |      |   | 2,735   |       
|Leasehold improvements                              |                                                      |      | 2,466   |        |      |   | 2,451   |       
|Land                                                |                                                      |      | 1,000   |        |      |   | 1,000   |       
|Vehicles                                            |                                                      |      | 107     |        |      |   | 107     |       
|                                                    |                                                      |      |         |        |      |  
|                                                    | Total property and equipment at
    cost at year end |      |         | 50,457 |      |   |         | 44,314 | 
|Less: accumulated depreciation and
    amortization |                                                      |      | (34,134 | )      |      |   | (27,504 | )     
|                                                    |                                                      |      |         |        |      |  
|                                                    | Net property and equipment at year
    end           |      | $       | 16,323 |      |   | $       | 16,810 | 
|                                                    |                                                      |      |         |        |      |  



|    |                                                                          
|--- | -------------------------------------------------------------------------
|10. | Acquired Intangible Assets and Capitalized Software
    Development Costs



|                                                              |                      |                   |       |     |                   |  |       |     |       |          |        |     |             |              |       |     |       |  |       |    |       |  |       |     |       | 
|------------------------------------------------------------- | -------------------- | ----------------- | ----- | --- | ----------------- |  | ----- | --- | ----- | -------- | ------ | --- | ----------- | ------------ | ----- | --- | ----- |  | ----- | -- | ----- |  | ----- | --- | ----- | 
|                                                              |                      | December 31, 2005 |       |     | December 31, 2004 | 
|                                                              |                      |                   |       |     |                   | 
|                                                              |                      | Gross             |       |     |                   |  | Gross |     |       |         
|                                                              |                      | Carrying          |       |     | Accumulated       |  |       |     |       | Carrying |        |     | Accumulated |              |       |    
|                                                              |                      | Amount            |       |     | Amortization      |  |       | Net |       |          | Amount |     |             | Amortization |       |     | Net   | 
|                                                              |                      |                   |       |     |                   |  |       |     |       |          |        |     |             |              |       |     |       | 
|Acquired intangible assets:                                   |                      |                   |       |     |                   |  |       |     |       |          |        |     |             |              |       |     |       |  |       |    |       |  |       |    
|                                                              | Customer Lists       |                   | $     | 576 |                   |  | $     | 144 |       |          | $      | 432 |             |              | $     | 576 |       |  | $     | 29 |       |  | $     | 547 |      
|                                                              | Trademarks & Patents |                   |       | 612 |                   |  |       | 40  |       |          |        | 572 |             |              |       | 612 |       |  |       | 8  |       |  |       | 604 |      
|Software development costs,
    including acquired technology |                      |                   | 5,845 |     |                   |  | 2,020 |     |       |          | 3,825  |     |             |              | 3,855 |     |       |  | 1,204 |    |       |  | 2,651 |    
|                                                              |                      |                   |       |     |                   |  |       |     |       |          |        |     |             |              |       |     |       | 
|                                                              |                      | Total             |       | $   | 7,033             |  |       | $   | 2,204 |          |        | $   | 4,829       |              |       | $   | 5,043 |  |       | $  | 1,241 |  |       | $   | 3,802 | 
|                                                              |                      |                   |       |     |                   |  |       |     |       |          |        |     |             |              |       |     |       | 

|                                           |                               |  |   |       | 
|------------------------------------------ | ----------------------------- |  | - | ----- | 
|Estimated future amortization
    expense: |                               |  |   |      
|                                           | Year ending December 31, 2006 |  | $ | 1,522 | 
|                                           | Year ending December 31, 2007 |  | $ | 1,426 | 
|                                           | Year ending December 31, 2008 |  | $ | 963   | 
|                                           | Year ending December 31, 2009 |  | $ | 473   | 
|                                           | Year ending December 31, 2010 |  | $ | 32    | 
|                                           | Thereafter                    |  | $ | 413   | 



F-21



---



##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated Financial
Statements  (Continued)

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



11.
    Accounts Payable and Accrued ExpensesOur accounts payable and accrued expenses consist of:

|                 |                                                             |                   |       |        |                   |   |       |       | 
|---------------- | ----------------------------------------------------------- | ----------------- | ----- | ------ | ----------------- | - | ----- | ----- | 
|                 |                                                             | December 31, 2005 |       |        | December 31, 2004 |  
|                 |                                                             |                   |       |        |                   |  
|Accounts payable |                                                             | $                 | 6,672 |        |                   | $ | 4,241 |      
|Accrued expenses |                                                             |                   | 3,503 |        |                   |   | 4,461 |      
|                 |                                                             |                   |       |        |                   |  
|                 | Total accounts payable and accrued
    expenses at year end |                   | $     | 10,175 |                   |   | $     | 8,702 | 
|                 |                                                             |                   |       |        |                   |  

E9-1-1




|    |               
|--- | --------------
|12. | Line of Credit







F-22



---



##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated Financial
Statements  (Continued)

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

terms of an equipment loan as detailed in Note 13. At
December 31, 2005, there were no other amounts outstanding
under the line and we had approximately $1,874 of unused
availability.



13.
    Long-Term DebtLong-term debt consists of the following at December 31:

|                                                                                                                                                                                                                                                                                     |                                      |      |        |       |      |  |        |       | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------ | ---- | ------ | ----- | ---- |  | ------ | ----- | 
|                                                                                                                                                                                                                                                                                     |                                      | 2005 |        |       | 2004 | 
|                                                                                                                                                                                                                                                                                     |                                      |      |        |       |      | 
|Note payable dated
    September 30, 2005, due April 1, 2007, and bearing
    interest at 10.5% per annum. The note requires monthly
    installments of principal and interest of $90 through
    April 1, 2007. The note is secured by the accounts
    receivable of one customer |                                      |      | 1,345  |       |      |  |       |      
|Note payable dated November 7,
    2005, due April 1, 2007, and bearing interest at
    10.5% per annum. The note requires monthly installments of
    principal and interest of $32 through April 1, 2007. The
    note is secured by the accounts receivable of one customer       |                                      |      | 472    |       |      |  |       |      
|Note payable dated
    December 30, 2003, due December 2, 2006, and bearing
    interest at 5.5% per annum. The note requires monthly
    installments of principal of $69 plus accrued interest through
    December 1, 2006. The note is secured by property and
    equipment     |                                      |      | 833    |       |      |  | 1,667  |      
|Note payable dated January 16,
    2003, due January 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                                                                     |                                      |      | 8      |       |      |  | 12     |      
|Note payable dated March 30,
    2004, paid in full October 1, 2005                                                                                                                                                                                                                  |                                      |      |       |       |      |  | 2,079  |      
|Note payable dated
    February 20, 2004, paid in full November 30, 2005                                                                                                                                                                                                             |                                      |      |       |       |      |  | 1,031  |      
|Note payable dated
    September 25, 2002, paid in full September 30, 2005                                                                                                                                                                                                           |                                      |      |       |       |      |  | 714    |      
|Note payable dated
    December 20, 2002, paid in full November 30, 2005                                                                                                                                                                                                             |                                      |      |       |       |      |  | 895    |      
|Note payable dated June 16,
    2003, paid in full October 31, 2005                                                                                                                                                                                                                  |                                      |      |       |       |      |  | 922    |      
|Note payable dated December 1,
    2003, paid in full July 1, 2005                                                                                                                                                                                                                   |                                      |      |       |       |      |  | 515    |      
|                                                                                                                                                                                                                                                                                     |                                      |      |        |       |      | 
|                                                                                                                                                                                                                                                                                     | Total long term debt                 |      |        | 2,658 |      |  |        | 7,835 | 
|Less: current portion                                                                                                                                                                                                                                                                |                                      |      | (2,176 | )     |      |  | (6,993 | )    
|                                                                                                                                                                                                                                                                                     |                                      |      |        |       |      | 
|                                                                                                                                                                                                                                                                                     | Noncurrent portion of long term debt |      | $      | 482   |      |  | $      | 842   | 
|                                                                                                                                                                                                                                                                                     |                                      |      |        |       |      | 



|     |       |   |       |       | 
|---- | ----- | - | ----- | ----- | 
|2006 |       | $ | 2,176 |      
|2007 |       |   | 482   |      
|     |       |   |      
|     | Total |   | $     | 2,658 | 
|     |       |   |      

F-23



---



##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated Financial
Statements  (Continued)

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



14.
    Capital LeasesWe lease certain equipment under capital leases. Property and
equipment included the following amounts for capital leases at
December 31:

|                               |                                                     |      |        |        |      |   |        |       | 
|------------------------------ | --------------------------------------------------- | ---- | ------ | ------ | ---- | - | ------ | ----- | 
|                               |                                                     | 2005 |        |        | 2004 |  
|                               |                                                     |      |        |        |      |  
|Computer equipment             |                                                     | $    | 8,922  |        |      | $ | 5,663  |      
|Computer software              |                                                     |      | 1,469  |        |      |   | 1,153  |      
|Furniture and fixtures         |                                                     |      | 227    |        |      |   | 227    |      
|Leasehold improvements         |                                                     |      | 46     |        |      |   | 40     |      
|                               |                                                     |      |        |        |      |  
|                               | Total equipment under capital lease
    at cost     |      |        | 10,664 |      |   |        | 7,083 | 
|Less: accumulated amortization |                                                     |      | (4,631 | )      |      |   | (3,997 | )    
|                               |                                                     |      |        |        |      |  
|                               | Net property and equipment under
    capital leases |      | $      | 6,033  |      |   | $      | 3,086 | 
|                               |                                                     |      |        |        |      |  





|                                    |                                                                                       |   |       |       | 
|----------------------------------- | ------------------------------------------------------------------------------------- | - | ----- | ----- | 
|2006                                |                                                                                       | $ | 3,228 |      
|2007                                |                                                                                       |   | 2,302 |      
|2008                                |                                                                                       |   | 658   |      
|                                    |                                                                                       |   |      
|                                    | Total minimum lease payments                                                          |   |       | 6,188 | 
|Less: amounts representing interest |                                                                                       |   | (328  | )    
|                                    |                                                                                       |   |      
|                                    | Present value of net minimum lease
    payments (including current portion of $3,001) |   | $     | 5,860 | 
|                                    |                                                                                       |   |      



|    |             
|--- | ------------
|15. | Common Stock





|    |                                    
|--- | -----------------------------------
|16. | Fair Value of Financial Instruments





Cash and cash equivalents, accounts receivable and accounts
payable:


Long-term debt:


F-24



---



##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated Financial
Statements  (Continued)

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



17.
    Income TaxesDuring the years ended December 31, 2005, 2004, and 2003,
respectively, we did not record either a current or deferred tax
provision due to our current loss position and uncertainties
regarding the realization of our net deferred tax assets.

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

|                                                                         |                                            |                        |                                |        |        |        |         |        |        |        |  
|------------------------------------------------------------------------ | ------------------------------------------ | ---------------------- | ------------------------------ | ------ | ------ | ------ | ------- | ------ | ------ | ------ | -
|                                                                         |                                            | 2005                   |                                |        | 2004   |       
|                                                                         |                                            |                        |                                |        |        |       
|Deferred tax assets:                                                     |                                            |                        |                                |        |        |        |         |       
|                                                                         | Reserves and accrued expenses              |                        | $                              | 1,267  |        |        | $       | 1,062  |       
|                                                                         | Depreciation and amortization              |                        |                                | 2,066  |        |        |         | 1,454  |       
|                                                                         | Deferred revenue                           |                        |                                | 547    |        |        |         | 205    |       
|                                                                         | Charitable contributions                   |                        |                                | 124    |        |        |         | 111    |       
|                                                                         | Stock options                              |                        |                                | 76     |        |        |         | 439    |       
|                                                                         | Capitalized software development
    costs |                        |                                |       |        |        |         | 325    |       
|                                                                         | Research and development tax credit        |                        |                                | 2,764  |        |        |         | 2,694  |       
|                                                                         | Foreign operating loss carryforward        |                        |                                | 5,091  |        |        |         | 5,154  |       
|                                                                         | Net operating loss carry forward           |                        |                                | 38,953 |        |        |         | 32,864 |       
|                                                                         |                                            |                        |                                |        |        |       
|                                                                         |                                            |                        | Total deferred tax assets      |        |        | 50,888 |         |        |        | 44,308 |  
|                                                                         |                                            |                        |                                |        |        |       
|Deferred tax liabilities:                                                |                                            |                        |                                |        |        |        |         |       
|                                                                         | Capitalized software development
    costs |                        |                                | (345   | )      |        |         |       |       
|                                                                         | Other                                      |                        |                                | (4     | )      |        |         | (4     | )     
|                                                                         |                                            |                        |                                |        |        |       
|                                                                         |                                            |                        | Total deferred tax liabilities |        |        | (349   | )       |        |        | (4     | )
|                                                                         |                                            |                        |                                |        |        |       
|                                                                         |                                            | Net deferred tax asset |                                |        | 50,539 |        |         |        | 44,304 |       
|Valuation allowance for net
    deferred tax asset                       |                                            |                        | (50,539                        | )      |        |        | (44,304 | )     
|                                                                         |                                            |                        |                                |        |        |       
|Net deferred tax asset recognized
    in the consolidated balance sheets |                                            | $                      |                               |        |        | $      |        |       
|                                                                         |                                            |                        |                                |        |        |       



F-25



---



##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated Financial
Statements  (Continued)

(amounts in thousands, except share and per 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 loss from continuing operations for the
year ended December 31 is as follows:

|                                     |       |      |        |   |      |   |        |      |  |   |        |   | 
|------------------------------------ | ----- | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - | 
|                                     |       | 2005 |        |   | 2004 |   |        | 2003 | 
|                                     |       |      |        |   |      |   |        |      | 
|Income tax benefit at statutory rate |       | $    | (1,467 | ) |      | $ | (5,407 | )    |  | $ | (4,585 | )
|State tax benefit                    |       |      | (135   | ) |      |   | (202   | )    |  |   | (556   | )
|Change in State tax rate             |       |      | (537   | ) |      |   | 1,597  |      |  |   | (414   | )
|Research and development tax credit  |       |      | (70    | ) |      |   | (2,694 | )    |  |   |       |  
|Non-deductible items                 |       |      | 48     |   |      |   | 2,884  |      |  |   | 430    |  
|Other                                |       |      |       |   |      |   | (337   | )    |  |   | (159   | )
|Change in valuation allowance        |       |      | 2,161  |   |      |   | 4,159  |      |  |   | 5,284  |  
|                                     |       |      |        |   |      |   |        |      | 
|                                     | Total |      | $      |  |      |   | $      |     |  |   | $      |  | 
|                                     |       |      |        |   |      |   |        |      | 



|    |                         
|--- | ------------------------
|18. | Stock Compensation Plans

Stock Options.


|                                                                                         |                             |           |           |          |          |   |      |           |          |   |           |       |  |           |      |      |          |   |           |       |  |   |      |      | 
|---------------------------------------------------------------------------------------- | --------------------------- | --------- | --------- | -------- | -------- | - | ---- | --------- | -------- | - | --------- | ----- |  | --------- | ---- | ---- | -------- | - | --------- | ----- |  | - | ---- | ---- | 
|                                                                                         |                             | 2005      |           |          | 2004     |   |      | 2003      |         
|                                                                                         |                             |           |           |          |          |   |      |           |         
|                                                                                         |                             |           |           | 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                                                           |                             |           | 8,650     |          |          | $ | 4.25 |           |          |   | 6,148     |       |  | $         | 2.95 |      |          |   | 6,838     |       |  | $ | 2.95 |     
|Granted                                                                                  |                             |           | 2,786     |          |          |   | 2.55 |           |          |   | 3,800     |       |  |           | 6.00 |      |          |   | 1,240     |       |  |   | 2.05 |     
|Exercised                                                                                |                             |           | (291      | )        |          |   | 1.08 |           |          |   | (535      | )     |  |           | 1.97 |      |          |   | (735      | )     |  |   | 1.26 |     
|Forfeited                                                                                |                             |           | (1,352    | )        |          |   | 4.30 |           |          |   | (763      | )     |  |           | 3.88 |      |          |   | (1,195    | )     |  |   | 2.83 |     
|                                                                                         |                             |           |           |          |          |   |      |           |          |   |           |       |  |           |      |      |          |  
|Outstanding, end of year                                                                 |                             |           | 9,793     |          |          | $ | 3.86 |           |          |   | 8,650     |       |  | $         | 4.25 |      |          |   | 6,148     |       |  | $ | 2.95 |     
|                                                                                         |                             |           |           |          |          |   |      |           |          |   |           |       |  |           |      |      |          |  
|                                                                                         | Exercisable, at end of year |           |           | 5,997    |          |   | $    | 4.55      |          |   |           | 3,382 |  |           | $    | 3.25 |          |   |           | 2,736 |  |   | $    | 3.05 | 
|                                                                                         |                             |           |           |          |          |   |      |           |          |   |           |       |  |           |      |      |          |  
|Estimated weighted-average grant-
    date fair value of options granted during the year |                             | $         | 2.06      |          |          |   |      |           |          | $ | 4.98      |       |  |           |      |      |          | $ | 1.72      |       |  |   |      |     
|                                                                                         |                             |           |           |          |          |   |      |           |          |   |           |       |  |           |      |      |          |  
|Weighted-average remaining
    contractual life of options outstanding at end of year    |                             |           | 7.3 years |          |          |   |      |           |          |   | 7.5 years |       |  |           |      |      |          |   | 7.7 years |       |  |   |      |     
|                                                                                         |                             |           |           |          |          |   |      |           |          |   |           |       |  |           |      |      |          |  

F-26



---



##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated Financial
Statements  (Continued)

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

Exercise prices for options outstanding at December 31,
2005 ranged from $0.01 to $26.05 as follows (all share amounts
in thousands):

|                |  |             |       |                  |             |                  |                  |                     |  |  |             |                  |  |             |       |  |  |   |       | 
|--------------- |  | ----------- | ----- | ---------------- | ----------- | ---------------- | ---------------- | ------------------- |  |  | ----------- | ---------------- |  | ----------- | ----- |  |  | - | ----- | 
|                |  |             |       |                  |             | Weighted-Average |                  |                     |  |  |            
|                |  |             |       | Weighted-Average |             |                  | Remaining        |                     |  |  |             | Weighted-Average | 
|                |  |             |       | Exercise Prices  |             |                  | Contractual Life |                     |  |  |             | Exercise Prices  | 
|                |  | Options     |       |                  | of Options  |                  |                  | of Options          |  |  | Options     |                  |  | of Options  |      
|Exercise Prices |  | Outstanding |       |                  | Outstanding |                  |                  | Outstanding (years) |  |  | Exercisable |                  |  | Exercisable |      
|                |  |             |       |                  |             |                  |                  |                     |  |  |             |                  |  |             |      
|$ 0.01  $2.61  |  |             | 3,801 |                  |             | $                | 2.22             |                     |  |  | 8.04        |                  |  |             | 1,024 |  |  | $ | 1.67  | 
|$ 2.61  $5.21  |  |             | 3,410 |                  |             | $                | 3.44             |                     |  |  | 6.35        |                  |  |             | 2,398 |  |  | $ | 3.28  | 
|$ 5.21  $7.82  |  |             | 2,525 |                  |             | $                | 6.76             |                     |  |  | 7.52        |                  |  |             | 2,518 |  |  | $ | 6.77  | 
|$ 7.82  $10.42 |  |             | 26    |                  |             | $                | 8.37             |                     |  |  | 7.29        |                  |  |             | 26    |  |  | $ | 8.37  | 
|$10.42  $26.05 |  |             | 31    |                  |             | $                | 14.06            |                     |  |  | 4.57        |                  |  |             | 31    |  |  | $ | 14.06 | 



Restricted Stock Grants.


Employee Stock Purchase Plan.




|                             |                                            |                |       |       | 
|---------------------------- | ------------------------------------------ | -------------- | ----- | ----- | 
|                             |                                            | (in thousands) |      
|Stock compensation plan      |                                            |                | 3,512 |      
|Warrants (see Note 4)        |                                            |                | 341   |      
|Employee stock purchase plan |                                            |                | 112   |      
|                             |                                            |                |      
|                             | Total shares restricted for future
    use |                |       | 3,965 | 
|                             |                                            |                |      

F-27



---



##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated Financial
Statements  (Continued)

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



19.
    Operating LeasesWe lease certain office space and equipment under non-cancelable
operating leases that expire on various dates through 2010.
Future minimum payments under non-cancelable operating leases
with initial terms of one year or more consisted of the
following at December 31, 2005:

|     |  |   |        | 
|---- |  | - | ------ | 
|2006 |  | $ | 3,353  | 
|2007 |  |   | 3,175  | 
|2008 |  |   | 2,478  | 
|2009 |  |   | 1,805  | 
|2010 |  |   | 949    | 
|     |  |   |       
|     |  | $ | 11,760 | 
|     |  |   |       







|    |                                                  
|--- | -------------------------------------------------
|20. | Concentrations of Credit Risk and Major Customers



|                  |  |                         |  |                         |     |  |      |  |      |      |  |  |      | 
|----------------- |  | ----------------------- |  | ----------------------- | --- |  | ---- |  | ---- | ---- |  |  | ---- | 
|                  |  |                         |  | % of Total Revenues For |    
|                  |  |                         |  | the Year Ended          |    
|                  |  |                         |  | December 31,            |    
|                  |  |                         |  |                         |    
|Customer          |  | Segment                 |  | 2005                    |     |  | 2004 |  |      | 2003 | 
|                  |  |                         |  |                         |     |  |      |  |      |      | 
|U.S. Government   |  | Government              |  |                         | 17% |  |      |  | 23%  |      |  |  | 32%  | 
|Verizon Wireless  |  | Commercial Applications |  |                         | 17% |  |      |  | 20%  |      |  |  | 17%  | 
|Cingular Wireless |  | Commercial Applications |  |                         | 10% |  |      |  | <10% |      |  |  | <10% | 

|                |  |                         |      |  |                         |  |      |            |  |  |             |  |  |  |      | 
|--------------- |  | ----------------------- | ---- |  | ----------------------- |  | ---- | ---------- |  |  | ----------- |  |  |  | ---- | 
|                |  | As of December 31, 2005 |      |  | As of December 31, 2004 | 
|                |  |                         |      |  |                         | 
|                |  | Accounts                |      |  | Unbilled                |  |      | Accounts   |  |  | Unbilled    | 
|Customer        |  | Receivable              |      |  | Receivables             |  |      | Receivable |  |  | Receivables | 
|                |  |                         |      |  |                         |  |      |            |  |  |             | 
|U.S. Government |  |                         | 35%  |  |                         |  | 16%  |            |  |  | 17%         |  |  |  | 46%  | 
|Customer A      |  |                         | <10% |  |                         |  | 30%  |            |  |  | 14%         |  |  |  | <10% | 
|Customer B      |  |                         | <10% |  |                         |  | <10% |            |  |  | 17%         |  |  |  | <10% | 
|Customer C      |  |                         | <10% |  |                         |  | <10% |            |  |  | 14%         |  |  |  | <10% | 



F-28



---



##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated Financial
Statements  (Continued)

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

experience significant losses from amounts due to us by any
customers for the year ended December 31, 2005.



21.
    Business and Geographic Segment InformationIn the fourth quarter of 2004, we realigned our segments to
better manage the business subsequent to our acquisitions
described in Notes 2 and 3. Our two operating segments are
now (i) our Commercial Applications Segment, which consists
of the previous Network Software and Service Bureau segments,
along with the Kivera assets acquired in 2004 and (ii) our
Government segment which consists of the previous Network
Solutions segment.

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

For the years ended December 31, 2005, 2004 and 2003,
respectively, our total revenues include approximately $6,874,
$6,457, and $3,559 of revenues generated from customers outside
of the United States.

The following table sets forth results for our reportable
segments as of December 31, 2005. All revenues reported
below are from external customers. Prior year amounts have been
restated based upon the classification of our Enterprise Assets
as discontinued operations in 2005 (see Note 2). A
reconciliation of segment gross profit to net loss for the
respective periods is also included below:

|                            |                                                        |                         |   |        |        |  |       |        |        |  |      |        |         |      |   |        |        |  |   |        |        |  |      |        |        |       |   |        |        |  |   |        |        |  |   |        |        | 
|--------------------------- | ------------------------------------------------------ | ----------------------- | - | ------ | ------ |  | ----- | ------ | ------ |  | ---- | ------ | ------- | ---- | - | ------ | ------ |  | - | ------ | ------ |  | ---- | ------ | ------ | ----- | - | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ | 
|                            |                                                        | Year Ended December 31, |  
|                            |                                                        |                         |  
|                            |                                                        | 2005                    |   |        | 2004   |  |       | 2003   |       
|                            |                                                        |                         |   |        |        |  |       |        |       
|                            |                                                        | Comm.                   |   |        |        |  | Comm. |        |        |  |      | Comm.  |         |      |  
|                            |                                                        | Apps                    |   |        | Gvmt   |  |       | Total  |        |  | Apps |        |         | Gvmt |   |        | Total  |  |   | Apps   |        |  | Gvmt |        |        | Total |  
|                            |                                                        |                         |   |        |        |  |       |        |        |  |      |        |         |      |   |        |        |  |   |        |        |  |      |        |        |       |  
|Revenue                     |                                                        |                         |   |        |        |  |       |        |        |  |      |        |         |      |   |        |        |  |   |        |        |  |      |        |        |       |   |        |        |  |   |        |        |  |   |       
|                            | Hosted subscriber and maintenance                      |                         | $ | 52,454 |        |  | $     | 413    |        |  | $    | 52,867 |         |      | $ | 44,256 |        |  | $ |       |        |  | $    | 44,256 |        |       | $ | 37,656 |        |  | $ |       |        |  | $ | 37,656 |       
|                            | Services                                               |                         |   | 1,744  |        |  |       | 20,361 |        |  |      | 22,105 |         |      |   | 365    |        |  |   | 15,613 |        |  |      | 15,978 |        |       |   |       |        |  |   | 13,923 |        |  |   | 13,923 |       
|                            | Systems                                                |                         |   | 11,668 |        |  |       | 15,513 |        |  |      | 27,181 |         |      |   | 13,061 |        |  |   | 23,617 |        |  |      | 36,678 |        |       |   | 11,102 |        |  |   | 29,384 |        |  |   | 40,486 |       
|                            |                                                        |                         |   |        |        |  |       |        |        |  |      |        |         |      |   |        |        |  |   |        |        |  |      |        |        |       |  
|                            |                                                        | Total revenue           |   |        | 65,866 |  |       |        | 36,287 |  |      |        | 102,153 |      |   |        | 57,682 |  |   |        | 39,230 |  |      |        | 96,912 |       |   |        | 48,758 |  |   |        | 43,307 |  |   |        | 92,065 | 
|                            |                                                        |                         |   |        |        |  |       |        |        |  |      |        |         |      |   |        |        |  |   |        |        |  |      |        |        |       |  
|Direct costs of
    revenue |                                                        |                         |   |        |        |  |       |        |        |  |      |        |         |      |   |        |        |  |   |        |        |  |      |        |        |       |   |        |        |  |   |        |        |  |   |       
|                            | Direct cost of hosted, subscriber,
    and maintenance |                         |   | 25,063 |        |  |       | 170    |        |  |      | 25,233 |         |      |   | 21,257 |        |  |   |       |        |  |      | 21,257 |        |       |   | 18,082 |        |  |   |       |        |  |   | 18,082 |       
|                            | Direct cost of services                                |                         |   | 809    |        |  |       | 13,172 |        |  |      | 13,981 |         |      |   | 188    |        |  |   | 9,481  |        |  |      | 9,669  |        |       |   |       |        |  |   | 9,835  |        |  |   | 9,835  |       
|                            | Direct cost of systems                                 |                         |   | 5,710  |        |  |       | 12,009 |        |  |      | 17,719 |         |      |   | 5,839  |        |  |   | 15,388 |        |  |      | 21,227 |        |       |   | 13,643 |        |  |   | 18,656 |        |  |   | 32,299 |       
|                            |                                                        |                         |   |        |        |  |       |        |        |  |      |        |         |      |   |        |        |  |   |        |        |  |      |        |        |       |  
|                            |                                                        | Total Direct Costs      |   |        | 31,582 |  |       |        | 25,351 |  |      |        | 56,933  |      |   |        | 27,284 |  |   |        | 24,869 |  |      |        | 52,153 |       |   |        | 31,725 |  |   |        | 28,491 |  |   |        | 60,216 | 
|                            |                                                        |                         |   |        |        |  |       |        |        |  |      |        |         |      |   |        |        |  |   |        |        |  |      |        |        |       |  
|Gross profit                |                                                        |                         |   |        |        |  |       |        |        |  |      |        |         |      |   |        |        |  |   |        |        |  |      |        |        |       |   |        |        |  |   |        |        |  |   |       
|                            | Hosted, subscriber, and maintenance
    gross profit   |                         |   | 27,391 |        |  |       | 243    |        |  |      | 27,634 |         |      |   | 22,999 |        |  |   |       |        |  |      | 22,999 |        |       |   | 19,574 |        |  |   |       |        |  |   | 19,574 |       
|                            | Services gross profit                                  |                         |   | 935    |        |  |       | 7,189  |        |  |      | 8,124  |         |      |   | 177    |        |  |   | 6,132  |        |  |      | 6,309  |        |       |   |       |        |  |   | 4,088  |        |  |   | 4,088  |       
|                            | Systems gross profit                                   |                         |   | 5,958  |        |  |       | 3,504  |        |  |      | 9,462  |         |      |   | 7,222  |        |  |   | 8,229  |        |  |      | 15,451 |        |       |   | (2,541 | )      |  |   | 10,728 |        |  |   | 8,187  |       
|                            |                                                        |                         |   |        |        |  |       |        |        |  |      |        |         |      |   |        |        |  |   |        |        |  |      |        |        |       |  
|                            |                                                        | Total Gross Profit      |   | $      | 34,284 |  |       | $      | 10,936 |  |      | $      | 45,220  |      |   | $      | 30,398 |  |   | $      | 14,361 |  |      | $      | 44,759 |       |   | $      | 17,033 |  |   | $      | 14,816 |  |   | $      | 31,849 | 
|                            |                                                        |                         |   |        |        |  |       |        |        |  |      |        |         |      |   |        |        |  |   |        |        |  |      |        |        |       |  

F-29



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##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated Financial
Statements  (Continued)

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

|                                    |                                                             |                         |         |         |      |   |         |         |   |   |         |         |  
|----------------------------------- | ----------------------------------------------------------- | ----------------------- | ------- | ------- | ---- | - | ------- | ------- | - | - | ------- | ------- | -
|                                    |                                                             | Year Ended December 31, |        
|                                    |                                                             |                         |        
|                                    |                                                             | 2005                    |         |         | 2004 |   |         | 2003    |  
|                                    |                                                             |                         |         |         |      |   |         |         |  
|Total segment gross
    profit      |                                                             | $                       | 45,220  |         |      | $ | 44,759  |         |   | $ | 31,849  |        
|                                    | Research and development expense                            |                         |         | (13,852 | )    |   |         | (17,966 | ) |   |         | (16,932 | )
|                                    | Sales and marketing expense                                 |                         |         | (10,517 | )    |   |         | (8,917  | ) |   |         | (8,917  | )
|                                    | General and administrative expense                          |                         |         | (14,369 | )    |   |         | (14,050 | ) |   |         | (11,251 | )
|                                    | Depreciation and amortization of
    property and equipment |                         |         | (8,625  | )    |   |         | (7,353  | ) |   |         | (6,612  | )
|                                    | Amortization of acquired intangible
    assets              |                         |         | (177    | )    |   |         | (37     | ) |   |         | (531    | )
|                                    | Non-cash stock compensation expense                         |                         |         | (720    | )    |   |         | (1,195  | ) |   |         | (1,501  | )
|                                    | Interest expense                                            |                         |         | (1,172  | )    |   |         | (3,196  | ) |   |         | (1,088  | )
|                                    | Debt conversion expense                                     |                         |         |        |      |   |         | (7,886  | ) |   |         |        |  
|                                    | Other (expense)/income, net                                 |                         |         | (104    | )    |   |         | (61     | ) |   |         | 1,497   |  
|                                    |                                                             |                         |         |         |      |   |         |         |  
|Loss from continuing
    operations |                                                             |                         | (4,316  | )       |      |   | (15,902 | )       |   |   | (13,486 | )      
|Loss from discontinued operations   |                                                             |                         | (7,151  | )       |      |   | (2,646  | )       |   |   |        |        
|                                    |                                                             |                         |         |         |      |   |         |         |  
|Net loss                            |                                                             | $                       | (11,467 | )       |      | $ | (18,548 | )       |   | $ | (13,486 | )      
|                                    |                                                             |                         |         |         |      |   |         |         |  



|    |                                            
|--- | -------------------------------------------
|22. | Quarterly Financial Information (Unaudited)



|                                                |  |                    |        |   |         |   |        |              |  |   |             |   |  |   |        |  
|----------------------------------------------- |  | ------------------ | ------ | - | ------- | - | ------ | ------------ |  | - | ----------- | - |  | - | ------ | -
|                                                |  | 2005               |       
|                                                |  |                    |       
|                                                |  | Three Months Ended |       
|                                                |  |                    |       
|                                                |  | (unaudited)        |       
|                                                |  | March 31           |        |   | June 30 |   |        | September 30 |  |   | December 31 |  
|                                                |  |                    |        |   |         |   |        |              |  |   |             |  
|Revenue                                         |  | $                  | 24,856 |   |         | $ | 21,404 |              |  | $ | 29,169      |   |  | $ | 26,724 |  
|Gross profit                                    |  | $                  | 12,793 |   |         | $ | 9,831  |              |  | $ | 11,660      |   |  | $ | 10,936 |  
|Loss from continuing operations                 |  | $                  | (575   | ) |         | $ | (2,316 | )            |  | $ | (313        | ) |  | $ | (1,112 | )
|Net loss                                        |  | $                  | (2,087 | ) |         | $ | (4,038 | )            |  | $ | (2,212      | ) |  | $ | (3,130 | )
|Loss per share from continuing
    operations   |  | $                  | (0.01  | ) |         | $ | (0.05  | )            |  | $ | (0.02       | ) |  | $ | (0.03  | )
|Loss per share from discontinued
    operations |  | $                  | (0.04  | ) |         | $ | (0.05  | )            |  | $ | (0.04       | ) |  | $ | (0.05  | )
|Net loss per share 
    basic and diluted      |  | $                  | (0.05  | ) |         | $ | (0.10  | )            |  | $ | (0.06       | ) |  | $ | (0.08  | )

F-30



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##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated Financial
Statements  (Continued)

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

|                                                         |  |                    |        |   |         |   |        |              |  |   |             |   |  |   |         |  
|-------------------------------------------------------- |  | ------------------ | ------ | - | ------- | - | ------ | ------------ |  | - | ----------- | - |  | - | ------- | -
|                                                         |  | 2004               |       
|                                                         |  |                    |       
|                                                         |  | Three Months Ended |       
|                                                         |  |                    |       
|                                                         |  | (unaudited)        |       
|                                                         |  | March 31           |        |   | June 30 |   |        | September 30 |  |   | December 31 |  
|                                                         |  |                    |        |   |         |   |        |              |  |   |             |  
|Revenue                                                  |  | $                  | 20,128 |   |         | $ | 29,099 |              |  | $ | 26,589      |   |  | $ | 21,096  |  
|Gross profit                                             |  | $                  | 10,001 |   |         | $ | 14,366 |              |  | $ | 10,651      |   |  | $ | 9,741   |  
|(Loss) Earnings from continuing
    operations           |  | $                  | (3,146 | ) |         | $ | 1,294  |              |  | $ | (2,216      | ) |  | $ | (11,834 | )
|Net (loss) income                                        |  | $                  | (3,446 | ) |         | $ | 863    |              |  | $ | (3,245      | ) |  | $ | (12,720 | )
|(Loss) Earnings per share from
    continuing operations |  | $                  | (0.10  | ) |         | $ | 0.04   |              |  | $ | (0.07       | ) |  | $ | (0.33   | )
|Loss per share from discontinued
    operations          |  | $                  | (0.01  | ) |         | $ | (0.01  | )            |  | $ | (0.03       | ) |  | $ | (0.03   | )
|Net (Loss) Earnings per common
    share  basic         |  | $                  | (0.11  | ) |         | $ | 0.03   |              |  | $ | (0.10       | ) |  | $ | (0.36   | )
|Net (Loss) Earnings per common
    share  diluted       |  | $                  | (0.11  | ) |         | $ | 0.02   |              |  | $ | (0.10       | ) |  | $ | (0.36   | )



|    |                              
|--- | -----------------------------
|23. | Commitments and Contingencies

Highstein v. Telecommunication Systems, Inc.,
et al. 10b-5 10b-5




F-31



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##### Table of Contents

TeleCommunication Systems, Inc.

Notes to Consolidated Financial
Statements  (Continued)

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

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



24.
    Related Party TransactionsIn 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.



25.
    Subsequent Event  Institutional FinancingOn March 10, 2006, pursuant to a note purchase agreement
dated the same date, we issued and sold to two institutional
lenders (i) $10,000 in aggregate principal amount of
secured notes due March 10, 2009, which bears cash interest
at the rate of 14% per annum, or non-cash interest, in the
form of additional notes, at the rate of 16% per annum, at
our option, and (ii) warrants to purchase an aggregate of
1.75 million shares of our Class A Common Stock at an
exercise price of $2.40 per share. We received net cash
proceeds of approximately $9,300 from this transaction, which
are intended to be used for general corporate purposes. The note
purchase agreement includes a provision such that if we default
in any of our debt obligations exceeding $2,500, the secured
notes shall become due and payable at the election of the holder
of the notes.

The warrants issued in the January 2004 financing described
above contain provisions requiring an adjustment in both the
warrant price and the number of warrants outstanding as a
consequence of the issuance of the new warrants in March 2006.
Consequently, the warrants from 2004 have been adjusted to a
purchase price of $2.50 per share and the total number of
January 2004 warrants now outstanding has been adjusted to
886,787.

Also on March 10, 2006, certain covenants related to our
line of credit were amended as described in Note 12.

F-32



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##### Table of Contents

SIGNATURES

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



TeleCommunication Systems, Inc.

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

|                                                           |  |                                                                                                |  |               
|---------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------- |  | --------------
|Name                                                       |  | Title                                                                                          |  | Date          
|                                                           |  |                                                                                                |  |               
|/s/
    Maurice B. ToséMaurice
    B. Tosé                 |  | Chief Executive Officer, President
    and Chairman of the Board (Principal Executive Officer) |  | March 16, 2006
|                                                          
|/s/
    Thomas M.
    Brandt, Jr.Thomas
    M. Brandt, Jr. |  | Chief Financial Officer and Senior
    Vice President (Principal Financial Officer)            |  | March 16, 2006
|                                                          
|/s/
    Clyde A. HeintzelmanClyde
    A. Heintzelman       |  | Director                                                                                       |  | March 16, 2006
|                                                          
|/s/
    Richard A. KozakRichard
    A. Kozak               |  | Director                                                                                       |  | March 16, 2006
|                                                          
|/s/
    Weldon H. LathamWeldon
    H. Latham               |  | Director                                                                                       |  | March 16, 2006
|                                                          
|/s/
    Byron F. MarchantByron
    F. Marchant             |  | Director                                                                                       |  | March 16, 2006

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##### Table of Contents

EXHIBIT INDEX

|        |    |     |             |                                                                                                                                                                                                                                                                                                          
|------- | -- | --- | ----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |            
|Numbers |    |     | Description
|        |    |     |            
|        | 4  | .1  |             | Amended and Restated Articles of
    Incorporation. (Incorporated by reference to the companys
    Quarterly Report on Form 10-Q for the quarter ended June 30,
    2004)                                                                                                                               
|        | 4  | .2  |             | Second Amended and Restated Bylaws.
    (Incorporated by reference to the companys Quarterly
    Report on Form 10-Q for the quarter ended June 30, 2004)                                                                                                                                               
|        | 4  | .3  |             | Form of Class A Common Stock
    certificate. (Incorporated by reference to the companys
    Registration Statement on Form S-1 (No. 333-35522))                                                                                                                                                        
|        | 4  | .5  |             | Warrants to Purchase Common Stock
    issued pursuant to the Securities Purchase Agreement for each of
    the investors party to the Securities Purchase Agreement dated
    January 13, 2004. (Incorporated by reference to the
    companys Current Report on Form 8-K filed on January 23,
    2004)
|        | 4  | .6  |             | Note Purchase Agreement dated March
    13, 2006 by and among the company and the Purchasers named
    therein                                                                                                                                                                                           
|        | 4  | .7  |             | Warrants to Purchase Common Stock
    issued pursuant to the Note Purchase Agreement dated March 13,
    2006 to each of the Purchasers named therein                                                                                                                                                    
|        | 4  | .8  |             | Notes issued pursuant to the Note
    Purchase Agreement dated March 13, 2006 to each of the
    Purchasers named therein                                                                                                                                                                                
|        | 4  | .9  |             | Registration Rights Agreement dated
    March 13, 2006 by and among the company and the Investors named
    therein                                                                                                                                                                                      
|        | 4  | .10 |             | Intellectual Property Security
    Agreement dated March 13, 2006 by and among the company, Bonanza
    Master Fund Ltd., as Agent, and the Secured Parties named therein                                                                                                                                
|        | 4  | .11 |             | Subordination Agreement dated March
    13, 2006 by and among the company, Silicon Valley Bank, and the
    Purchasers named therein                                                                                                                                                                     
|        | 10 | .1  |             | West Garrett Office Building Full
    service Lease Agreement dated October 1, 1997 by and between the
    company and West Garrett Joint Venture. (Incorporated by
    reference to the companys Registration Statement on Form
    S-1 (No. 333-35522))                                               
|        | 10 | .2 |             | Form of Indemnification Agreement.
    (Incorporated by reference to the companys Registration
    Statement on Form S-1 (No. 333-35522))                                                                                                                                                               
|        | 10 | .3 |             | Fourth Amended and Restated 1997
    Stock Incentive Plan. (Incorporated by reference to Appendix A
    to the companys definitive proxy statement for its 2004
    Annual Meeting of stockholders as filed with the SEC on June 17,
    2004 (No. 000-30821))                                          
|        | 10 | .4 |             | Employee Stock Purchase Plan.
    (Incorporated by reference to the companys Registration
    Statement on Form S-1 (No. 333-35522))                                                                                                                                                                    
|        | 10 | .5 |             | Optionee Agreement dated October 1,
    1997 by and between the company and Richard A. Young.
    (Incorporated by reference to the companys Registration
    Statement on Form S-1 (No. 333-35522))                                                                                                    
|        | 10 | .6 |             | Optionee Agreement dated July 29,
    1998 by and between the company and Richard A. Young.
    (Incorporated by reference to the companys Registration
    Statement on Form S-1 (No. 333-35522))                                                                                                      
|        | 10 | .7 |             | Optionee Agreement dated October 1,
    1997 by and between the company and Thomas M. Brandt, Jr.
    (Incorporated by reference to the companys Registration
    Statement on Form S-1 (No. 333-35522))                                                                                                
|        | 10 | .8 |             | Optionee Agreement dated July 29,
    1998 by and between the company and Thomas M. Brandt, Jr.
    (Incorporated by reference to the companys Registration
    Statement on Form S-1 (No. 333-35522))                                                                                                  
|        | 10 | .9 |             | Optionee Agreement dated April 1,
    1999 by and between the company and Thomas M. Brandt, Jr.
    (Incorporated by reference to the companys Registration
    Statement on Form S-1 (No. 333-35522))                                                                                                  

F-34



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##### Table of Contents



|        |    |      |             |                                                                                                                                                                                                                               
|------- | -- | ---- | ----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |            
|Numbers |    |      | Description
|        |    |      |            
|        | 10 | .10 |             | 401(k) and Profit Sharing Plan of
    the company dated January 1, 1999. (Incorporated by reference to
    the companys Registration Statement on Form S-4
    (No. 333-51656))                                              
|        | 10 | .11 |             | Employment Agreement dated February
    1, 2001 by and between the company and Richard A. Young.
    (Incorporated by reference to the companys Quarterly
    Report on Form 10-Q for the quarter ended September 30, 2001)  
|        | 10 | .12 |             | Employment Agreement dated February
    1, 2001 by and between the company and Thomas M. Brandt.
    (Incorporated by reference to the companys Quarterly
    Report on Form 10-Q for the quarter ended September 30, 2001)  
|        | 10 | .13 |             | Employment Agreement dated February
    1, 2001 by and between the company and Drew A. Morin.
    (Incorporated by reference to the companys Quarterly
    Report on Form 10-Q for the quarter ended September 30, 2001)     
|        | 10 | .14 |             | Employment Agreement dated February
    1, 2001 by and between the company and Timothy J. Lorello.
    (Incorporated by reference to the companys Quarterly
    Report on Form 10-Q for the quarter ended September 30, 2001)
|        | 10 | .15 |             | Services Integration Agreement
    dated January 31, 2002 by and between the company and Hutchison
    3G. (Incorporated by reference to the companys Annual
    Report on Form 10-K for the year ended December 31, 2001)   
|        | 10 | .16  |             | Deed of Lease by and between
    Annapolis Partner, LLC and the company. (Incorporated by
    reference to the companys Annual Report on Form 10-K for
    the year ended December 31, 2002)                                 
|        | 10 | .17 |             | Restricted stock award certificate
    to Mr. Thomas M. Brandt, Jr. (Incorporated by reference to the
    companys Quarterly Report on Form 10-Q for the quarter
    ended September 30, 2003)                               
|        | 10 | .18 |             | Restricted stock award certificate
    to Mr. Thomas M. Brandt, Jr. (Incorporated by reference to the
    companys Quarterly Report on Form 10-Q for the quarter
    ended September 30, 2003)                               
|        | 10 | .19 |             | Restricted stock award certificate
    to Mr. Clyde A. Heintzelman. (Incorporated by reference to the
    companys Quarterly Report on Form 10-Q for the quarter
    ended September 30, 2003)                               
|        | 10 | .20 |             | Restricted stock award certificate
    to Mr. Richard A. Kozak. (Incorporated by reference to the
    companys Quarterly Report on Form 10-Q for the quarter
    ended September 30, 2003)                                   
|        | 10 | .21 |             | Restricted stock award certificate
    to Mr. Weldon H. Latham. (Incorporated by reference to the
    companys Quarterly Report on Form 10-Q for the quarter
    ended September 30, 2003)                                   
|        | 10 | .22 |             | Restricted stock award certificate
    to Mr. Timothy J. Lorello. (Incorporated by reference to the
    companys Quarterly Report on Form 10-Q for the quarter
    ended September 30, 2003)                                 
|        | 10 | .23 |             | Restricted stock award certificate
    to Mr. Timothy J. Lorello. (Incorporated by reference to the
    companys Quarterly Report on Form 10-Q for the quarter
    ended September 30, 2003)                                 
|        | 10 | .24 |             | Restricted stock award certificate
    to Mr. Bryon F. Marchant. (Incorporated by reference to the
    companys Quarterly Report on Form 10-Q for the quarter
    ended September 30, 2003)                                  
|        | 10 | .25 |             | Restricted stock award certificate
    to Mr. Drew A. Morin. (Incorporated by reference to the
    companys Quarterly Report on Form 10-Q for the quarter
    ended September 30, 2003)                                      
|        | 10 | .26 |             | Restricted stock award certificate
    to Mr. Drew A. Morin. (Incorporated by reference to the
    companys Quarterly Report on Form 10-Q for the quarter
    ended September 30, 2003)                                      
|        | 10 | .27 |             | Restricted stock award certificate
    to Mr. Maurice B. Tosé. (Incorporated by reference to the
    companys Quarterly Report on Form 10-Q for the quarter
    ended September 30, 2003)                                    
|        | 10 | .28 |             | Restricted stock award certificate
    to Mr. Maurice B. Tosé. (Incorporated by reference to the
    companys Quarterly Report on Form 10-Q for the quarter
    ended September 30, 2003)                                    
|        | 10 | .29 |             | Restricted stock award certificate
    to Mr. Kevin M. Webb. (Incorporated by reference to the
    companys Quarterly Report on Form 10-Q for the quarter
    ended September 30, 2003)                                      
|        | 10 | .30 |             | Restricted stock award certificate
    to Mr. Kevin M. Webb. (Incorporated by reference to the
    companys Quarterly Report on Form 10-Q for the quarter
    ended September 30, 2003)                                      
|        | 10 | .31 |             | Restricted stock award certificate
    to Mr. Richard A. Young. (Incorporated by reference to the
    companys Quarterly Report on Form 10-Q for the quarter
    ended September 30, 2003)                                   

F-35



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##### Table of Contents



|        |    |      |             |                                                                                                                                                                                                                                                            
|------- | -- | ---- | ----------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |            
|Numbers |    |      | Description
|        |    |      |            
|        | 10 | .32 |             | Restricted stock award certificate
    to Mr. Richard A. Young. (Incorporated by reference to the
    companys Quarterly Report on Form 10-Q for the quarter
    ended September 30, 2003)                                                                
|        | 10 | .33  |             | Registration Rights Agreement dated
    as of December 18, 2003 by and among the company and the
    investors party to the 2003 SPA. (Incorporated by reference to
    Exhibit 10 to the companys Current Report on Form 8-K
    dated December 18, 2003)
|        | 10 | .34  |             | Trademark License Agreement by and
    among Aether, TSYS and the company dated as of January 13, 2004.
    (Incorporated by reference to the companys Current Report
    on Form 8-K filed on January 23, 2004)                                          
|        | 10 | .35  |             | Registration Rights Agreement by
    and between the company and Aether dated as of January 13, 2004.
    (Incorporated by reference to the companys Current Report
    on Form 8-K filed on January 23, 2004)                                            
|        | 10 | .36 |             | Amended and Restated Loan and
    Security Agreement by and between the company and Silicon Valley
    Bank. (Incorporated by reference to the companys Quarterly
    Report on Form 10-Q for the quarter ended September 30, 2004)                       
|        | 10 | .37  |             | Restricted stock award certificate
    to Mr. Clyde A. Heintzelman                                                                                                                                                                                         
|        | 10 | .38  |             | Restricted stock award certificate
    to Mr. Richard A. Kozak                                                                                                                                                                                             
|        | 10 | .39  |             | Restricted stock award certificate
    to Mr. Weldon F. Latham                                                                                                                                                                                             
|        | 10 | .40  |             | Restricted stock award certificate
    to Mr. Byron F. Marchant                                                                                                                                                                                            
|        | 12 | .1   |             | Supplemental Financial Statement
    Schedule II                                                                                                                                                                                                           
|        | 21 | .1   |             | Subsidiaries of the Registrant                                                                                                                                                                                                                             
|        | 23 | .1   |             | Consent of Ernst & Young LLP                                                                                                                                                                                                                               
|        | 23 | .2   |             | Consent of James & Cowper                                                                                                                                                                                                                                  
|        | 31 | .1   |             | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002                                                                                                                             
|        | 31 | .2   |             | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002                                                                                                                             
|        | 32 | .1   |             | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002                                                                                                                             
|        | 32 | .2   |             | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002                                                                                                                             
|        | 99 | .01  |             | Report of Independent Auditors-
    James & Cowper                                                                                                                                                                                                         






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

F-36