##### 



SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
  FORM 10-K/A 
 (Mark One)x
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934For the year ended December 31, 2003ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE 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
(Registrants telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Class A common
stock, par value $0.01 per share Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days: Yes x No o Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o Indicate by check mark whether the registrant is an accelerated filer, as
defined by Securities Exchange Act Rule 12 b-2: Yes o No x As of June 30, 2003, the aggregate market value of the Class A common
stock held by non-affiliates, as reported on the NASDAQ National Market, was
approximately $36,176,088.* As of January 31, 2004 there were 23,833,724 shares of Class A common
stock and 9,232,918 shares of Class B common stock outstanding. * Excludes 3,507,613 shares of Class A common stock deemed to be held by
officers and directors and stockholders whose ownership exceeds ten percent of
the shares outstanding at June 30, 2003. Exclusion of shares held by any person
should not be construed to indicate that such person possess the power, direct
or indirect, to direct or cause the direction of the management or policies of
the registrant, or that such person is controlled by or under common control
with the registrant. DOCUMENTS INCORPORATED BY REFERENCE None.




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##### 



Explanatory Note This Amendment No. 1 on Form 10-K/A (the Amendment) is being filed to
amend Part IV, Item 15 of the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 2003, filed on February 24, 2004 (the Original
10-K). Exhibit 23.1 (Consent of Ernst & Young LLP) to the Original 10-K was
incorrect. This Amendment amends and restates Exhibit 23.1 in
its entirety. This Amendment does not otherwise alter or amend any exhibits to
or disclosures set forth in the Original 10-K. Item 15 of Part IV has been
reproduced in its entirety in this Amendment in accordance with the
requirements of Rule 12b-15 promulgated under the Securities Exchange Act of
1934, as amended, but this Amendment does not reflect any changes to the
financial statements, financial statement schedules or reports on Form 8-K
included in the Original 10-K. Part IV Item 15.Exhibits, Financial Statement Schedules, and Reports on Form 8-K Financial Statements Report of Independent Auditors
    
    
    F-1Consolidated Balance Sheets as of December 31, 2003 and
2002
    
    
    F-2Consolidated Statements of Operations for each of the three
years in the period ended December 31, 2003
    
    
    F-3Consolidated Statements of Stockholders Equity for each of
the three years in the period ended December 31, 2003
    
    
    F-4Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2003
    
    
    F-5Notes to Consolidated Financial Statements
    
    
    F-6
 Financial Statement Schedules All financial statement schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange Commission are
not required pursuant to the instructions to Item 8 or are inapplicable and
therefore have been omitted. Exhibits The exhibits are listed in the Exhibit Index immediately preceding the
exhibits. Reports on Form 8-K On April 24, 2003, we filed a Form 8-K attaching a press release relating
to the Registrants financial results for the quarter ended March 31, 2003. On July 25, 2003, we filed a Form 8-K attaching a press release relating
to the Registrants financial results for the quarter ended June 30, 2003. On October 23, 2003, we filed a Form 8-K attaching a press release
relating to the Registrants financial results for the quarter ended September
30, 2003. On December 23, 2003, we filed a Form 8-K attaching a press release
announcing a definitive purchase agreement to acquire the Enterprise Mobility
Solutions business unit of Aether Systems, Inc. On January 23, 2004, we filed a Form 8-K attaching a press release
announcing that we had consummated the purchase of the Enterprise Mobility
Solutions business unit of Aether Systems, Inc. On February 12, 2004, we filed a Form 8-K attaching a press release
relating to the Registrants financial results for the quarter and fiscal year
ended December 31, 2003. 2




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##### 



Report of Independent Auditors

The Board of Directors and Stockholders 
 TeleCommunication Systems, Inc.

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

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

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



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

Baltimore, Maryland

January 30, 2004


F-1



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##### 



TeleCommunication Systems, Inc.

Consolidated Balance Sheets

(amounts in thousands, except share
data)


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

See accompanying Notes to Consolidated Financial
Statements.

F-2



---



##### 



TeleCommunication Systems, Inc.

Consolidated Statements of
Operations

(amounts in thousands, except per share
data)


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

See accompanying Notes to Consolidated Financial
Statements.

F-3



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##### 



TeleCommunication Systems, Inc.

Consolidated Statements of Stockholders
Equity

(amounts in thousands, except share
data)


|                                                                                                                    |  |         |     |         |  |              |     |            |  |             |        |       |  |   |         |  |  |   |          |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------- |  | ------- | --- | ------- |  | ------------ | --- | ---------- |  | ----------- | ------ | ----- |  | - | ------- |  |  | - | -------- | - |  | - | ------- | -
|                                                                                                                    |  | Class A |     | Class B |  |              |     | Additional |  |             |        |      
|                                                                                                                    |  | Common  |     | Common  |  | Deferred     |     | Paid-in    |  | Accumulated |        |      
|                                                                                                                    |  | Stock   |     | Stock   |  | Compensation |     | Capital    |  | Deficit     |        | Total
|                                                                                                                    |  |         |     |         |  |              |     |            |  |             |        |      
|Balance at January 1, 2001                                                                                          |  | $       | 137 |         |  | $            | 108 |            |  | $           |       |       |  | $ | 94,418  |  |  | $ | (10,514  | ) |  | $ | 84,149  |  
|Options exercised for the purchase of 510,494
    shares of Class A Common Stock                                    |  |         | 5   |         |  |              |    |            |  |             |       |       |  |   | 387     |  |  |   |         |   |  |   | 392     |  
|Issuance of 102,699 shares of Class A Common
    Stock under Employee Stock Purchase Plan                           |  |         | 1   |         |  |              |    |            |  |             |        |       |  |   | 274     |  |  |   |          |   |  |   | 275     |  
|Issuance of 3,597,520 shares of Class A
    Common Stock for the acquisition of Xypoint                             |  |         | 36  |         |  |              |    |            |  |             |       |       |  |   | 56,625  |  |  |   |         |   |  |   | 56,661  |  
|Issuance of stock options to purchase 656,990
    shares of Class A Common Stock for the acquisition of
    Xypoint |  |         |    |         |  |              |    |            |  |             |       |       |  |   | 7,860   |  |  |   |         |   |  |   | 7,860   |  
|Issuance of 53,264 shares of Class A Common
    Stock for an acquired company                                       |  |         | 1   |         |  |              |    |            |  |             |       |       |  |   | 409     |  |  |   |         |   |  |   | 410     |  
|Issuance of stock options to purchase 5,554
    shares of Class A Common Stock for an acquired company              |  |         |    |         |  |              |    |            |  |             |       |       |  |   | 10      |  |  |   |         |   |  |   | 10      |  
|Stock compensation expense for issuance of Class
    A Common Stock options at below fair market value              |  |         |    |         |  |              |    |            |  |             |       |       |  |   | 2,587   |  |  |   |         |   |  |   | 2,587   |  
|Conversion of Class B Common Stock into
    Class A Common Stock  194,083 shares                                   |  |         | 2   |         |  |              | (2  | )          |  |             |       |       |  |   |        |  |  |   |         |   |  |   |        |  
|Net loss for 2001                                                                                                   |  |         |    |         |  |              |    |            |  |             |       |       |  |   |        |  |  |   | (89,483  | ) |  |   | (89,483 | )
|                                                                                                                    |  |         |     |         |  |              |     |            |  |             |        |       |  |   |         |  |  |   |          |   |  |   |         |  
|Balance at December 31, 2001                                                                                        |  |         | 182 |         |  |              | 106 |            |  |             |       |       |  |   | 162,570 |  |  |   | (99,997  | ) |  |   | 62,861  |  
|Options exercised for the purchase of 415,713
    shares of Class A Common Stock                                    |  |         | 4   |         |  |              |    |            |  |             |       |       |  |   | 372     |  |  |   |         |   |  |   | 376     |  
|Issuance of 116,141 shares of Class A Common
    Stock under Employee Stock Purchase Plan                           |  |         | 1   |         |  |              |     |            |  |             |       |       |  |   | 216     |  |  |   |         |   |  |   | 217     |  
|Stock compensation expense for issuance of Class
    A Common Stock options at below fair market value              |  |         |    |         |  |              |    |            |  |             |       |       |  |   | 1,554   |  |  |   |         |   |  |   | 1,554   |  
|Issuance of 232,210 shares of Class A Common
    Stock for the acquisition of Otelnet                               |  |         | 2   |         |  |              |    |            |  |             |       |       |  |   | 259     |  |  |   |         |   |  |   | 261     |  
|Issuance of stock options to purchase 125,000
    shares of Class A Common Stock for non-employee services          |  |         |    |         |  |              |    |            |  |             |       |       |  |   | 205     |  |  |   |         |   |  |   | 205     |  
|Conversion of Class B Common Stock into
    Class A Common Stock  702,628 shares                                   |  |         | 7   |         |  |              | (7  | )          |  |             |       |       |  |   |        |  |  |   |         |   |  |   |        |  
|Net loss for 2002                                                                                                   |  |         |    |         |  |              |    |            |  |             |       |       |  |   |        |  |  |   | (17,838  | ) |  |   | (17,838 | )
|                                                                                                                    |  |         |     |         |  |              |     |            |  |             |        |       |  |   |         |  |  |   |          |   |  |   |         |  
|Balance at December 31, 2002                                                                                        |  |         | 196 |         |  |              | 99  |            |  |             |       |       |  |   | 165,176 |  |  |   | (117,835 | ) |  |   | 47,636  |  
|Options exercised for the purchase of 735,151
    shares of Class A Common Stock                                    |  |         | 7   |         |  |              |    |            |  |             |       |       |  |   | 919     |  |  |   |         |   |  |   | 926     |  
|Issuance of 91,243 shares of Class A Common
    Stock under Employee Stock Purchase Plan                            |  |         | 1   |         |  |              |    |            |  |             |       |       |  |   | 142     |  |  |   |         |   |  |   | 143     |  
|Issuance of 1,077,250 shares of restricted
    Class A Common Stock to directors and key executives                 |  |         | 11  |         |  |              |    |            |  |             | (1,890 | )     |  |   | 1,879   |  |  |   |         |   |  |   |        |  
|Amortization of deferred compensation expense                                                                       |  |         |    |         |  |              |    |            |  |             | 491    |       |  |   |        |  |  |   |         |   |  |   | 491     |  
|Conversion of 527,272 shares of Class B
    Common Stock to Class A Common Stock                                    |  |         | 5   |         |  |              | (5  | )          |  |             |       |       |  |   |        |  |  |   |         |   |  |   |        |  
|Stock compensation expense for issuance of
    Class A Common Stock options at below fair market value              |  |         |    |         |  |              |    |            |  |             |       |       |  |   | 1,010   |  |  |   |         |   |  |   | 1,010   |  
|Stock compensation expense for options issued to
    non-employees for service                                      |  |         |    |         |  |              |    |            |  |             |       |       |  |   | 131     |  |  |   |         |   |  |   | 131     |  
|Net loss for 2003                                                                                                   |  |         |    |         |  |              |    |            |  |             |       |       |  |   |        |  |  |   | (13,486  | ) |  |   | (13,486 | )
|                                                                                                                    |  |         |     |         |  |              |     |            |  |             |        |       |  |   |         |  |  |   |          |   |  |   |         |  
|Balance at December 31, 2003                                                                                        |  | $       | 221 |         |  | $            | 94  |            |  | $           | (1,399 | )     |  | $ | 169,256 |  |  | $ | (131,321 | ) |  | $ | 36,851  |  
|                                                                                                                    |  |         |     |         |  |              |     |            |  |             |        |       |  |   |         |  |  |   |          |   |  |   |         |  

See accompanying Notes to Consolidated Financial
Statements.

F-4



---



##### 



TeleCommunication Systems, Inc.

Consolidated Statements of Cash
Flows

(amounts in thousands)


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

See accompanying Notes to Consolidated Financial
Statements.

F-5



---



##### 



TeleCommunication Systems, Inc.

Notes to Consolidated Financial
Statements

(amounts in thousands, except share
data)


1. Significant Accounting
Policies

Description of Business

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

Our Network Software products enable wireless
carriers to deliver short text messages, location information,
Internet content, alerts and privacy information and other
enhanced communication services to and from wireless phones. We
earn network software revenue through the sale of licenses,
deployment and customization fees and maintenance fees. Pricing
is generally based on the volume of capacity bought from us by
the carrier.

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

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

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

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

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

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

Cash and Cash Equivalents.Cash and cash equivalents include cash
and highly liquid investments with a maturity of three months or
less when purchased. Cash equivalents are reported at fair
value, which approximates cost.

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

Property and Equipment.Property and equipment is stated at
cost less accumulated depreciation. Depreciation is computed
using the straight-line method based on the estimated useful
lives of equipment, generally five years for furniture and
fixtures and three years for computer equipment, software and
vehicles. Amortization of leasehold improvements is provided
using the straight-line method over the lesser of the useful
life of the asset or the remaining term of the lease. Assets
held under capital leases are stated at the lesser of

F-6



---



##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

(amounts in thousands, except share
data)


the present value of future minimum lease
payments or the fair value of the property at the inception of
the lease. The assets recorded under capital leases are
amortized over the lesser of the lease term or the estimated
useful life of the assets in a manner consistent with our
depreciation policy for owned assets.

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

Costs incurred for the development of computer
software that will be sold, leased or otherwise marketed are
capitalized when technological feasibility has been established.
For new products, technological feasibility is established when
an operative version of the computer software product is
completed in the same software language as the product to be
ultimately marketed, performs all the major functions planned
for the product, and has successfully completed initial customer
testing. Technological feasibility for enhancements to an
existing product is established when a detail program design is
completed. Costs that are capitalized include direct labor,
related overhead and other direct costs. These capitalized costs
are subject to an ongoing assessment of recoverability based
upon anticipated future revenue and changes in hardware and
software technologies. Unamortized capitalized software
development costs determined to be in excess of net realizable
value of the product are expensed immediately as additional
amortization.

Amortization of capitalized software development
costs begins when the product is available for general release.
Amortization is computed on a product-by-product basis using the
straight-line method over the products estimated useful
life, which is not to exceed three years. Amortization is also
computed using the ratio that current revenue for the product
bears to the total of current and anticipated future revenue for
that product. If this revenue curve method results in
amortization greater than the amount computed using the
straight-line method, amortization is recorded at that greater
amount.

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

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

Network Software Revenue.We license packaged network software
principally for use in the wireless telecommunications industry.
These licenses typically contain multiple elements. In addition
to the product license, elements may include installation,
integration services, hardware and maintenance. The total
arrangement fee is allocated among each element based on
vendor-specific objective evidence of the relative fair value of
each of the elements. Fair value is generally determined based
on the price charged when the element is sold separately. In the
absence of evidence of fair value of a delivered element,
revenue is allocated first to the undelivered elements based on
fair value and the residual revenue to the delivered elements.
The software licenses are generally perpetual licenses for a
specified number of users that allow for the purchase of annual
maintenance at a specified rate. All fees are recognized as
revenue when four criteria are met. These four criteria are
(i) evidence of an arrangement (ii) delivery of the
software has occurred, (iii) the fee is fixed or
determinable and (iv) the fee is probable of collection.
Software license fees billed and not recognized as revenue are
included in deferred revenue.

Software licenses include a 90-day warranty for
defects. We have not incurred significant warranty costs on any
software product to date, and no costs are currently accrued
upon recording the related revenue.

F-7



---



##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

(amounts in thousands, except share
data)


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

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

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

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

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

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

Network Solutions Revenue.Network solutions revenue is generated
from the design, development and deployment of information
processing and communication systems primarily for government
enterprises. These services are provided under time and
materials contracts, cost plus fee contracts, or fixed price
contracts. Revenue is recognized under time and materials
contracts and cost plus fee contracts as billable costs are
incurred. Fixed price contracts are accounted for using the
percentage-of-completion method, measured either by total costs
incurred as a percentage of total estimated costs at the
completion of the contract, or direct labor hours incurred
compared to estimated total direct labor hours for projects for
which third-party hardware represents a significant portion of
the total estimated costs. These contracts generally allow for
monthly billing or billing upon achieving certain specified
milestones. Any estimated losses on contracts are recognized in
their entirety at the date that they become evident.

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

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

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

F-8



---



##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

(amounts in thousands, except share
data)


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

Impairment of Long-Lived Assets.Long-lived assets, including
intangible assets, are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of
an asset or group of assets may not be fully recoverable. If an
impairment indicator is present, we evaluate recoverability by a
comparison of the carrying amount of the assets to future
undiscounted net cash flows that we expect to generate from
these assets. If the assets are impaired, we recognize an
impairment charge equal to the amount by which the carrying
amount exceeds the fair value of the assets. Fair value is
generally determined by estimates of discounted cash flows. The
discount rate used in any estimate of discounted cash flows
would be the rate required for a similar investment of like
risk. Assets to be disposed of are reported at the lower of
carrying values or fair values, less estimated costs of disposal.

Stock-Based Compensation.We have two stock-based employee
compensation plans, which are described more fully in Note 14.
We record compensation expense for all stock-based compensation
plans using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees(APB No. 25) and related
interpretations. Under APB No. 25, compensation expense is
recorded over the vesting period to the extent that the fair
value of the underlying stock on the date of grant exceeds the
exercise or acquisition price of the stock or stock-based award.
The following table illustrates the effect on net loss
attributable to common stockholders and loss per common share if
we had applied the fair value recognition provisions of
Financial Accounting Standards Board Statement No. 123,
Accounting for Stock-Based Compensation(Statement
No. 123), to stock-based employee compensation.

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

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

F-9



---



##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

(amounts in thousands, except share
data)


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

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

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

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

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

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

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

F-10



---



##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

(amounts in thousands, except share
data)


2. Loss Per Common Share

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

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

3. Supplemental Disclosure of Cash Flow
Information

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

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

4. Unbilled Receivables

Unbilled receivables consisted of the following
at December 31:

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

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

5. Property and Equipment

Property and equipment consisted of the following
at December 31:

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

F-11



---



##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

(amounts in thousands, except share
data)


6. Line of Credit

We maintain a $15,000 line of credit with a bank
that expires in April 2006. The credit agreement allows us to
borrow up to 80% of outstanding receivables less than
90 days old, and amounts borrowed bear interest at the
prime rate plus 1.0% or prime plus 1.25% for equipment loans
under the line, with a floor prime rate of 4.25%. Under the term
of the line of credit, we borrowed $2,500 as a term loan
maturing in 36 months at a rate of 5.5%. At
December 31, 2003, there were no other amounts outstanding
under the line.

7. Long-Term Debt

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

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |      |        |      |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ------ | ---- |  | - | ------ | -
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  | 2003 |        | 2002
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |      |        |     
|Note payable dated September 25, 2002, due
    March 31, 2004, and bearing interest at 7.75% per annum.
    The note requires monthly installments of principal and interest
    of $84 through February 28, 2004. The note is secured by
    the accounts receivable of one customer                                                                                                                                                                                                                                                                                                                                                                        |  | $    | 1,605  |      |  | $ | 2,432  |  
|Note payable dated December 20, 2002, due
    June 30, 2004, and bearing interest at 7.75% per annum. The
    note requires monthly installments of principal and interest of
    $84 through May 31, 2004. The note is secured by the
    accounts receivable of one customer                                                                                                                                                                                                                                                                                                                                                                               |  |      | 1,802  |      |  |   | 2,634  |  
|Note payable dated January 16, 2003, due
    February 16, 2008, and bearing interest at 6.0% per annum.
    The note requires monthly installments of principal and interest
    of $0.3 through January 16, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |      | 15     |      |  |   |       |  
|Note payable dated June 16, 2003, due
    October 31, 2005, and bearing interest at 7.75% per annum.
    The note requires monthly installments of principal and interest
    of $106 through September 30, 2005. The note is secured by
    the accounts receivable of one customer                                                                                                                                                                                                                                                                                                                                                                         |  |      | 2,072  |      |  |   |       |  
|Note payable dated September 26, 2003, due
    April 30, 2005, and bearing interest at 7.75% per annum.
    The note requires monthly installments of principal and interest
    of $83 through February 28, 2005 and a final payment of
    $1,481 on March 31, 2005. The note is secured by the
    accounts receivable of one customer                                                                                                                                                                                                                                                                                                                    |  |      | 2,446  |      |  |   |       |  
|Note payable dated December 1, 2003, due
    July 1, 2005, and bearing interest at 6.0% per annum. The
    note requires monthly installments of principal and interest of
    $87 through June 1, 2005. The note is secured by property
    and equipment                                                                                                                                                                                                                                                                                                                                                                                                   |  |      | 1,500  |      |  |   |       |  
|Note payable dated December 30, 2003, due
    January 2, 2007, and bearing interest at 5.5% per annum.
    The note requires monthly installments of principal and interest
    of $76 through December 1, 2006. The note is secured by
    property and equipment                                                                                                                                                                                                                                                                                                                                                                                           |  |      | 2,500  |      |  |   |       |  
|State of Maryland loan-to-grant dated
    May 10, 2001, due January 1, 2004, and bearing
    interest at 5% per annum. The loan becomes a grant in $100
    increments plus a pro rata share of the accrued interest, based
    on employment levels at annual milestones. At the time of the
    loan, $100 was immediately converted to a grant. In February
    2002 and 2003, $100 of the principal and the pro rata share of
    the interest was forgiven. The remaining balance of $100
    outstanding as of December 31, 2003 was forgiven on
    January 26, 2004. The loan is secured by a letter of credit
    in favor of the State of Maryland |  |      | 100    |      |  |   | 200    |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |      |        |      |  |   |        |  
|Total                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |      | 12,040 |      |  |   | 5,266  |  
|Less: current portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |      | (5,698 | )    |  |   | (1,767 | )
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |      |        |      |  |   |        |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  | $    | 6,342  |      |  | $ | 3,499  |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |      |        |      |  |   |        |  

F-12



---



##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

(amounts in thousands, except share
data)


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

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

8. Capital Leases

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

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

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

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

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

9. Common Stock

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

10. Fair Value of Financial
Instruments

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

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

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

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

F-13



---



##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

(amounts in thousands, except share
data)


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

11. Income Taxes

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

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

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

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

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

F-14



---



##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

(amounts in thousands, except share
data)


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

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

12. Acquisitions

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

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

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

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

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

F-15



---



##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

(amounts in thousands, except share
data)


13. Impairment of Goodwill and Other
Intangibles

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

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

14. Stock Compensation Plans

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

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

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

F-16



---



##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

(amounts in thousands, except share
data)


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

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

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

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

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

15. Operating Leases

We lease certain office space and equipment under
non-cancelable operating leases that expire on various dates
through 2010. Future minimum payments under non-cancelable
operating leases with initial terms of one year or more
consisted of the following at December 31, 2003:

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

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

F-17



---



##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

(amounts in thousands, except share
data)


16. Retirement Plan

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

17. Derivative and Hedging
Activities

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

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

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

18. Concentrations of Credit Risk and
Major Customers

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

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

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

19. Business and Geographic Segment
Information

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

F-18



---



##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

(amounts in thousands, except share
data)




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

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

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

The following table sets forth information on
reportable segments:

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

F-19



---



##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

(amounts in thousands, except share
data)


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

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

20. Quarterly Financial Information
(unaudited)

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

|                                          |  |                    |        |         |  |              |         |             |  |   |        |  |  |   |        | 
|----------------------------------------- |  | ------------------ | ------ | ------- |  | ------------ | ------- | ----------- |  | - | ------ |  |  | - | ------ | 
|                                          |  |                   
|                                          |  | 2003              
|                                          |  |                   
|                                          |  |                   
|                                          |  | Three months ended
|                                          |  |                   
|                                          |  | March 31           |        | June 30 |  | September 30 |         | December 31
|                                          |  |                    |        |         |  |              |         |            
|Revenue                                   |  | $                  | 19,292 |         |  | $            | 20,080  |             |  | $ | 28,247 |  |  | $ | 24,446 | 
|Direct cost of revenue                    |  | $                  | 11,051 |         |  | $            | 11,805  |             |  | $ | 16,425 |  |  | $ | 11,900 | 
|Net (loss) income                         |  | $                  | (4,048 | )       |  | $            | (11,392 | )           |  | $ | 506    |  |  | $ | 1,448  | 
|(Loss) Earnings per common share  basic  |  | $                  | (0.14  | )       |  | $            | (0.38   | )           |  | $ | 0.02   |  |  | $ | 0.05   | 
|(Loss) Earnings per common share diluted |  | $                  | (0.14  | )       |  | $            | (0.38   | )           |  | $ | 0.02   |  |  | $ | 0.04   | 

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

21. Commitments and
Contingencies

In November 2001, a shareholder class action
lawsuit was filed against us, certain of our current officers
and a director, and several investment banks that were the
underwriters of our initial public offering (the
Underwriters): Highstein v.
Telecommunication Systems, Inc., et al., United States
District Court for the Southern District of New York, Civil
Action No.01-CV-9500. The plaintiffs seek an unspecified amount
of damages. The lawsuit purports to be a class action suit filed
on behalf of purchasers of our common stock during the period
August 8, 2000 through December 6, 2000. The
plaintiffs allege that the Underwriters agreed to allocate
common stock offered for sale in our initial public offering to
certain purchasers in exchange for

F-20



---



##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

(amounts in thousands, except share
data)


excessive and undisclosed commissions and
agreements by those purchasers to make additional purchases of
common stock in the aftermarket at pre-determined prices. The
plaintiffs allege that all of the defendants violated
Sections 11,12 and 15 of the Securities Act of 1933, as
amended, and that the underwriters violated Section 10(b)
of the Securities Exchange Act of 1934, as amended, and
Rule 10b-5 promulgated thereunder. The claims against us of
violation of Rule 10b-5 have been dismissed with the
plaintiffs having the right to re-plead. We intend to vigorously
defend the lawsuit. We believe that more than 300 other
companies have been named in nearly identical lawsuits that have
been filed by some of the same law firms that represent the
plaintiffs in the lawsuit against us.

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

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

We acquired the Enterprise Mobility Solutions
business unit of Aether Systems, Inc. on January 13, 2004,
with an effective date of January 1, 2004. The Enterprise
Mobility Solutions business unit provides wireless data and
location-based solutions to approximately 1,200 large enterprise
customers and 60,000 wireless data users, uniting messaging,
synchronization and web technologies. These solutions include
package and vehicle tracking, productivity tools, and the
ability to capture digital signatures for proof of delivery to a
growing installed base of logistics customers. The Enterprise
Mobility Solutions business unit is a leading reseller of
Blackberry devices and provides real-time financial market data
to wireless device users under annual subscriber contracts.

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

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

F-21



---



##### 



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, 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 and
Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. Name
    
    Title
    
    Date/s/
MAURICE B TOSÉ

Maurice B. Tosé
    
    Chief Executive Officer, President
and Chairman of the Board
(Principal Executive Officer)
    
    February 27, 2004/s/
THOMAS M. BRANDT, JR.

Thomas M. Brandt, Jr.
    
    Chief Financial Officer and Senior
Vice President (Principal Financial Officer)
    
    February 27, 2004*

Clyde A. Heintzelman
    
    Director
    
    February 27, 2004*

Richard A. Kozak
    
    Director
    
    February 27, 2004*

Weldon H. Latham
    
    Director
    
    February 27, 2004*

Byron F. Marchant
    
    Director
    
    February 27, 2004
  *
    
    By Maurice B. Tosé as attorney-in-fact




---



##### 



EXHIBIT INDEX ExhibitNumbers
    
    Description10.48*
    
    Restricted stock award certificate to Mr. Thomas M. Brandt, Jr.10.49*
    
    Restricted stock award certificate to Mr. Thomas M. Brandt, Jr.10.50*
    
    Restricted stock award certificate to Mr. Clyde A. Heintzelman.10.51*
    
    Restricted stock award certificate to Mr. Richard A. Kozak.10.52*
    
    Restricted stock award certificate to Mr. Weldon H. Latham.10.53*
    
    Restricted stock award certificate to Mr. Timothy J. Lorello.10.54*
    
    Restricted stock award certificate to Mr. Timothy J. Lorello.10.55*
    
    Restricted stock award certificate to Mr. Byron F. Marchant.10.56*
    
    Restricted stock award certificate to Mr. Drew A. Morin.10.57*
    
    Restricted stock award certificate to Mr. Drew A. Morin.10.58*
    
    Restricted stock award certificate to Mr. Maurice B. Tosé.10.59*
    
    Restricted stock award certificate to Mr. Maurice B. Tosé.10.60*
    
    Restricted stock award certificate to Mr. Kevin M. Webb.10.61*
    
    Restricted stock award certificate to Mr. Kevin M. Webb.10.62*
    
    Restricted stock award certificate to Mr. Richard A. Young.10.63*
    
    Restricted stock award certificate to Mr. Richard A. Young.23.1
    
    Consent of Ernst & Young LLP31.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.99.01*
    
    Risk Factors Affecting Our Business and Future Results
  *
    
    Previously filed as an exhibit to the Companys Annual Report on Form
10-K for the year ended December 31, 2003 (File No. 000-30821).