##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




---

FORM 10-Q

|                                         |  |                                                                                                
|---------------------------------------- |  | -----------------------------------------------------------------------------------------------
|[X]                                      |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR
    15(d) OF
    THE SECURITIES EXCHANGE ACT OF 1934
|For the quarter ended March 31,
    2004
|OR                                      
|[  ]                                     |  | THE SECURITIES EXCHANGE ACT OF 1934                                                            

Commission File No. 0-30821

TELECOMMUNICATION SYSTEMS, INC.

(Exact name of registrant as specified in its
charter)


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

(410) 263-7616

(Registrants telephone number, including
area code)


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

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Exchange Act):
Yes [     ]     No
[ X ]

Indicate the number of shares outstanding of each
of the issuers classes of common stock, as of the latest
practicable date.

|                                                    |  |                    |            | 
|--------------------------------------------------- |  | ------------------ | ---------- | 
|                                                    |  | Shares outstanding
|                                                    |  | as of April 30,   
|Title of Each Class                                 |  | 2004              
|                                                    |  |                   
|Class A Common Stock, par value
    $0.01 per share |  |                    | 24,406,487 | 
|Class B Common Stock, par value
    $0.01 per share |  |                    | 8,987,541  | 
|                                                    |  |                    |            | 
|Total Common Stock Outstanding                      |  |                    | 33,394,028 | 
|                                                    |  |                    |            | 



---






---

TABLE OF CONTENTS



|                              |                                                                                               |                                                 |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------------------------- |  |  |  |  |  | 
|                              |                                                                                               | Consolidated Balance Sheets                    
|                              |                                                                                               | Consolidated Statements of Operations          
|                              |                                                                                               | Consolidated Statements of Stockholders Equity
|                              |                                                                                               | Consolidated Statements of Cash Flows          
|                              |                                                                                               | Notes to Consolidated Financial Statements     
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                              | Item 4. Controls and Procedures                                                              
|PART II. -- OTHER INFORMATION
|                              | Item 1. Legal Proceedings                                                                    
|                              | Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities     
|                              | Item 3. Defaults Upon Senior Securities                                                      
|                              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                              | Item 5. Other Information                                                                    
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|                              | SIGNATURES                                                                                   
|Certification CEO            
|Certification- CFO           
|Certification-CEO            
|Certification-CFO            



---



##### Table of Contents



INDEX

TELECOMMUNICATION SYSTEMS, INC.

|                              |  |            |  |                                                                                               |    |      |    | 
|----------------------------- |  | ---------- |  | --------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                              |  |            |  |                                                                                               |    | Page
|                              |  |            |  |                                                                                               |    |     
|PART I. FINANCIAL INFORMATION |  |            |  |                                                                                              
|                              |  | Item 1.    |  | Financial Statements (Unaudited)                                                              |    |      |    | 
|                              |  |            |  | Consolidated Balance Sheets as of March 31,
    2004 and December 31, 2003                    |    |      | 3  | 
|                              |  |            |  | Consolidated Statements of Operations for the
    three months ended March 31, 2004 and 2003  |    |      | 4  | 
|                              |  |            |  | Consolidated Statements of Stockholders
    Equity for the three months ended March 31, 2004 |    |      | 5  | 
|                              |  |            |  | Consolidated Statements of Cash Flows for the
    three months ended March 31, 2004 and 2003  |    |      | 6  | 
|                              |  |            |  | Notes to Consolidated Financial Statements                                                    |    |      | 7  | 
|                              |  | Item 2.    |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations     |    |      | 15 | 
|                              |  | Item 3.    |  | Qualitative and Quantitative Disclosures about
    Market Risk                                |    |      | 29 | 
|                              |  | Item 4.    |  | Controls and Procedures                                                                       |    |      | 29 | 
|PART II. OTHER INFORMATION    |  |            |  |                                                                                              
|                              |  | Item 1.    |  | Legal Proceedings                                                                             |    |      | 30 | 
|                              |  | Item 2.    |  | Changes in Securities, Use of Proceeds and Issuer
    Purchases of Equity Securities          |    |      | 30 | 
|                              |  | Item 3.    |  | Defaults Upon Senior Securities                                                               |    |      | 30 | 
|                              |  | Item 4.    |  | Submission of Matters to a Vote of Security
    Holders                                       |    |      | 30 | 
|                              |  | Item 5.    |  | Other Information                                                                             |    |      | 30 | 
|                              |  | Item 6.    |  | Exhibits and Reports on Form 8-K                                                              |    |      | 31 | 
|                              |  | SIGNATURES |  |                                                                                               | 32 |     





---



##### Table of Contents



TeleCommunication Systems, Inc.






Consolidated Balance Sheets


(amounts in thousands)


|                                                                                                                        |                                                                              |                                                                                                                     |                                            |              |      |        |        |          |     |        | 
|----------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------ | ---- | ------ | ------ | -------- | --- | ------ | 
|                                                                                                                        |                                                                              | March 31,                                                                                                           |                                            | December 31,
|                                                                                                                        |                                                                              | 2004                                                                                                                |                                            | 2003        
|                                                                                                                        |                                                                              |                                                                                                                     |                                            |             
|                                                                                                                        |                                                                              | (unaudited)                                                                                                         |                                            |             
|Assets                                                                                                                  |                                                                              |                                                                                                                     |                                            |              |      |        |        |         
|Current assets:                                                                                                         |                                                                              |                                                                                                                     |                                            |              |      |        |        |         
|                                                                                                                        | Cash and cash equivalents                                                    |                                                                                                                     | $                                          | 19,870       |      |        | $      | 18,785   |    
|                                                                                                                        | Accounts receivable, net of allowance of $1,618
    in 2004 and $393 in 2003 |                                                                                                                     |                                            | 23,400       |      |        |        | 20,208   |    
|                                                                                                                        | Unbilled receivables                                                         |                                                                                                                     |                                            | 10,348       |      |        |        | 8,862    |    
|                                                                                                                        | Inventory                                                                    |                                                                                                                     |                                            | 2,891        |      |        |        | 451      |    
|                                                                                                                        | Other current assets                                                         |                                                                                                                     |                                            | 4,029        |      |        |        | 1,915    |    
|                                                                                                                        |                                                                              |                                                                                                                     |                                            |              |      |        |        |         
|                                                                                                                        |                                                                              |                                                                                                                     | Total current assets                       |              |      | 60,538 |        |          |     | 50,221 | 
|Property and equipment, net of accumulated
    depreciation and amortization of $22,657 in 2004 and $20,925 in
    2003 |                                                                              |                                                                                                                     | 13,934                                     |              |      |        | 11,449 |         
|Software development costs, net of accumulated
    amortization of $841 in 2004 and $754 in 2003                        |                                                                              |                                                                                                                     | 718                                        |              |      |        | 518    |         
|Acquired intangible assets, net of accumulated
    amortization of $532 in 2004                                         |                                                                              |                                                                                                                     | 6,287                                      |              |      |        |       |         
|Goodwill                                                                                                                |                                                                              |                                                                                                                     | 13,046                                     |              |      |        |       |         
|Other assets                                                                                                            |                                                                              |                                                                                                                     | 4,695                                      |              |      |        | 3,092  |         
|                                                                                                                        |                                                                              |                                                                                                                     |                                            |              |      |        |        |         
|                                                                                                                        |                                                                              |                                                                                                                     | Total assets                               |              | $    | 99,218 |        |          | $   | 65,280 | 
|                                                                                                                        |                                                                              |                                                                                                                     |                                            |              |      |        |        |         
|Liabilities and stockholders
    equity                                                                                |                                                                              |                                                                                                                     |                                            |              |      |        |        |         
|Current liabilities:                                                                                                    |                                                                              |                                                                                                                     |                                            |              |      |        |        |         
|                                                                                                                        | Accounts payable and accrued expenses                                        |                                                                                                                     | $                                          | 17,656       |      |        | $      | 8,817    |    
|                                                                                                                        | Accrued payroll and related liabilities                                      |                                                                                                                     |                                            | 3,964        |      |        |        | 3,331    |    
|                                                                                                                        | Deferred revenue                                                             |                                                                                                                     |                                            | 4,309        |      |        |        | 1,683    |    
|                                                                                                                        | Current portion of notes payable                                             |                                                                                                                     |                                            | 7,638        |      |        |        | 5,698    |    
|                                                                                                                        | Current portion of capital lease obligations                                 |                                                                                                                     |                                            | 2,062        |      |        |        | 2,154    |    
|                                                                                                                        |                                                                              |                                                                                                                     |                                            |              |      |        |        |         
|                                                                                                                        |                                                                              |                                                                                                                     | Total current liabilities                  |              |      | 35,629 |        |          |     | 21,683 | 
|Capital lease obligations and notes payable, less
    current portion                                                   |                                                                              |                                                                                                                     | 7,379                                      |              |      |        | 6,746  |         
|Convertible subordinated debentures, net of
    discount of $6,362 in 2004                                              |                                                                              |                                                                                                                     | 8,638                                      |              |      |        |       |         
|Stockholders equity:                                                                                                   |                                                                              |                                                                                                                     |                                            |              |      |        |        |         
|                                                                                                                        | Class A Common Stock; $0.01 par value:                                       |                                                                                                                     |                                            |              |      |        |        |          |    
|                                                                                                                        |                                                                              | Authorized shares  225,000,000; issued
    and outstanding shares of 24,223,475 in 2004 and 22,062,974 in
    2003 |                                            |              | 242  |        |        |          | 221 |       
|                                                                                                                        | Class B Common Stock; $0.01 par value:                                       |                                                                                                                     |                                            |              |      |        |        |          |    
|                                                                                                                        |                                                                              | Authorized shares  75,000,000; issued
    and outstanding shares of 9,009,641 in 2004 and 9,363,688 in 2003        |                                            |              | 90   |        |        |          | 94  |       
|                                                                                                                        | Deferred compensation                                                        |                                                                                                                     |                                            | (1,235       | )    |        |        | (1,399   | )  
|                                                                                                                        | Additional paid-in capital                                                   |                                                                                                                     |                                            | 183,598      |      |        |        | 169,256  |    
|                                                                                                                        | Accumulated other comprehensive loss                                         |                                                                                                                     |                                            |              |      |        |        |          |    
|                                                                                                                        |                                                                              | Cumulative foreign currency translation adjustment                                                                  |                                            |              | (356 | )      |        |          |    |       
|                                                                                                                        | Accumulated deficit                                                          |                                                                                                                     |                                            | (134,767     | )    |        |        | (131,321 | )  
|                                                                                                                        |                                                                              |                                                                                                                     |                                            |              |      |        |        |         
|                                                                                                                        |                                                                              |                                                                                                                     | Total stockholders equity                 |              |      | 47,572 |        |          |     | 36,851 | 
|                                                                                                                        |                                                                              |                                                                                                                     |                                            |              |      |        |        |         
|                                                                                                                        |                                                                              |                                                                                                                     | Total liabilities and stockholders equity |              | $    | 99,218 |        |          | $   | 65,280 | 
|                                                                                                                        |                                                                              |                                                                                                                     |                                            |              |      |        |        |         

See accompanying Notes to Consolidated Financial
Statements

3



---



##### Table of Contents



TeleCommunication Systems, Inc.




Consolidated Statements of
Operations

(amounts in thousands, except per share
data)


(unaudited)


|                                                            |                                                             |                               |                                    |        |       |        |        |       |       |        | 
|----------------------------------------------------------- | ----------------------------------------------------------- | ----------------------------- | ---------------------------------- | ------ | ----- | ------ | ------ | ----- | ----- | ------ | 
|                                                            |                                                             |                              
|                                                            |                                                             | Three months ended           
|                                                            |                                                             | March 31,                    
|                                                            |                                                             |                              
|                                                            |                                                             | 2004                          |                                    | 2003  
|                                                            |                                                             |                               |                                    |       
|Revenue:                                                    |                                                             |                               |                                    |        |       |        |        |      
|                                                            | Service bureau and subscriber                               |                               | $                                  | 20,736 |       |        | $      | 7,555 |      
|                                                            | Software systems:                                           |                               |                                    |        |       |        |        |       |      
|                                                            |                                                             | Software licenses             |                                    |        | 1,696 |        |        |       | 2,467 |       
|                                                            |                                                             | Software systems and services |                                    |        | 2,841 |        |        |       | 1,141 |       
|                                                            |                                                             |                               |                                    |        |       |        |        |      
|                                                            | Software systems total                                      |                               |                                    | 4,537  |       |        |        | 3,608 |      
|                                                            | Network solutions                                           |                               |                                    | 7,484  |       |        |        | 8,129 |      
|                                                            |                                                             |                               |                                    |        |       |        |        |      
|                                                            |                                                             |                               | Total revenue                      |        |       | 32,757 |        |       |       | 19,292 | 
|Operating costs and expenses:                               |                                                             |                               |                                    |        |       |        |        |      
|                                                            | Direct cost of service bureau and subscriber
    revenue    |                               |                                    | 13,267 |       |        |        | 4,006 |      
|                                                            | Direct cost of software systems revenue                     |                               |                                    | 2,404  |       |        |        | 1,685 |      
|                                                            | Direct cost of network solutions revenue                    |                               |                                    | 4,199  |       |        |        | 5,360 |      
|                                                            | Research and development expense                            |                               |                                    | 5,046  |       |        |        | 3,915 |      
|                                                            | Sales and marketing expense                                 |                               |                                    | 3,190  |       |        |        | 2,393 |      
|                                                            | General and administrative expense                          |                               |                                    | 4,487  |       |        |        | 2,903 |      
|                                                            | Non-cash stock compensation expense                         |                               |                                    | 357    |       |        |        | 373   |      
|                                                            | Depreciation and amortization of property
    and equipment |                               |                                    | 1,732  |       |        |        | 1,545 |      
|                                                            | Amortization of acquired intangible assets                  |                               |                                    | 532    |       |        |        | 138   |      
|                                                            | Amortization of software development costs                  |                               |                                    | 87     |       |        |        | 1,030 |      
|                                                            |                                                             |                               |                                    |        |       |        |        |      
|                                                            |                                                             |                               | Total operating costs and expenses |        |       | 35,301 |        |       |       | 23,348 | 
|                                                            |                                                             |                               |                                    |        |       |        |        |      
|Loss from operations                                        |                                                             |                               | (2,544                             | )      |       |        | (4,056 | )    
|Interest expense                                            |                                                             |                               | (807                               | )      |       |        | (276   | )    
|Other (expense)/income, net                                 |                                                             |                               | (95                                | )      |       |        | 284    |      
|                                                            |                                                             |                               |                                    |        |       |        |        |      
|Net loss                                                    |                                                             | $                             | (3,446                             | )      |       | $      | (4,048 | )    
|                                                            |                                                             |                               |                                    |        |       |        |        |      
|Loss per share  basic and diluted                          |                                                             | $                             | (0.10                              | )      |       | $      | (0.14  | )    
|                                                            |                                                             |                               |                                    |        |       |        |        |      
|Weighted average shares outstanding 
    basic and diluted |                                                             |                               | 32,922                             |        |       |        | 29,568 |      
|                                                            |                                                             |                               |                                    |        |       |        |        |      

See accompanying Notes to Consolidated Financial
Statements

4



---



##### Table of Contents



TeleCommunication Systems, Inc.






Consolidated Statements of Stockholders
Equity


(amounts in thousands, except share
data)


(unaudited)


|                                                                                                                                                        |  |         |     |         |  |              |    |            |  |               |        |             |  |       |         |  |  |   |      |   |  |   |          |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------- | --- | ------- |  | ------------ | -- | ---------- |  | ------------- | ------ | ----------- |  | ----- | ------- |  |  | - | ---- | - |  | - | -------- | - |  | - | ------ | -
|                                                                                                                                                        |  |         |     |         |  |              |    |            |  | Accumulated   |        |             |  |      
|                                                                                                                                                        |  | Class A |     | Class B |  |              |    | Additional |  | Other         |        |             |  |      
|                                                                                                                                                        |  | Common  |     | Common  |  | Deferred     |    | Paid-in    |  | Comprehensive |        | Accumulated |  |      
|                                                                                                                                                        |  | Stock   |     | Stock   |  | Compensation |    | Capital    |  | Loss          |        | Deficit     |  | Total
|                                                                                                                                                        |  |         |     |         |  |              |    |            |  |               |        |             |  |      
|Balance at January 1, 2004                                                                                                                              |  | $       | 221 |         |  | $            | 94 |            |  | $             | (1,399 | )           |  | $     | 169,256 |  |  | $ |     |   |  | $ | (131,321 | ) |  | $ | 36,851 |  
|Options exercised for the purchase of 287,479
    shares of Class A Common Stock                                                                        |  |         | 3   |         |  |              |   |            |  |               |       |             |  |       | 611     |  |  |   |     |   |  |   |         |   |  |   | 614    |  
|Issuance of 20,867 shares of Class A Common
    Stock under Employee Stock Purchase Plan                                                                |  |         |    |         |  |              |   |            |  |               |       |             |  |       | 97      |  |  |   |     |   |  |   |         |   |  |   | 97     |  
|Issuance of 1,568,308 shares of Class A
    Common Stock in connection with the Enterprise acquisition and
    related financing, net of issuance costs |  |         | 16  |         |  |              |   |            |  |               |       |             |  |       | 8,366   |  |  |   |     |   |  |   |         |   |  |   | 8,382  |  
|Fair value of beneficial conversion feature of
    convertible subordinated debentures                                                                  |  |         |    |         |  |              |   |            |  |               |       |             |  |       | 3,662   |  |  |   |     |   |  |   |         |   |  |   | 3,662  |  
|Issuance of warrants to purchase 341,072 shares
    of Class A Common Stock                                                                             |  |         |    |         |  |              |   |            |  |               |       |             |  |       | 1,395   |  |  |   |     |   |  |   |         |   |  |   | 1,395  |  
|Conversion of 318,847 shares of Class B
    Common Stock to Class A Common Stock                                                                        |  |         | 3   |         |  |              | (3 | )          |  |               |       |             |  |       |        |  |  |   |     |   |  |   |         |   |  |   |       |  
|Stock compensation expense for issuance of
    Class A Common Stock options at below fair market value                                                  |  |         |    |         |  |              |   |            |  |               |       |             |  |       | 193     |  |  |   |     |   |  |   |         |   |  |   | 193    |  
|Amortization of deferred compensation expense                                                                                                           |  |         |    |         |  |              |   |            |  |               | 164    |             |  |       |        |  |  |   |     |   |  |   |         |   |  |   | 164    |  
|Stock compensation expense for options issued to
    non- employees for service                                                                         |  |         |    |         |  |              |   |            |  |               |       |             |  |       | 17      |  |  |   |     |   |  |   |         |   |  |   | 17     |  
|Foreign currency translation adjustment                                                                                                                 |  |         |    |         |  |              |   |            |  |               |       |             |  |       |        |  |  |   | (356 | ) |  |   |         |   |  |   | (356   | )
|Net loss for the three months ended
    March 31, 2004                                                                                                  |  |         |    |         |  |              |   |            |  |               |       |             |  |       |        |  |  |   |     |   |  |   | (3,446   | ) |  |   | (3,446 | )
|                                                                                                                                                        |  |         |     |         |  |              |    |            |  |               |        |             |  |       |         |  |  |   |      |   |  |   |          |   |  |   |        |  
|Balance at March 31, 2004                                                                                                                               |  | $       | 242 |         |  | $            | 90 |            |  | $             | (1,235 | )           |  | $     | 183,598 |  |  | $ | (356 | ) |  | $ | (134,767 | ) |  | $ | 47,572 |  
|                                                                                                                                                        |  |         |     |         |  |              |    |            |  |               |        |             |  |       |         |  |  |   |      |   |  |   |          |   |  |   |        |  

See accompanying Notes to Consolidated Financial
Statements

5



---



##### Table of Contents



TeleCommunication Systems, Inc.






Consolidated Statements of Cash
Flows


(amounts in thousands)


(unaudited)


|                                                                                                       |                                                                          |                                         |         |       |        |   |        |       |        |  
|------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------ | --------------------------------------- | ------- | ----- | ------ | - | ------ | ----- | ------ | -
|                                                                                                       |                                                                          |                                        
|                                                                                                       |                                                                          | Three months ended                     
|                                                                                                       |                                                                          | March 31,                              
|                                                                                                       |                                                                          |                                        
|                                                                                                       |                                                                          | 2004                                    |         | 2003 
|                                                                                                       |                                                                          |                                         |         |      
|Operating activities:                                                                                  |                                                                          |                                         |         |       |        |   |        |      
|Net loss                                                                                               |                                                                          | $                                       | (3,446  | )     |        | $ | (4,048 | )    
|Adjustments to reconcile net loss to net cash
    used in operating activities:                        |                                                                          |                                         |         |       |        |   |        |      
|                                                                                                       | Depreciation and amortization of property and
    equipment              |                                         |         | 1,732 |        |   |        | 1,613 |       
|                                                                                                       | Amortization of acquired intangible assets                               |                                         |         | 532   |        |   |        | 138   |       
|                                                                                                       | Non-cash employee compensation expense                                   |                                         |         | 357   |        |   |        | 373   |       
|                                                                                                       | Amortization of software development costs                               |                                         |         | 87    |        |   |        | 1,030 |       
|                                                                                                       | Amortization of debt discount                                            |                                         |         | 335   |        |   |        |      |       
|                                                                                                       | Amortization of deferred financing fees included
    in interest expense |                                         |         | 208   |        |   |        |      |       
|                                                                                                       | Other non-cash expenses                                                  |                                         |         | 17    |        |   |        |      |       
|                                                                                                       | State of Maryland loan forgiveness                                       |                                         |         | (100  | )      |   |        | (100  | )     
|                                                                                                       | Changes in operating assets and liabilities                              |                                         |         |       |        |   |        |       |       
|                                                                                                       |                                                                          | Accounts receivable, net                |         |       | 4,040  |   |        |       | 5,594  |  
|                                                                                                       |                                                                          | Unbilled receivables                    |         |       | (1,486 | ) |        |       | (1,151 | )
|                                                                                                       |                                                                          | Inventory                               |         |       | (1,552 | ) |        |       |       |  
|                                                                                                       |                                                                          | Other current assets                    |         |       | (1,395 | ) |        |       | (539   | )
|                                                                                                       |                                                                          | Accounts payable and accrued expenses   |         |       | (105   | ) |        |       | (5,419 | )
|                                                                                                       |                                                                          | Accrued payroll and related liabilities |         |       | (408   | ) |        |       | (116   | )
|                                                                                                       |                                                                          | Deferred revenue                        |         |       | 245    |   |        |       | (74    | )
|                                                                                                       |                                                                          |                                         |         |       |        |   |        |      
|Net cash used in operating activities                                                                  |                                                                          |                                         | (939    | )     |        |   | (2,699 | )    
|Investing activities:                                                                                  |                                                                          |                                         |         |       |        |   |        |      
|Acquisition of Enterprise assets, net of cash
    acquired                                             |                                                                          |                                         | (17,436 | )     |        |   |       |      
|Purchases of property and equipment                                                                    |                                                                          |                                         | (1,973  | )     |        |   | (1,240 | )    
|Change in other assets                                                                                 |                                                                          |                                         | (223    | )     |        |   | (2     | )    
|Capitalized software development costs                                                                 |                                                                          |                                         |        |       |        |   | (1,149 | )    
|                                                                                                       |                                                                          |                                         |         |       |        |   |        |      
|Net cash used in investing activities                                                                  |                                                                          |                                         | (19,632 | )     |        |   | (2,391 | )    
|Financing activities:                                                                                  |                                                                          |                                         |         |       |        |   |        |      
|Payments on long-term debt and capital lease
    obligations                                           |                                                                          |                                         | (1,513  | )     |        |   | (1,256 | )    
|Proceeds from issuance of Class A Common
    Stock and Convertible subordinated debentures             |                                                                          |                                         | 21,000  |       |        |   |       |      
|Financing fees related to issuance of
    Class A Common Stock and Convertible subordinated debentures |                                                                          |                                         | (1,100  | )     |        |   |       |      
|Proceeds from issuance of long-term debt                                                               |                                                                          |                                         | 2,500   |       |        |   | 18     |      
|Proceeds from exercise of employee stock options
    and sale of stock                                 |                                                                          |                                         | 711     |       |        |   | 72     |      
|                                                                                                       |                                                                          |                                         |         |       |        |   |        |      
|Net cash provided by/(used in) financing
    activities                                                |                                                                          |                                         | 21,598  |       |        |   | (1,166 | )    
|                                                                                                       |                                                                          |                                         |         |       |        |   |        |      
|Net increase/(decrease) in cash                                                                        |                                                                          |                                         | 1,027   |       |        |   | (6,256 | )    
|Effect of exchange rates on cash and cash
    equivalents                                              |                                                                          |                                         | 58      |       |        |   |       |      
|Cash and cash equivalents at the beginning of the
    period                                           |                                                                          |                                         | 18,785  |       |        |   | 27,402 |      
|                                                                                                       |                                                                          |                                         |         |       |        |   |        |      
|Cash and cash equivalents at the end of the
    period                                                 |                                                                          | $                                       | 19,870  |       |        | $ | 21,146 |      
|                                                                                                       |                                                                          |                                         |         |       |        |   |        |      

See accompanying Notes to Consolidated Financial
Statements

6



---



##### Table of Contents



TeleCommunication Systems, Inc.






Notes to Consolidated Financial
Statements


March 31, 2004


(amounts in thousands, except per share
amounts)


(unaudited)




|   |                                                                         
|-- | ------------------------------------------------------------------------
|1. | Basis of Presentation and Summary of
    Significant Accounting Policies

The accompanying unaudited consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three-month period
ended March 31, 2004 are not necessarily indicative of the
results that may be expected for the year ended
December 31, 2004. These consolidated financial statements
should be read in conjunction with our audited financial
statements and related notes included in our 2003 Annual Report
on Form 10-K, as amended.

Effective January 1, 2004, we acquired 100%
of the Enterprise Mobility Solutions division of Aether Systems,
Inc. in accordance with a Purchase Agreement dated as of
December 18, 2003. The operations for this newly acquired
segment have been included in the consolidated financial
statements as of January 1, 2004. All intercompany balances
have been eliminated.

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

Allowances for Doubtful Accounts Receivable.We use estimates to determine the
amount of the allowance for doubtful accounts necessary to
reduce accounts receivable to their expected net realizable
value. We estimate the amount of the required allowance by
reviewing the status of significant past-due receivables and by
establishing 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.

Goodwill.Goodwill
represents the excess of cost over the fair value of assets of
businesses acquired. Goodwill acquired in a purchase business
combination is not amortized, but instead tested at least
annually for impairment in accordance with the provisions of
Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets. See below for a
description of our accounting policies regarding testing
long-lived assets for impairment.

Acquired Intangible Assets.We acquired customer contracts, a
customer list, developed technology, and trademarks that will be
amortized over their respective estimated remaining useful lives
of 3  5 years, with a weighted-average useful
life of 4.1 years, based on the ratio of the estimated cash
flows generated in each period to the estimated total cash flows
to be contributed from each asset.

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

7



---



##### Table of Contents



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

Inventory.We
maintain inventory of component parts and finished product for
certain SwiftLink® units. Additionally, we acquired
inventory in conjunction with the acquisition of the Enterprise
division of Aether Systems, Inc. The acquired inventory consists
primarily of finished goods such as handheld computers, pagers,
wireless modems, and accessories. Inventory is stated at the
lower of cost or market. Cost is determined using the first-in,
first-out method.

Stock-Based Compensation.We have two stock-based employee
compensation plans, which are described more fully in
Note 7. 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.

Reclassifications.Certain prior period amounts have been
reclassified to conform to the current year presentation.



|   |                                      
|-- | -------------------------------------
|2. | Acquisition and Related
    Financing

Effective January 1, 2004, we acquired 100%
of the Enterprise Mobility Solutions division of Aether Systems,
Inc. (Enterprise segment) in accordance with a
Purchase Agreement dated as of December 18, 2003.

The Enterprise segment provides wireless data
solutions, uniting messaging, synchronization and web
technologies. These solutions include package and vehicle
tracking, productivity tools, and the ability to capture digital
signatures for proof of delivery to a growing installed base of
logistics customers. The Enterprise segment is a leading
reseller of Blackberry devices and provides real-time financial
market data to wireless device users under annual subscriber
contracts in the U.S. and Europe. As a result of the acquisition
of the Enterprise segment, the Company believes that it will be
able to expand its product offerings to both new and existing
customers, expand its international sales, and provide broader
technology and expertise to its customers, opening new markets
to the Company.

The aggregate purchase price was approximately
$22,406, consisting of cash payments of $18,150, a note payable
in the amount of $1,000, bearing interest at the prime interest
rate, and 204,020 shares of our Class A Common Stock,
valued at $1,056, based on the average closing price for the
five days immediately preceding the closing of the acquisition.
In addition, management expects to incur approximately $2,200 of
costs directly related to the acquisition. The total purchase
price has been allocated on a preliminary basis based on
independent third-party valuation procedures performed to date
on the acquired assets and assumed liabilities, with the excess
of the purchase price over the assets acquired and liabilities
assumed being allocated to goodwill. We expect to have the
valuation completed during the second quarter of 2004. This
allocation is subject to change pending a final analysis of the
direct costs of the acquisition and the completion of the final
valuations of the assets acquired and liabilities assumed. The
preliminary valuation has resulted in the recognition of $13,046
of goodwill. This goodwill has been allocated to the Enterprise
segment, and we expect it to be deductible for tax purposes.

8



---



##### Table of Contents



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

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

|                                        |                   |   |        |        | 
|--------------------------------------- | ----------------- | - | ------ | ------ | 
|Assets:                                 |                   |   |        |       
|Cash                                    |                   | $ | 1,882  |       
|Accounts receivable, net                |                   |   | 7,203  |       
|Inventory                               |                   |   | 886    |       
|Other current assets                    |                   |   | 700    |       
|Property and equipment                  |                   |   | 750    |       
|Acquired software development costs     |                   |   | 287    |       
|Acquired intangible assets              |                   |   | 6,819  |       
|Goodwill                                |                   |   | 13,046 |       
|Other assets                            |                   |   | 255    |       
|                                        |                   |   |        |       
|                                        | Total assets      |   |        | 31,828 | 
|Liabilities:                            |                   |   |        |       
|Accounts payable and accrued expenses   |                   |   | 6,036  |       
|Accrued payroll and related liabilities |                   |   | 1,032  |       
|Deferred revenue                        |                   |   | 2,341  |       
|Capital lease obligation                |                   |   | 13     |       
|                                        |                   |   |        |       
|                                        | Total liabilities |   |        | 9,422  | 
|                                        |                   |   |        |       
|Net assets acquired                     |                   | $ | 22,406 |       
|                                        |                   |   |        |       

The following unaudited consolidated pro forma
results of operations of the Company for the three-month period
ended March 31, 2003, gives effect to the January 1,
2004 acquisition as though it had occurred on January 1,
2003:

|                       |                   |   |        |       |  
|---------------------- | ----------------- | - | ------ | ----- | -
|Revenue                |                   | $ | 33,674 |      
|Loss from operations   |                   |   | (5,342 | )    
|Net loss               |                   |   | (5,831 | )    
|                       |                   |   |        |      
|Loss per common share: |                   |   |        |      
|                       | Basic and diluted |   | $      | (0.19 | )
|                       |                   |   |        |      

The pro forma results include the estimated
amortization of intangibles, estimated depreciation of the fair
value of the property, plant and equipment acquired, and the
recognition of interest expense related to financing the
acquisition. The pro forma results are not necessarily
indicative of the results that would have occurred if the
acquisition had actually been completed on January 1, 2003
and do not reflect the reduction in recurring costs during the
latter part of 2003, nor are they necessarily indicative of
future consolidated results.



|   |                                                     
|-- | ----------------------------------------------------
|3. | Supplemental Disclosure of Cash Flow
    Information

Property and equipment acquired under capital
leases totaled $1,488 during the three months ended
March 31, 2004. We did not acquire any property under
capital leases during the three months ended March 31, 2003.

Interest paid totaled $263 and $287 for the three
months ended March 31, 2004 and 2003, respectively.

9



---



##### Table of Contents



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)



|   |                    
|-- | -------------------
|4. | Segment Information

Beginning with our acquisition of the Enterprise
segment in January 2004, we manage our business across three
market segments: (i) our Wireless Carrier segment, which
consists principally of our products and services marketed
directly to wireless carriers consisting of monthly recurring
E9-1-1 and hosted software application offerings as well as
software license and service fees, (ii) our Government
segment, which includes the design, development and deployment
of information processing and communication systems and related
services to government agencies, and (iii) our Enterprise
segment, which comprises the operations we acquired from Aether
Systems, Inc., which offers recurring subscriber-based services
as well as software licenses and services to Enterprise
customers.

Management evaluates performance based on gross
profit. 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. We have restated prior period
segment information for comparative purposes.

|                              |                               |                                   |       |            |        |            |       |       |       |   |        |     |        |   |        |       |        | 
|----------------------------- | ----------------------------- | --------------------------------- | ----- | ---------- | ------ | ---------- | ----- | ----- | ----- | - | ------ | --- | ------ | - | ------ | ----- | ------ | 
|                              |                               |                                  
|                              |                               | Three months ended March 31, 2004
|                              |                               |                                  
|                              |                               | Wireless                          |       |           
|                              |                               | Carrier                           |       | Government |        | Enterprise |       | Total
|                              |                               |                                   |       |            |        |            |       |      
|Revenue:                      |                               |                                   |       |            |        |            |       |       |       |   |        |     |        |   |        |      
|Service bureau and subscriber |                               | $                                 | 9,118 |            |        | $          |      |       |       | $ | 11,618 |     |        | $ | 20,736 |      
|Software systems:             |                               |                                   |       |            |        |            |       |       |       |   |        |     |        |   |        |      
|                              | Software licenses             |                                   |       | 1,664      |        |            |       |      |       |   |        | 32  |        |   |        | 1,696 |       
|                              | Software systems and services |                                   |       | 1,861      |        |            |       |      |       |   |        | 980 |        |   |        | 2,841 |       
|                              |                               |                                   |       |            |        |            |       |       |       |   |        |     |        |   |        |      
|Software systems total        |                               |                                   | 3,525 |            |        |            |      |       |       |   | 1,012  |     |        |   | 4,537  |      
|Network solutions             |                               |                                   |      |            |        |            | 7,484 |       |       |   |       |     |        |   | 7,484  |      
|                              |                               |                                   |       |            |        |            |       |       |       |   |        |     |        |   |        |      
|                              |                               | Total revenue                     |       | $          | 12,643 |            |       | $     | 7,484 |   |        | $   | 12,630 |   |        | $     | 32,757 | 
|                              |                               |                                   |       |            |        |            |       |       |       |   |        |     |        |   |        |      
|Segment gross profit:         |                               |                                   |       |            |        |            |       |       |       |   |        |     |        |   |        |      
|Service bureau and subscriber |                               | $                                 | 4,790 |            |        | $          |      |       |       | $ | 2,679  |     |        | $ | 7,469  |      
|Software systems              |                               |                                   | 1,974 |            |        |            |      |       |       |   | 159    |     |        |   | 2,133  |      
|Network solutions             |                               |                                   |      |            |        |            | 3,285 |       |       |   |       |     |        |   | 3,285  |      
|                              |                               |                                   |       |            |        |            |       |       |       |   |        |     |        |   |        |      
|                              |                               | Total segment gross profit        |       | $          | 6,764  |            |       | $     | 3,285 |   |        | $   | 2,838  |   |        | $     | 12,887 | 
|                              |                               |                                   |       |            |        |            |       |       |       |   |        |     |        |   |        |      

10



---



##### Table of Contents



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

|                              |                               |                                   |       |            |        |            |       |       |       |   |   |   |   |   |       |       |        | 
|----------------------------- | ----------------------------- | --------------------------------- | ----- | ---------- | ------ | ---------- | ----- | ----- | ----- | - | - | - | - | - | ----- | ----- | ------ | 
|                              |                               |                                  
|                              |                               | Three months ended March 31, 2003
|                              |                               |                                  
|                              |                               | Wireless                          |       |           
|                              |                               | Carrier                           |       | Government |        | Enterprise |       | Total
|                              |                               |                                   |       |            |        |            |       |      
|Revenue:                      |                               |                                   |       |            |        |            |       |       |       |   |   |   |   |   |       |      
|Service bureau and subscriber |                               | $                                 | 7,555 |            |        | $          |      |       |       | $ |  |   |   | $ | 7,555 |      
|Software systems:             |                               |                                   |       |            |        |            |       |       |       |   |   |   |   |   |       |      
|                              | Software licenses             |                                   |       | 2,467      |        |            |       |      |       |   |   |  |   |   |       | 2,467 |       
|                              | Software systems and services |                                   |       | 1,141      |        |            |       |      |       |   |   |  |   |   |       | 1,141 |       
|                              |                               |                                   |       |            |        |            |       |       |       |   |   |   |   |   |       |      
|Software systems total        |                               |                                   | 3,608 |            |        |            |      |       |       |   |  |   |   |   | 3,608 |      
|Network solutions             |                               |                                   |      |            |        |            | 8,129 |       |       |   |  |   |   |   | 8,129 |      
|                              |                               |                                   |       |            |        |            |       |       |       |   |   |   |   |   |       |      
|                              |                               | Total revenue                     |       | $          | 11,163 |            |       | $     | 8,129 |   |   | $ |  |   |       | $     | 19,292 | 
|                              |                               |                                   |       |            |        |            |       |       |       |   |   |   |   |   |       |      
|Segment gross profit:         |                               |                                   |       |            |        |            |       |       |       |   |   |   |   |   |       |      
|Service bureau and subscriber |                               | $                                 | 3,549 |            |        | $          |      |       |       | $ |  |   |   | $ | 3,549 |      
|Software systems              |                               |                                   | 1,923 |            |        |            |      |       |       |   |  |   |   |   | 1,923 |      
|Network solutions             |                               |                                   |      |            |        |            | 2,769 |       |       |   |  |   |   |   | 2,769 |      
|                              |                               |                                   |       |            |        |            |       |       |       |   |   |   |   |   |       |      
|                              |                               | Total segment gross profit        |       | $          | 5,472  |            |       | $     | 2,769 |   |   | $ |  |   |       | $     | 8,241  | 
|                              |                               |                                   |       |            |        |            |       |       |       |   |   |   |   |   |       |      

A reconciliation of segment gross profit to net
loss for the respective periods is as follows:

|                           |                                                             |                    |        |        |   |   |        |        |  
|-------------------------- | ----------------------------------------------------------- | ------------------ | ------ | ------ | - | - | ------ | ------ | -
|                           |                                                             |                   
|                           |                                                             | Three months ended
|                           |                                                             | March 31,         
|                           |                                                             |                   
|                           |                                                             | 2004               |        | 2003  
|                           |                                                             |                    |        |       
|Total segment gross profit |                                                             | $                  | 12,887 |        |   | $ | 8,241  |       
|                           | Research and development expense                            |                    |        | (5,046 | ) |   |        | (3,915 | )
|                           | Sales and marketing expense                                 |                    |        | (3,190 | ) |   |        | (2,393 | )
|                           | General and administrative expense                          |                    |        | (4,487 | ) |   |        | (2,903 | )
|                           | Non-cash stock compensation expense                         |                    |        | (357   | ) |   |        | (373   | )
|                           | Depreciation and amortization of property and
    equipment |                    |        | (1,732 | ) |   |        | (1,545 | )
|                           | Amortization of acquired intangible assets                  |                    |        | (532   | ) |   |        | (138   | )
|                           | Amortization of software development costs                  |                    |        | (87    | ) |   |        | (1,030 | )
|                           | Interest expense                                            |                    |        | (807   | ) |   |        | (276   | )
|                           | Other (expense)/income                                      |                    |        | (95    | ) |   |        | 284    |  
|                           |                                                             |                    |        |        |   |   |        |       
|Net loss                   |                                                             | $                  | (3,446 | )      |   | $ | (4,048 | )     
|                           |                                                             |                    |        |        |   |   |        |       

11



---



##### Table of Contents



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)



|   |                                                                          
|-- | -------------------------------------------------------------------------
|5. | Acquired Intangible Assets and Capitalized
    Software Development Costs

Our acquired intangible assets and capitalized
software development costs consisted of the following:

|                                                              |                    |                |       |                   |       |       |     |          |       |              |     |       |       |  |       |   |       |  |     |   |     |  |     |   |     | 
|------------------------------------------------------------- | ------------------ | -------------- | ----- | ----------------- | ----- | ----- | --- | -------- | ----- | ------------ | --- | ----- | ----- |  | ----- | - | ----- |  | --- | - | --- |  | --- | - | --- | 
|                                                              |                    |                |       |                  
|                                                              |                    | March 31, 2004 |       | December 31, 2003
|                                                              |                    |                |       |                  
|                                                              |                    | Gross          |       |                   |       | Gross |     |         
|                                                              |                    | Carrying       |       | Accumulated       |       |       |     | Carrying |       | Accumulated  |     |      
|                                                              |                    | Amount         |       | Amortization      |       | Net   |     | Amount   |       | Amortization |     | Net  
|                                                              |                    |                |       |                   |       |       |     |          |       |              |     |      
|Acquired intangible assets:                                   |                    |                |       |                   |       |       |     |          |       |              |     |       |       |  |       |   |       |  |     |   |     |  |     |  
|                                                              | Customer Contracts |                | $     | 4,208             |       |       | $   | 345      |       |              | $   | 3,863 |       |  | $     |  |       |  | $   |  |     |  | $   |  |    
|                                                              | Customer List      |                |       | 1,942             |       |       |     | 160      |       |              |     | 1,782 |       |  |       |  |       |  |     |  |     |  |     |  |    
|                                                              | Trademarks         |                |       | 669               |       |       |     | 27       |       |              |     | 642   |       |  |       |  |       |  |     |  |     |  |     |  |    
|Software development costs, including acquired
    technology |                    |                | 1,559 |                   |       |       | 841 |          |       |              | 718 |       |       |  | 1,272 |   |       |  | 754 |   |     |  | 518 |  
|                                                              |                    |                |       |                   |       |       |     |          |       |              |     |       |       |  |       |   |       |  |     |   |     |  |     |  
|                                                              |                    | Total          |       | $                 | 8,378 |       |     | $        | 1,373 |              |     | $     | 7,005 |  |       | $ | 1,272 |  |     | $ | 754 |  |     | $ | 518 | 
|                                                              |                    |                |       |                   |       |       |     |          |       |              |     |       |       |  |       |   |       |  |     |   |     |  |     |  
|Estimated future amortization expense:                        |                    |                |       |                   |       |       |     |          |       |              |     |       |       |  |       |  
|Year ending December 31, 2004                                 |                    | $              | 1,897 |                   |       |       |     |          |       |              |     |       |       |  |       |  
|Year ending December 31, 2005                                 |                    | $              | 2,524 |                   |       |       |     |          |       |              |     |       |       |  |       |  
|Year ending December 31, 2006                                 |                    | $              | 1,859 |                   |       |       |     |          |       |              |     |       |       |  |       |  
|Year ending December 31, 2007                                 |                    | $              | 566   |                   |       |       |     |          |       |              |     |       |       |  |       |  
|Year ending December 31, 2008                                 |                    | $              | 159   |                   |       |       |     |          |       |              |     |       |       |  |       |  

We routinely update our estimates of both the
recoverability of the software products that have been
capitalized and the fair value of the acquired intangible assets
recognized as a result of the acquisition of the Enterprise
segment. Management uses these estimates as the basis for
evaluating the carrying values of the respective assets.

6.     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. Accounts
receivable are generally due within thirty days and no
collateral is required. We maintain allowances for potential
credit losses and historically such losses have been
insignificant and within our expectations.

The following table summarizes revenue
concentrations from our significant customers:

|                 |  |                  |  |                    |               |                |  |  |     | 
|---------------- |  | ---------------- |  | ------------------ | ------------- | -------------- |  |  | --- | 
|                 |  |                  |  |                   
|                 |  |                  |  | % of Total Revenue
|                 |  |                  |  |                   
|                 |  |                  |  | For the three      |               | For the three 
|                 |  |                  |  | months ended       |               | months ended  
|Customer         |  | Segment          |  | March 31, 2004     |               | March 31, 2003
|                 |  |                  |  |                    |               |               
|Federal Agencies |  | Government       |  |                    | 10%           |                |  |  | 27% | 
|Customer A       |  | Wireless Carrier |  |                    | 12%           |                |  |  | 13% | 
|Customer C       |  | Wireless Carrier |  |                    | Less than 10% |                |  |  | 10% | 

12



---



##### Table of Contents



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

|                 |  |                  |  |                      |               |             |  |  |               | 
|---------------- |  | ---------------- |  | -------------------- | ------------- | ----------- |  |  | ------------- | 
|                 |  |                  |  |                     
|                 |  |                  |  | As of March 31, 2004
|                 |  |                  |  |                     
|                 |  |                  |  | Accounts             |               | Unbilled   
|Customer         |  | Segment          |  | Receivable           |               | Receivables
|                 |  |                  |  |                      |               |            
|Federal Agencies |  | Government       |  |                      | Less than 10% |             |  |  | 36%           | 
|Customer A       |  | Wireless Carrier |  |                      | 13%           |             |  |  | Less than 10% | 
|Customer B       |  | Wireless Carrier |  |                      | Less than 10% |             |  |  | 21%           | 
|Customer C       |  | Wireless Carrier |  |                      | 14%           |             |  |  | Less than 10% | 

7.     Stock-Based
Compensation

We have two stock-based employee compensation
plans: our Third Amended and Restated 1997 Stock Incentive Plan
(the Stock Incentive Plan) and our Employee Stock
Purchase Plan. 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 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 and loss per common share if we had applied the fair
value recognition provisions of Financial Accounting Standards
Board Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.

|                                                                                                                    |                                 |                    |        |       |   |   |        |       |  
|------------------------------------------------------------------------------------------------------------------- | ------------------------------- | ------------------ | ------ | ----- | - | - | ------ | ----- | -
|                                                                                                                    |                                 |                   
|                                                                                                                    |                                 | Three months ended
|                                                                                                                    |                                 | March 31,         
|                                                                                                                    |                                 |                   
|                                                                                                                    |                                 | 2004               |        | 2003 
|                                                                                                                    |                                 |                    |        |      
|Net loss, as reported                                                                                               |                                 | $                  | (3,446 | )     |   | $ | (4,048 | )    
|Add: Stock-based employee compensation expense
    included in reported net loss                                    |                                 |                    | 357    |       |   |   | 373    |      
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards |                                 |                    | (1,800 | )     |   |   | (1,117 | )    
|                                                                                                                    |                                 |                    |        |       |   |   |        |      
|Pro forma net loss                                                                                                  |                                 | $                  | (4,889 | )     |   | $ | (4,792 | )    
|                                                                                                                    |                                 |                    |        |       |   |   |        |      
|Loss per common share:                                                                                              |                                 |                    |        |       |   |   |        |      
|                                                                                                                    | Basic and diluted  as reported |                    | $      | (0.10 | ) |   | $      | (0.14 | )
|                                                                                                                    |                                 |                    |        |       |   |   |        |      
|                                                                                                                    | Basic and diluted  pro forma   |                    | $      | (0.15 | ) |   | $      | (0.16 | )
|                                                                                                                    |                                 |                    |        |       |   |   |        |      

In calculating the fair value of our stock
options using Black-Scholes, we assumed that the expected life
was five years for options granted to employees and three years
for options granted to non-employees, that the risk free
interest rate was 3%, and that there was no dividend yield. We
also assumed that the expected volatility of our stock was 122%.

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, as reported, includes $193 and $373 of
non-cash stock compensation expense related to these grants for
the three months ended March 31, 2004 and 2003,
respectively. We expect to record future stock compensation
expense of $586 as a result of these option grants that will be
recognized over the remaining vesting period of two years.

In the second quarter of 2003, we issued
restricted stock to directors and certain key executives. The
restrictions expire at the end of one year for directors and in
annual increments over three years for executives and are based
on continued employment. Net loss for the three months ended
March 31,

13



---



##### Table of Contents



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

2004, as reported, includes $164 of non-cash
stock compensation expense related to such stock grants. We
expect to record future stock compensation expense of $1,235 as
a result of these restricted stock grants that will be
recognized over the remaining vesting period for directors and
executives.

8.     Long-Term
Debt

To provide the necessary cash to complete the
acquisition, on January 13, 2004 TCS raised $21,000 in cash
from third-parties through the issuance of (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 TCS Class A
Common Stock at the option of the Company (ii) warrants to
purchase 341,072 shares of Class A Common Stock at an
exercise price of $6.50 per share and expiring in January 2007,
and (iii) 1,364,288 shares of Class A Common Stock. We
determined that the value of the common stock issued was $7,640
based on the quoted closing price of the Companys common
stock on the issue date of $5.60. The difference between the
proceeds from the issuance of these shares and their fair value
was recognized as a debt discount. The value of the warrants was
estimated to be $1,395, determined using the Black-Scholes
option-pricing model and was recorded as a debt discount and
additional paid-in capital. The convertible subordinated
debentures provide for a contractual conversion price of $5.38
per share, and were estimated to have an issuance date
beneficial conversion value of $3,662, which was recorded as a
debt discount and additional paid-in capital. The resulting
carrying value of the debt at issuance was $8,303, net of $6,697
of original issue discount that will be amortized over its
five-year term using the effective interest method, which will
yield an effective interest rate of 12.6%. As of March 31,
2004, the subordinated convertible debentures had a carrying
value of $8,638.

Additionally, during the three months ended
March 31, 2004, we borrowed approximately $2,606, primarily
to fund equipment purchases. The debt bears interest at 7.75%,
is payable monthly through October 2005, and is secured by the
accounts receivable owed to us by certain customers.

14



---



##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

The following discussion and analysis of the
financial condition and results of operations should be read in
conjunction with the consolidated financial statements, related
notes, and other detailed information included elsewhere in this
Quarterly Report on Form 10-Q. This report contains certain
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended. Forward-looking statements are statements other than
historical information or statements of current condition. Some
forward-looking statements may be identified by the use of such
terms as believes, anticipates,
intends, or expects. For example, the
statements (a) regarding our belief as to the sufficiency of our
capital resources to meet our anticipated working capital and
capital expenditures for at least the next twelve months and
(b) that we expect to realize approximately
$45.9 million of backlog during this year and
$48.0 million in the next 12 months are
forward-looking statement. These forward-looking statements
relate to our plans, objectives and expectations for future
operations. In light of the risks and uncertainties inherent in
all such projected operational matters, the inclusion of
forward-looking statements in this report should not be regarded
as a representation by us or any other person that our
objectives or plans will be achieved or that any of our
operating expectations will be realized. Our actual financial
results realized could differ materially from the statements
made herein, depending in particular upon the risks and
uncertainties described in our filings with the Securities and
Exchange Commission. These include without limitation risks and
uncertainties relating to our financial results and our ability
to (i) reach and maintain profitability as early as
anticipated or at all, (ii) continue to rely on our
customers and other third parties to provide additional products
and services that create a demand for our products and services,
(iii) conduct our business in foreign countries,
(iv) adapt and integrate new technologies into our
products, (v) develop software and deliver products and
services without any errors or defects, (vi) protect our
intellectual property rights, (vii) implement our business
strategy (viii) realize backlog, and (vix) achieve
continued revenue growth in the foreseeable future for our
E9-1-1 business. These factors should not be considered
exhaustive; we undertake no obligation to release publicly the
results of any future revisions we may make to forward-looking
statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events. We
caution you not to put undue reliance on these forward-looking
statements.

Critical Accounting Policies and
Estimates

The information in this Item 2.
Managements Discussion and Analysis of Financial Condition
and Results of Operations discusses our consolidated
financial statements, which have been prepared in accordance
with U.S. generally accepted accounting principles. The
preparation of these financial statements requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, management
evaluates its estimates and judgments, including those related
to intangible assets and contingencies and litigation.
Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under
different assumptions or conditions.

We identified our most critical accounting
policies to be those related to revenue recognition for our
software contracts with multiple elements, contracts accounted
for using the percentage of completion method, the relevant
accounting related to valuation allowances, capitalized software
development costs, and other acquired intangible assets. We
describe these accounting policies in relevant sections of this
discussion and analysis. This discussion and analysis should be
read in conjunction with our consolidated financial statements
and related notes included in our 2003 Annual Report on
Form 10-K, as amended.

15



---



##### Table of Contents



Overview

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

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

This Item 2. Managements
Discussion and Analysis of Financial Condition and Results of
Operations provides information that our management
believes to be necessary to achieve a clear understanding of our
financial statements and results of operations.

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



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Revenue.We derive
    revenue from products and services including service bureau and
    subscriber-based services, software license fees and related
    service fees relating to our developed software products, and
    network solutions revenue related to our communication systems
    delivered to governmental agencies. We manage our business
    across three market segments: (i) our Wireless Carrier
    segment, which consists principally of our products and services
    marketed directly to wireless carriers consisting of monthly
    recurring E9-1-1 and hosted software application offerings as
    well as software license and service fees, (ii) our
    Government segment, which includes the design, development and
    deployment of information processing and communication systems
    and related services marketed to government agencies, and
    (iii) our Enterprise segment which comprises the operations
    we acquired from Aether Systems, Inc. which offers recurring
    subscriber-based services as well as software licenses and
    services to Enterprise customers.
|
| |  | Cost of revenue.The
    major items impacting our cost of revenue are compensation and
    benefits as well as third-party hardware and software, airtime
    costs of subscriber-based revenue and overhead expenses.
    Hardware and third-party software costs are primarily associated
    with the delivery of product within our Government segment while
    also, to a lesser extent, may be attributed to the delivery of
    software licenses and services in both our Wireless Carrier and
    Enterprise segments. These costs tend to fluctuate as a result
    of the relative volume, mix of projects, level of service
    support required and the complexity of customized products and
    services delivered in a period. Airtime costs relate to the
    volume of monthly subscriber-based revenue experiences in our
    Enterprise segment.                                                                                                                                                                                                                                                          
|
| |  | Operating expenses.Operating expenses are substantially
    driven by compensation and benefits, travel costs, professional
    fees, facility costs, specific marketing and sales-related
    expenses as well as certain non-cash expenses such as non-cash
    stock compensation expenses, depreciation and amortization of
    property and equipment, of software development costs, and of
    acquired intangible assets. Operating expenses are incurred in
    connection with the development and marketing of new software
    applications as well as general corporate overhead expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Liquidity and cash flows.The primary driver of our cash flows
    is our results of operations. Important sources of our liquidity
    have been cash raised at the time of our initial public offering                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

16



---



##### Table of Contents



| |   |                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | in 2000, our January 2004 private investment in
    public equity financing (as described below under
    Liquidity and Capital Resources), and borrowing and
    lease financings secured for the purchase of equipment.
|
| |  | Balance sheet.We
    view cash, working capital, accounts receivable balances and
    days revenues outstanding as important indicators of our
    financial health.                                                       

Results of Operations

Revenue and Cost of Revenue

The following discussion addresses the relative
revenue and direct cost for each segment of our business:

Wireless Carrier Segment:

The following table sets forth, for the
three-months ended March 31, 2004 and March 31, 2003,
a period-over-period comparison of the key components of the
revenue and cost of revenue of our Wireless Carrier segment:

|                                             |                               |      |     |      |  |               |     |     |  |   |      |      |   |  |    |     |   
|-------------------------------------------- | ----------------------------- | ---- | --- | ---- |  | ------------- | --- | --- |  | - | ---- | ---- | - |  | -- | --- | --
|                                             |                               |      |     |      |  |              
|                                             |                               |      |     |      |  | 2004 vs. 2003
|                                             |                               |      |     |      |  |              
|($ in millions)                              |                               | 2004 |     | 2003 |  | $             |     | %  
|                                             |                               |      |     |      |  |               |     |    
|Service bureau and subscriber revenue        |                               | $    | 9.1 |      |  | $             | 7.6 |     |  | $ | 1.6  |      |   |  | 21 | %  
|Software systems revenue:                    |                               |      |     |      |  |               |     |     |  |   |      |      |   |  |    |    
|                                             | Software licenses             |      |     | 1.7  |  |               |     | 2.5 |  |   |      | (0.8 | ) |  |    | (33 | %)
|                                             | Software systems and services |      |     | 1.9  |  |               |     | 1.1 |  |   |      | 0.7  |   |  |    | 63  | % 
|                                             |                               |      |     |      |  |               |     |     |  |   |      |      |   |  |    |    
|Software systems total                       |                               |      | 3.5 |      |  |               | 3.6 |     |  |   | (0.1 | )    |   |  | (2 | %) 
|Direct cost of service bureau and subscriber |                               |      | 4.3 |      |  |               | 4.0 |     |  |   | 0.3  |      |   |  | 8  | %  
|Direct cost of software systems              |                               |      | 1.6 |      |  |               | 1.7 |     |  |   | (0.1 | )    |   |  | (8 | %) 
|                                             |                               |      |     |      |  |               |     |     |  |   |      |      |   |  |    |    
|Segment gross profit*                        |                               | $    | 6.8 |      |  | $             | 5.5 |     |  | $ | 1.3  |      |   |  | 24 | %  
|                                             |                               |      |     |      |  |               |     |     |  |   |      |      |   |  |    |    
|Percent of revenue                           |                               |      | 53  | %    |  |               | 49  | %   |  |   |      |      |   |  |    |    



---



|  |                                                                                                      
|- | -----------------------------------------------------------------------------------------------------
|* | See discussion of segment reporting in Note 4
    to the accompanying unaudited financial statements.

Service bureau revenue and cost of
revenue:

We market our service bureau and software
offerings to wireless carriers. Our service bureau offerings
include our E9-1-1, hosted Position Determining Entity
(PDE) and Text Message Distribution Center
(MDC) applications. Revenue from our service bureau
offerings primarily consists of monthly recurring service fees
and is recognized in the month earned. E9-1-1 and PDE service
fees are primarily dependent on the number of subscribers the
carrier covers, Public Service Answering Points (PSAPs) served
or cell sites that provide E9-1-1 services for the carrier. As
the carriers number of subscribers, PSAPs, or cell sites
increases, the monthly recurring service fees increase. Message
Distribution Center revenue is priced based on message volume.
In 2004, our revenue reflects an increase in the number of
wireless carriers served as well as the volume served from the
customer client base that existed in 2003. Additionally, our
hosted PDE and MDC applications continue to increase in volume
each month.

The direct cost of our service bureau revenue
consists primarily of compensation, benefits, travel expenses,
and consulting fees incurred when providing our services, as
well as the equipment maintenance and circuit costs of our
network operations centers circuits utilized for connectivity to
carrier customers and local governments PSAPs. In 2004, we
increased headcount to support this business, resulting in an 8%
increase in costs.

17



---



##### Table of Contents



Software systems revenue and cost of
revenue:

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

We sell our software products directly to
wireless carriers. Initial licensing fees are a function of the
number of subscribers or other measure of usage of our software
in the network where our software is deployed. As a
carriers subscriber base or usage increases, the carrier
must purchase additional capacity under its license agreement
and we receive additional revenue. Generally, we recognize
license fee revenue when each of the following has occurred:
(1) evidence of an arrangement is in place; (2) we
have delivered software; (3) the fee is fixed or
determinable; and (4) collection of the fee is probable.
Software projects that require significant customization are
accounted for under the percentage-of-completion method. We
measure progress to completion using costs incurred compared to
estimated total costs. We recognize estimated losses under
long-term contracts in their entirety upon discovery. If we did
not accurately estimate total costs to complete a contract or do
not manage our contracts within the planned budget, then future
margins may be negatively affected or losses on existing
contracts may need to be recognized. Software license fees
billed and not recognized as revenue are included in deferred
revenue.

We have also historically sold some of our
network software products through our channel relationships.
This sales process typically includes participation of our
engineers along with original equipment manufacturers in
presenting our products to prospective customers. In 2004,
software license revenue declined from $2.5 million to
$1.7 million, primarily because new business was not booked
to replace revenue generated in 2003 from a large contract to
deliver location platforms for multiple carrier networks in
Europe and the Pacific.

Our software systems and services revenue arises
from annual maintenance fees for our packaged and custom
software products and fees from custom development and
implementation of software products. Maintenance fees on
packaged software are collected in advance and recognized
ratably over the maintenance period. Unrecognized maintenance
fees are included in deferred revenue. Custom software
development, implementation and maintenance services may be
provided under time and materials or fixed-fee contracts. We
also occasionally sell computer equipment as part of our
packaged software sales.

In 2004, 64% of software service revenues related
to maintenance fees, while 34% related to installation fees
associated with the delivery of related software applications
and the remaining 2% related to third-party hardware and
software delivered as part of our packaged software sales. In
2003, 72% of service revenue is related to maintenance fees,
while 28% of service revenue was associated with installation
fees.

The direct cost of our software systems revenue
consists primarily of compensation, benefits, purchased
equipment, third-party software, travel expenses and consulting
fees incurred when providing our services. In 2004, such costs
primarily included compensation, benefits, travel and consulting
fees. In 2003, such costs primarily included compensation,
benefits, travel expenses and consulting fees while 25% of such
costs related to the cost of purchased equipment and third-party
software delivered as part of our packaged software sales in
that year.

18



---



##### Table of Contents



Government Segment:

The following table sets forth, for the
three-months ended March 31, 2004 and March 31, 2003,
a period-over-period comparison of the key components of our
Government segment revenue and cost of revenue:

|                                 |  |      |     |      |  |               |     |   |  |   |      |   |  |  |     |   
|-------------------------------- |  | ---- | --- | ---- |  | ------------- | --- | - |  | - | ---- | - |  |  | --- | --
|                                 |  |      |     |      |  |              
|                                 |  |      |     |      |  | 2004 vs. 2003
|                                 |  |      |     |      |  |              
|($ in millions)                  |  | 2004 |     | 2003 |  | $             |     | %
|                                 |  |      |     |      |  |               |     |  
|Network solutions revenue        |  | $    | 7.5 |      |  | $             | 8.1 |   |  | $ | (0.6 | ) |  |  | (8  | %)
|Direct cost of network solutions |  |      | 4.2 |      |  |               | 5.4 |   |  |   | (1.2 | ) |  |  | (22 | %)
|                                 |  |      |     |      |  |               |     |   |  |   |      |   |  |  |     |   
|Segment gross profit*            |  | $    | 3.3 |      |  | $             | 2.8 |   |  | $ | 0.5  |   |  |  | 19  | % 
|                                 |  |      |     |      |  |               |     |   |  |   |      |   |  |  |     |   
|Percent of revenues              |  |      | 44  | %    |  |               | 34  | % |  |   |      |   |  |  |     |   



---



|  |                                                                                                      
|- | -----------------------------------------------------------------------------------------------------
|* | See discussion of segment reporting in Note 4
    to the accompanying unaudited financial statements.

We generate Government segment revenue from the
design, development, assembly and deployment of information
processing and communication systems, primarily for government
enterprises. Representative examples of recent network solutions
projects include delivery of our SwiftLink® product, a
lightweight, secure, deployable communications systems to the
U.S. Departments of State, Justice, and Defense, and information
services systems to local government agencies. SwiftLink®
provides secure voice, video and data communications, supports a
worldwide network during trips abroad and throughout the United
States and provides full network functionality and Internet
Protocol telephony capability using landlines and
satellite-based technologies. Our Government segment also
operates teleport facilities in Baltimore, MD and Manassas, VA,
which support the integration of satellite communications and
terrestrial wireless broadband with U.S. broadband networks.
Through our teleport facilities we offer data connectivity via
satellite to and from North and South America, as well as Africa
and Europe. We generally provide network solutions under
long-term contracts. We recognize revenue under long-term
contracts as billable costs are incurred and for fixed-price
contracts using the percentage-of-completion method, measured by
either total labor hours or total costs incurred compared to
total estimated labor hours or costs. We recognize estimated
losses on contracts in their entirety upon discovery. If we did
not accurately estimate total labor hours or costs to complete a
contract or do not manage our contracts within the planned
budget, then future margins may be negatively affected or losses
on existing contracts may need to be recognized. Under our
contracts with the U.S. government, contract costs, including
the allocated indirect expenses, are subject to audit and
adjustment by the Defense Contract Audit Agency. We record
revenue under these contracts at estimated net realizable
amounts.

In 2004, approximately 45% of network solutions
revenue resulted from the sale of SwiftLink® and related
deployable communications systems, an increase of 10% over the
amount in 2003. In 2004, we also designed, tested and delivered
products to government customers related to other
satellite-based communication systems and information processing
systems for local government agencies as well as for the country
of Bahrain. In 2003, 39% of our revenue for this segment
resulted from the sale of SwiftLink® and related deployable
communication systems, while the remaining amount related to the
design, development and operation of other communication
systems, as well as the design, testing and delivery of products
for several government agencies.

The direct cost of our network solutions revenue
consists of compensation, benefits, travel, satellite
space segment and airtime and approximately 40% of
costs are related to purchased equipment components, which we
purchase as needed for customer contracts or release from
inventory, and the costs of third-party contractors that we
engage.

19



---



##### Table of Contents



Enterprise Segment:

The following table sets forth, for the three
months ended March 31, 2004, the key components of
subscriber and software systems revenue and related cost of
revenue for the Enterprise segment:

|                                             |                               |   |      |     | 
|-------------------------------------------- | ----------------------------- | - | ---- | --- | 
|($ in millions)                              |                               |  
|                                             |                               |  
|Service bureau and subscriber revenue        |                               | $ | 11.6 |    
|Software systems revenue:                    |                               |   |      |    
|                                             | Software systems licenses     |   |      |    | 
|                                             | Software systems and services |   |      | 1.0 | 
|                                             |                               |   |      |    
|Software systems total                       |                               |   | 1.0  |    
|Direct cost of service bureau and subscriber |                               |   | 8.9  |    
|Direct cost of software systems              |                               |   | 0.9  |    
|                                             |                               |   |      |    
|Segment gross profit*                        |                               | $ | 2.8  |    
|                                             |                               |   |      |    
|Percent of revenue                           |                               |   | 22   | %  



---



|  |                                                                                                      
|- | -----------------------------------------------------------------------------------------------------
|* | See discussion of segment reporting in Note 4
    to the accompanying unaudited financial statements.

No period-over-period comparison is presented for
our Enterprise segment because the Enterprise Mobility Solutions
division of Aether Systems, Inc, which makes up the Enterprise
segment, was acquired in 2004.

Subscriber revenue and cost of
revenue:

Our Enterprise segment markets mobile office,
mobile finance, and mobile asset services and products to
Enterprise customers. Subscriber-based revenue is generated from
all three segments; 68% of which from mobile office subscribers,
26% from mobile finance subscribers and 6% from mobile asset
subscribers. Such revenue is billed to customers on a monthly
basis and is generally cancelable with 30-days notice. Most
corporate customers have retained their service for three years
or more.

The direct cost of our subscriber revenue
consists primarily of compensation, benefits, travel expenses,
airtime charges and consulting fees incurred when providing our
services, as well as the equipment maintenance and circuit costs
of our network operations centers circuits utilized for
connectivity to customer devices.

Major Customers

For the three months ended March 31, 2004,
customers that accounted for 10% or more of total revenue were
Verizon Wireless and various U.S. Government agencies. The loss
of either of these customers would have a material adverse
impact on our business. For the three months ended
March 31, 2003 customers that accounted for 10% or more of
total revenue were Verizon Wireless, United States Cellular
Corporation, and various U.S. Government agencies.

Revenue Backlog

Total company backlog at March 31, 2004 was
$86.6 million, of which $63.5 million related to our
Wireless Carrier segment, $12.6 million related to our
Government segment and $10.5 million related to our
Enterprise segment. We expect to realize approximately
$45.9 million in the balance of this year and
$48.0 million of this backlog in the next twelve months.
The remaining backlog primarily represents the balance of
multi-year contracts for our service bureau business. Total
company backlog at March 31, 2003 was $81.8 million.
Our backlog at any given time may be affected by a number of
factors, including contracts being renewed or new contracts
being signed before existing contracts are completed. Some of
our backlog could be canceled for causes such as late delivery,
poor perform-

20



---



##### Table of Contents



ance, and other factors. Accordingly, a
comparison of backlog from period to period is not necessarily
meaningful and may not be indicative of eventual actual revenue.


Operating Expenses

Research and development expense:

The following table sets forth, for the
three-months ended March 31, 2004 and March 31, 2003,
a period-over-period comparison of our research and development
expense:

|                                 |  |      |     |      |  |               |     |   |  |   |     |  |  |  |    |  
|-------------------------------- |  | ---- | --- | ---- |  | ------------- | --- | - |  | - | --- |  |  |  | -- | -
|                                 |  |      |     |      |  |              
|                                 |  |      |     |      |  | 2004 vs. 2003
|                                 |  |      |     |      |  |              
|($ in millions)                  |  | 2004 |     | 2003 |  | $             |     | %
|                                 |  |      |     |      |  |               |     |  
|Research and development expense |  | $    | 5.0 |      |  | $             | 3.9 |   |  | $ | 1.1 |  |  |  | 29 | %
|Percent of revenue               |  |      | 15  | %    |  |               | 20  | % |  |   |     |  |  |  |    |  

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

In 2004, we incurred research and development
expenses related to Wireless Carrier and Enterprise software
applications, which are being marketed to new and existing
customers on a global basis, with emphasis on expanded
functionality of our location platform software and E9-1-1
application. In 2003, the research and development expenditures
were primarily incurred in the development of our Wireless
Carrier software and E9-1-1 application. Management continually
assesses our spending on research and development to ensure
resources are focused on products that are expected to achieve
the highest level of success.

Sales and marketing expense:

The following table sets forth, for the
three-months ended March 31, 2004 and March 31, 2003,
a period-over-period comparison of our sales and marketing
expenses:

|                            |  |      |     |      |  |               |     |   |  |   |     |  |  |  |    |  
|--------------------------- |  | ---- | --- | ---- |  | ------------- | --- | - |  | - | --- |  |  |  | -- | -
|                            |  |      |     |      |  |              
|                            |  |      |     |      |  | 2004 vs. 2003
|                            |  |      |     |      |  |              
|($ in millions)             |  | 2004 |     | 2003 |  | $             |     | %
|                            |  |      |     |      |  |               |     |  
|Sales and marketing expense |  | $    | 3.2 |      |  | $             | 2.4 |   |  | $ | 0.8 |  |  |  | 33 | %
|Percent of total revenue    |  |      | 10  | %    |  |               | 12  | % |  |   |     |  |  |  |    |  

Our sales and marketing expenses include
compensation and benefits, trade show expenses, travel costs,
advertising and public relations costs as well as a
proportionate share of facility-related costs which are expensed
as incurred. Our marketing efforts also include speaking
engagements and attending and sponsoring industry conferences.
We sell our software products and services through our direct
sales force and through indirect channels. We have also
historically leveraged our relationship with original equipment
manufacturers to market our software products to wireless
carrier customers. We sell our network solutions primarily
through direct sales professionals. Costs incurred for sales and
marketing increased in 2004 from 2003 due to increased costs
associated with addressing the Enterprise market. We expect our
sales and marketing expense to increase in 2004 as

21



---



##### Table of Contents



a result of our acquisition of the Enterprise
Division. Such costs may fluctuate quarter-to-quarter depending
on spending on tradeshows and variable compensation based on
levels of revenue.


General and administrative expense:

The following table sets forth, for the
three-months ended March 31, 2004 and March 31, 2003,
a period-over-period comparison of our general and
administrative expense:

|                                   |  |      |     |      |  |               |     |   |  |   |     |  |  |  |    |  
|---------------------------------- |  | ---- | --- | ---- |  | ------------- | --- | - |  | - | --- |  |  |  | -- | -
|                                   |  |      |     |      |  |              
|                                   |  |      |     |      |  | 2004 vs. 2003
|                                   |  |      |     |      |  |              
|($ in millions)                    |  | 2004 |     | 2003 |  | $             |     | %
|                                   |  |      |     |      |  |               |     |  
|General and administrative expense |  | $    | 4.5 |      |  | $             | 2.9 |   |  | $ | 1.6 |  |  |  | 55 | %
|Percent of total revenue           |  |      | 14  | %    |  |               | 15  | % |  |   |     |  |  |  |    |  

General and administrative expense consists
primarily of compensation costs and other costs associated with
management, finance, human resources and internal information
systems. These costs include compensation and benefits, travel,
and a proportionate share of rent, utilities and other
facilities costs which are expensed as incurred. In 2004 such
costs increased over 2003 largely due to costs incurred to
support the Enterprise segment. We expect general and
administrative expense to remain at a higher level than in 2003
for the remainder of 2004, as a result of our acquisition of the
Enterprise segment.

Non-cash stock compensation expense:

The following table sets forth, for the
three-months ended March 31, 2004 and March 31, 2003,
a period-over-period comparison of our non-cash stock
compensation expense:

|                                    |  |      |     |      |  |               |     |   |  |   |   |  |  |  |   |  
|----------------------------------- |  | ---- | --- | ---- |  | ------------- | --- | - |  | - | - |  |  |  | - | -
|                                    |  |      |     |      |  |              
|                                    |  |      |     |      |  | 2004 vs. 2003
|                                    |  |      |     |      |  |              
|($ in millions)                     |  | 2004 |     | 2003 |  | $             |     | %
|                                    |  |      |     |      |  |               |     |  
|Non-cash stock compensation expense |  | $    | 0.4 |      |  | $             | 0.4 |   |  | $ |  |  |  |  | 4 | %

During the second and third quarters of 2000, we
granted options to purchase 885,983 shares of Class A
Common Stock to employees and directors at an exercise price
less than the fair market value of our Class A Common Stock
at the date of grant. Net loss attributable to common
stockholders, as reported, includes $193 and $373 of non-cash
stock compensation expense related to these grants for the
quarters ended March 31, 2004 and 2003, respectively. We
expect to record future aggregate stock compensation expense of
$586 as a result of these option grants that will be recognized
over the remaining vesting period of two years.

In the second quarter of 2003, we issued
restricted stock to directors and certain key executives. The
restrictions expire at the end of one year for directors and in
annual increments over three years for executives, and are based
on continued employment. Net loss for the quarter ended
March 31, 2004, as reported, includes $164 of non-cash
stock compensation expense related to such stock grants. We
expect to record future aggregate stock compensation expense of
$1,235 as a result of these restricted stock grants that will be
recognized over the remaining vesting period for directors and
executives.

Depreciation and amortization of property and
equipment:

The following table sets forth, for the
three-months ended March 31, 2004 and March 31, 2003,
a period-over-period comparison of our depreciation and
amortization of property and equipment:

|                                                            |  |      |      |      |  |               |      |   |  |   |     |  |  |  |    |  
|----------------------------------------------------------- |  | ---- | ---- | ---- |  | ------------- | ---- | - |  | - | --- |  |  |  | -- | -
|                                                            |  |      |      |      |  |              
|                                                            |  |      |      |      |  | 2004 vs. 2003
|                                                            |  |      |      |      |  |              
|($ in millions)                                             |  | 2004 |      | 2003 |  | $             |      | %
|                                                            |  |      |      |      |  |               |      |  
|Depreciation and amortization of property and
    equipment |  | $    | 1.7  |      |  | $             | 1.5  |   |  | $ | 0.2 |  |  |  | 12 | %
|Gross cost of property and equipment                        |  | $    | 36.6 |      |  | $             | 27.1 |   |  | $ | 9.5 |  |  |  | 35 | %

22



---



##### Table of Contents



Depreciation and amortization expense (other than
amortization of software development costs and acquired
intangible assets, discussed below) represents the period costs
associated with our investment in computers, telephony
equipment, software, furniture and fixtures, and leasehold
improvements. We compute depreciation and amortization using the
straight-line method over the estimated useful lives of the
assets. In 2004, depreciation and amortization expense was
slightly higher than 2003 reflecting the level of capital
expenditures made primarily to support our network operations
centers and our development efforts.

Amortization of software development
costs:

The following table sets forth, for the
three-months ended March 31, 2004 and March 31, 2003,
a period-over-period comparison of our amortization of software
development costs:

|                                            |  |      |     |      |  |               |     |   |  |   |      |   |  |  |     |   
|------------------------------------------- |  | ---- | --- | ---- |  | ------------- | --- | - |  | - | ---- | - |  |  | --- | --
|                                            |  |      |     |      |  |              
|                                            |  |      |     |      |  | 2004 vs. 2003
|                                            |  |      |     |      |  |              
|($ in millions)                             |  | 2004 |     | 2003 |  | $             |     | %
|                                            |  |      |     |      |  |               |     |  
|Amortization of software development costs  |  | $    | 0.1 |      |  | $             | 1.0 |   |  | $ | (0.9 | ) |  |  | (92 | )%
|Percent of network software license revenue |  |      | 5   | %    |  |               | 42  | % |  |   |      |   |  |  |     |   

We capitalize software development costs after we
establish technological feasibility, and amortize those costs
over the estimated useful lives of the software beginning on the
date when the software is first installed and used. We calculate
amortization of software development costs on a
product-by-product basis using the straight-line method over the
remaining estimated economic life of the product, which is never
greater than three years. We also compute amortization of
software development costs using the ratio that current revenue
for the product bears to the total current and anticipated
future revenues for that product. If this revenue curve method
results in amortization greater than the amount computed using
the straight-line method, we record amortization at that greater
amount. Amortization as a percentage of software license fees is
generally a higher percentage in the early stages of a
products life cycle. Our policies to determine when to
capitalize software development costs and how much to amortize
in a given period require us to make subjective estimates and
judgments. If our software products do not achieve the level of
market acceptance that we expect and our future revenue
estimates for these products change, the amount of amortization
that we record may increase compared to prior periods. In 2004
these expenses were lower than in 2003 primarily due to the
lower remaining balance of capitalized software development
costs. Additionally, in connection with the acquisition of the
Enterprise segment, we recorded $0.3 million of developed
technology, which is being amortized over its remaining life of
3 years.

Amortization of acquired intangible assets:The acquired intangible assets
associated with our acquisition of the Enterprise segment are
being amortized over their useful lives of between 3 and
5 years. The expense recognized in 2004 relates to the
intangible assets acquired in the acquisition. The expense in
2003 related to the amortization of the Xypoint trade name which
was amortized based on its estimated useful life of three years
using the straight-line method and was fully amortized by
December 31, 2003.

23



---



##### Table of Contents



Interest expense:

The following table sets forth, for the
three-months ended March 31, 2004 and March 31, 2003,
a period-over-period comparison of our components of interest
expense:

|                                                                     |  |      |     |      |  |               |     |   |  |   |      |   |  |  |     |  
|-------------------------------------------------------------------- |  | ---- | --- | ---- |  | ------------- | --- | - |  | - | ---- | - |  |  | --- | -
|                                                                     |  |      |     |      |  |              
|                                                                     |  |      |     |      |  | 2004 vs. 2003
|                                                                     |  |      |     |      |  |              
|($ in millions)                                                      |  | 2004 |     | 2003 |  | $             |     | %
|                                                                     |  |      |     |      |  |               |     |  
|Interest expense incurred on notes payable                           |  | $    | 0.2 |      |  | $             | 0.1 |   |  |   | 0.1  |   |  |  | N/M |  
|Interest expense incurred on capital lease
    obligations           |  |      | 0.1 |      |  |               | 0.2 |   |  |   | (0.1 | ) |  |  | N/M |  
|Interest expense incurred on convertible
    subordinated debentures |  |      | 0.1 |      |  |               |    |   |  |   | 0.1  |   |  |  | N/M |  
|Amortization of deferred commitment fees                             |  |      | 0.1 |      |  |               |    |   |  |   | 0.1  |   |  |  | N/M |  
|Amortization of debt discount                                        |  |      | 0.3 |      |  |               |    |   |  |   | 0.3  |   |  |  | N/M |  
|                                                                     |  |      |     |      |  |               |     |   |  |   |      |   |  |  |     |  
|Total interest expense                                               |  | $    | 0.8 |      |  | $             | 0.3 |   |  | $ | 0.5  |   |  |  | 166 | %

Interest expense is incurred under notes payable
and capital lease obligations. Interest, under the terms of our
notes payable, is primarily at stated interest rates of 7.75%
while the portion related to an equipment loan is at 5.5%.
Because the balance of notes payable has increased versus the
prior period, the related interest expense has also increased.
Our capital lease obligations include interest at various
amounts depending on the lease arrangement and are generally at
slightly higher rates than those incurred under notes payable.
The balance of our total capital lease obligations has decreased
since 2003. Therefore, the related interest expense was also
lower. Interest expense incurred on the convertible subordinated
debentures issued in connection with our recent acquisition of
the Enterprise segment accrues at the rate of 3% of the face
value of the note but may be payable in cash or stock. Deferred
debt discount relates to the amount of discount computed as part
of that private placement. Such discount is recorded as a
reduction of debt and is being amortized over the life of the
convertible subordinated debenture of 5 years. The deferred
commitment fees relate to the up-front payment of fees that were
incurred to secure our notes payable and our revolving line of
credit facility and are being amortized over the term of the
note or, in the case of the line of credit, the life of the
facility, which expires in April 2006.

Other (expense)/income, net:

The following table sets forth, for the
three-months ended March 31, 2004 and March 31, 2003,
a period-over-period comparison of our components of other
income, net:

|                                              |  |      |      |      |  |               |      |   |  |   |      |   |  |  |      |   
|--------------------------------------------- |  | ---- | ---- | ---- |  | ------------- | ---- | - |  | - | ---- | - |  |  | ---- | --
|                                              |  |      |      |      |  |              
|                                              |  |      |      |      |  | 2004 vs. 2003
|                                              |  |      |      |      |  |              
|($ in millions)                               |  | 2004 |      | 2003 |  | $             |      | %
|                                              |  |      |      |      |  |               |      |  
|State of Maryland loan to grant program       |  | $    | 0.1  |      |  | $             | 0.1  |   |  | $ |     |   |  |  |     |   
|Foreign currency translation/transaction gain |  |      |     |      |  |               | 0.1  |   |  |   | (0.1 | ) |  |  | (100 | %)
|Investment income                             |  |      |     |      |  |               | 0.1  |   |  |   | (0.1 | ) |  |  | (100 | %)
|Miscellaneous other expense                   |  |      | (0.2 | )    |  |               | -   |   |  |   | (0.2 | ) |  |  | (100 | %)
|                                              |  |      |      |      |  |               |      |   |  |   |      |   |  |  |      |   
|Total other (expense)/income, net             |  | $    | (0.1 | )    |  | $             | 0.3  |   |  | $ | (0.4 | ) |  |  | NM   |   
|                                              |  |      |      |      |  |               |      |   |  |   |      |   |  |  |      |   
|Average interest rate earned on investments   |  |      | 1    | %    |  |               | 1    | % |  |   |      |   |  |  |      |   
|Average cash balance                          |  | $    | 19.3 |      |  | $             | 24.3 |   |  | $ | (5.0 | ) |  |  | (21  | %)

Other (expense)/income consists of miscellaneous
gains and losses related to foreign currency
translation/transaction gain or loss, investment income earned
on cash equivalents, and other income related to a loan-to-grant
program provided by the State of Maryland. Investment income is
a function of our cash balances available for short-term
investment as well as interest rates, the average balance of
which has reduced from the prior year. We record the effect of
foreign currency translation on our receivables that are stated
in currency other than our functional currency.

24



---



##### Table of Contents



Income taxes:

Because we have incurred net losses since 1999,
no provision for federal or state income taxes has been made for
the three-months ended March 31, 2004 or any portion of
2003. We have recorded a full valuation allowance for deferred
tax assets as a result of our inability to determine the
realizability of our net operating loss carryforwards.

Net loss:

The following table sets forth, for the
three-months ended March 31, 2004 and March 31, 2003,
a period-over-period comparison of our net loss:

|                |  |      |      |      |  |               |      |   |  |   |     |  |  |  |    |  
|--------------- |  | ---- | ---- | ---- |  | ------------- | ---- | - |  | - | --- |  |  |  | -- | -
|                |  |      |      |      |  |              
|                |  |      |      |      |  | 2004 vs. 2003
|                |  |      |      |      |  |              
|($ in millions) |  | 2004 |      | 2003 |  | $             |      | %
|                |  |      |      |      |  |               |      |  
|Net loss        |  | $    | (3.4 | )    |  | $             | (4.0 | ) |  | $ | 0.6 |  |  |  | 15 | %

Net loss has declined primarily due to the
significant increases in gross profit from higher revenue and
our measures taken to control operating expenses. These
improvements were somewhat offset by non-cash interest expense
related to the convertible subordinated debentures secured to
finance our recent acquisition.

25



---



##### Table of Contents



Liquidity and Capital Resources

The following table sets forth, for the
three-months ended March 31, 2004 and March 31, 2003,
a period-over-period comparison of key components of our
liquidity and capital resources:

|                                                                                                                |                                     |                                         |      |       |      |               |      |      |      |   |      |       |      |   |     |     |   | 
|--------------------------------------------------------------------------------------------------------------- | ----------------------------------- | --------------------------------------- | ---- | ----- | ---- | ------------- | ---- | ---- | ---- | - | ---- | ----- | ---- | - | --- | --- | - | 
|                                                                                                                |                                     |                                         |      |       |      |              
|                                                                                                                |                                     |                                         |      |       |      | 2004 vs. 2003
|                                                                                                                |                                     |                                         |      |       |      |              
|($ in millions)                                                                                                 |                                     | 2004                                    |      | 2003  |      | $             |      | %   
|                                                                                                                |                                     |                                         |      |       |      |               |      |     
|Net cash provided by (used in):                                                                                 |                                     |                                         |      |       |      |               |      |      |      |   |      |       |      |   |     |    
|                                                                                                                | Operating activities                |                                         | $    | (0.9  | )    |               | $    | (2.7 | )    |   | $    | 1.8   |      |   |     | 65  | %
|                                                                                                                | Investing activities                |                                         |      | (19.6 | )    |               |      | (2.4 | )    |   |      | (17.2 | )    |   |     | N/M |  
|                                                                                                                | Financing activities                |                                         |      | 21.6  |      |               |      | (1.2 | )    |   |      | 22.8  |      |   |     | N/M |  
|Adjusted operating income/(loss), excluding
    non-cash charges (see reconciliation below)                     |                                     |                                         | (0.2 | )     |      |               | (0.9 | )    |      |   | 0.7  |       |      |   | (79 | %) 
|Purchases of property and equipment                                                                             |                                     |                                         | (2.0 | )     |      |               | (1.2 | )    |      |   | (0.7 | )     |      |   | (59 | %) 
|Capitalized software development costs                                                                          |                                     |                                         |     |       |      |               | (1.1 | )    |      |   | 1.1  |       |      |   | 100 | %  
|Payments under long-term debt and lease
    obligations                                                         |                                     |                                         | (1.5 | )     |      |               | (1.3 | )    |      |   | (0.3 | )     |      |   | (21 | %) 
|Proceeds from issuance of Class A Common
    Stock and                                                          |                                     |                                         |      |       |      |               |      |      |      |   |      |       |      |   |     |    
|                                                                                                                | Convertible subordinated debentures |                                         |      | 21.0  |      |               |      |     |      |   |      | 21.0  |      |   |     | N/M |  
|Proceeds from long-term debt                                                                                    |                                     |                                         | 2.5  |       |      |               |     |      |      |   | 2.5  |       |      |   | N/M |    
|Proceeds from exercise of employee stock options                                                                |                                     |                                         | 0.7  |       |      |               | 0.1  |      |      |   | 0.6  |       |      |   | N/M |    
|Financing fees paid related to debenture and
    stock issued to fund the acquisition of the Enterprise segment |                                     |                                         | (1.1 | )     |      |               |     |      |      |   | (1.1 | )     |      |   | N/M |    
|Effect of change in foreign currency exchange
    rates on cash                                                 |                                     |                                         | 0.1  |       |      |               |     |      |      |   | 0.1  |       |      |   | N/M |    
|                                                                                                                |                                     |                                         |      |       |      |               |      |      |      |   |      |       |      |   |     |    
|Cash and cash equivalents                                                                                       |                                     |                                         | 19.9 |       |      |               | 21.1 |      |      |   | (1.3 | )     |      |   | (6  | %) 
|Changes in:                                                                                                     |                                     |                                         |      |       |      |               |      |      |      |   |      |       |      |   |     |    
|                                                                                                                |                                     | Accounts receivable                     |      |       | 4.0  |               |      |      | 5.6  |   |      |       | (1.6 | ) |     |     |   | 
|                                                                                                                |                                     | Unbilled receivables, net               |      |       | (1.5 | )             |      |      | (1.2 | ) |      |       | (0.3 | ) |     |     |   | 
|                                                                                                                |                                     | Inventory                               |      |       | (1.6 | )             |      |      |     |   |      |       | (1.6 | ) |     |     |   | 
|                                                                                                                |                                     | Other current assets                    |      |       | (1.4 | )             |      |      | (0.5 | ) |      |       | (0.9 | ) |     |     |   | 
|                                                                                                                |                                     | Accounts payable and accrued expenses   |      |       | (0.1 | )             |      |      | (5.4 | ) |      |       | 5.3  |   |     |     |   | 
|                                                                                                                |                                     | Accrued payroll and related liabilities |      |       | (0.4 | )             |      |      | (0.1 | ) |      |       | (0.3 | ) |     |     |   | 
|                                                                                                                |                                     | Deferred revenue                        |      |       | 0.2  |               |      |      | (0.1 | ) |      |       | 0.3  |   |     |     |   | 
|Days revenues outstanding in accounts receivable
    including unbilled receivables                             |                                     |                                         | 93   |       |      |               | 123  |      |      |   |      |       |      |   |     |    

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

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

Operating cash flows improved in 2004 primarily
as a result of improvements in gross profit from higher revenue.
Management believes that an important measure of cash flow from
operating results is

26



---



##### Table of Contents



a measure of adjusted operating income/(loss),
excluding non-cash charges. Management considers adjusted
operating income/(loss), excluding non-cash charges in addition
to, but not as a substitute for, earnings measured in accordance
with generally accepted accounting principles, because it is
indicative of the availability of discretionary funds and the
capacity to service debt. Adjusted operating income/(loss),
excluding non-cash charges is a non-GAAP financial measure,
which indicates the amount of cash generated from/(used in) the
operations of the business. The following table sets forth the
calculation of adjusted operating income/(loss), excluding
non-cash charges from our Consolidated Statements of Operations:


|                                                                 |                                                                                |      |      |      |  |   |      |     | 
|---------------------------------------------------------------- | ------------------------------------------------------------------------------ | ---- | ---- | ---- |  | - | ---- | --- | 
|($ in millions)                                                  |                                                                                | 2004 |      | 2003
|                                                                 |                                                                                |      |      |     
|Net loss                                                         |                                                                                | $    | (3.4 | )    |  | $ | (4.0 | )  
|Non-cash charges included in net loss:                           |                                                                                |      |      |      |  |   |      |    
|                                                                 | Depreciation and amortization of property and
    equipment                    |      |      | 1.7  |  |   |      | 1.6 | 
|                                                                 | Non-cash stock compensation expense                                            |      |      | 0.4  |  |   |      | 0.4 | 
|                                                                 | Amortization of acquired intangible assets                                     |      |      | 0.5  |  |   |      | 0.1 | 
|                                                                 | Amortization of software development costs                                     |      |      | 0.1  |  |   |      | 1.0 | 
|                                                                 | Amortization of deferred debt discount, financing
    fees and commitment fees |      |      | 0.5  |  |   |      |    | 
|                                                                 |                                                                                |      |      |      |  |   |      |    
|Adjusted operating income/(loss), excluding
    non-cash charges |                                                                                | $    | (0.2 | )    |  | $ | (0.9 | )  
|                                                                 |                                                                                |      |      |      |  |   |      |    

The favorable change in adjusted operating
income/(loss) in 2004 was $0.7 million, lowering the need for
net cash expenditures.

Net cash used in investing activities increased
in 2004 from 2003 primarily related to the acquisition of the
Enterprise segment which was consummated in January, somewhat
offset by a reduction in the amount of capitalized software
development costs. In 2004, the total cash used for the purchase
of property and equipment and development of our software
products was $2.0 million while they were $2.4 million
in 2003. The decline in 2004 is primarily due to completion of
certain software development projects that were under
development in prior years. Property and equipment purchases
include equipment and software costs required for our network
operations center including the cost of leasehold improvements
related to the move into new office space, our software
development efforts, and our corporate administrative support.

Net cash provided by financing activities
increased in 2004 from previous year levels as we secured
$21.0 million in financing to fund our acquisition of the
Enterprise segment. This amount was somewhat offset by financing
fees of $1.1 million paid to secure such funding.
Additionally, we received $2.5 million under the terms of a note
payable, principally to fund capital expenditure needs while
meeting our commitment to repay lease and long-term debt
obligations.

Under our bank credit agreement, we can borrow an
amount equal to up to 80% of receivables less than 90 days
old. The line of credit is secured by accounts receivable and
bears interest at the prime rate plus 1.25% for equipment loans
and at the prime rate plus 1.0% for all other loans, with a
minimum prime rate of 4.25% (borrowing rates of 5.5% and 5.25%,
respectively, at March 31, 2004). As part of this
agreement, we have borrowed $2.5 million as an equipment
loan, secured by purchased equipment, for a term of three years.
The equipment loan was drawn in full at March 31, 2004. As
of March 31, 2004, we had $4.3 million available and
unused under the revolving line of credit, and as of May 7,
2004, there were no borrowings other than the term loan
outstanding under the bank agreement. The line of credit will
expire in April 2006.

On January 13, 2004, we consummated the
purchase, with an effective date of January 1, 2004, of the
Enterprise Mobility Solutions division of Aether Systems, Inc.
Consideration for the acquisition was valued at approximately
$20 million, consisting of $18.1 million in cash,
$1 million in the form of a note payable and 204,020 newly
issued shares of Class A Common Stock. Concurrent with the
acquisition, we closed on $21.0 million of financing with
two accredited institutional investors, which

27



---



##### Table of Contents



included a subordinated convertible debenture
with stated principal of $15 million, bearing interest at a
stated rate of 3% per annum and due in lump sum on
January 13, 2009 in cash or shares of our Class A
Common Stock at the option of the Company, approximately
1.4 million newly issued shares of our Class A Common
Stock and warrants to purchase 341,072 shares of our
Class A Common Stock at a strike price of $6.50 per share,
expiring in January 2007. The majority of the proceeds from this
financing transaction was used to fund the purchase of the
acquired assets.


Off-Balance Sheet Arrangements

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

Commitments

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

|                                   |  |      |      |           |  |           |      |        |  |       |     |  |  |   |      |  |  |   |      | 
|---------------------------------- |  | ---- | ---- | --------- |  | --------- | ---- | ------ |  | ----- | --- |  |  | - | ---- |  |  | - | ---- | 
|($ in millions)                    |  | 2004 |      | 20052006 |  | 20072008 |      | Beyond |  | Total
|                                   |  |      |      |           |  |           |      |        |  |      
|Notes payable                      |  | $    | 5.9  |           |  | $         | 7.9  |        |  | $     |    |  |  | $ |     |  |  | $ | 13.8 | 
|Convertible subordinated debenture |  |      |     |           |  |           |     |        |  |       |    |  |  |   | 15.0 |  |  |   | 15.0 | 
|Capital lease obligations          |  |      | 1.8  |           |  |           | 1.4  |        |  |       | 0.1 |  |  |   |     |  |  |   | 3.3  | 
|Operating leases                   |  |      | 2.9  |           |  |           | 4.0  |        |  |       | 3.2 |  |  |   | 2.4  |  |  |   | 12.5 | 
|                                   |  |      |      |           |  |           |      |        |  |       |     |  |  |   |      |  |  |   |      | 
|                                   |  | $    | 10.6 |           |  | $         | 13.3 |        |  | $     | 3.3 |  |  | $ | 17.4 |  |  | $ | 44.6 | 
|                                   |  |      |      |           |  |           |      |        |  |       |     |  |  |   |      |  |  |   |      | 

Related Party Transactions

The leases for substantially all of our
Annapolis, Maryland office facilities, including our principal
executive office, will expire in early 2005. We have begun
planning for facilities needs thereafter, including entering an
agreement with Annapolis Partners LLC to explore the opportunity
of relocating our Annapolis offices to a planned new real estate
development. Our President and Chief Executive Officer owns a
controlling voting and economic interest in Annapolis Partners
LLC and he also serves as a member. The financial and many other
terms of the lease have not yet been established. The lease is
subject to several contingencies and rights of termination. For
example, the lease can be terminated at the sole discretion of
our Board of Directors if the terms and conditions of the
development are unacceptable to us, including without limitation
the circumstances that market conditions make the lease not
favorable to us or the overall cost is not in the best interest
of us or our shareholders, or any legal or regulatory
restrictions apply. Our Board of Directors will evaluate this
opportunity along with alternatives that are or may become
available in the relevant time periods and there is no assurance
that we will enter into a definitive lease at this new
development site.

28



---



##### Table of Contents








|        |                                                               
|------- | --------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures
    About Market Risk

Interest Rate Risk

We have limited exposure to financial market
risks, including changes in interest rates. In July 2003, we
extended our bank agreement for a $15.0 million line of
credit. The line of credit is secured by accounts receivable and
bears an interest rate of prime plus 1.25% for equipment loans
and an interest rate of prime plus 1.0% for all other loans,
with a minimum prime rate of 4.25% (borrowing rates of 5.5% and
5.25%, respectively, at March 31, 2004). As of
March 31, 2004, we had $4.3 million available and
unused under the line of credit. As of May 3, 2004,
$2.2 million was outstanding under the terms of an
equipment loan that was secured by purchased equipment, bearing
interest at 5.5% and payable monthly through December 2006. A
hypothetical 100 basis point adverse movement (decrease) in
the prime rate would have increased our net loss for the three
month period ending March 31, 2004 by approximately $7,000,
resulting in no significant impact on our consolidated financial
position, results of operations or cash flows.

During the three months ended 2004, we borrowed
approximately $2.6 million, primarily to fund equipment
purchases. The debt bears interest at a fixed rate of 7.75%. We
did not borrow any funds during the comparable period of 2003.

At March 31, 2004, we had cash and cash
equivalents of $19.9 million. Cash and cash equivalents
consisted of demand deposits and money market accounts that are
interest rate sensitive. However, these investments have short
maturities mitigating their sensitivity to interest rates. A
hypothetical 100 basis point adverse movement (decrease) in
interest rates would have increased our net loss for the three
month period ending March 31, 2004 by approximately
$50,000, resulting in no significant impact on our consolidated
financial position, results of operations or cash flows.

Foreign Currency Risk

We have contracted for the sale of our products
and services in British Pounds Sterling. As of March 31,
2004, we had approximately $0.6 million in accounts
receivable and $2.2 million in unbilled receivables that
are exposed to foreign currency exchange risk. We record
transaction gains or losses as a component of other
(expense)/income in our Consolidated Statements of Operations.

The Enterprise segment acquired in January 2004
has international subsidiaries that operate throughout Europe in
currencies other than U.S. dollars. These subsidiaries prepare
financial statements in currencies other than the U.S. dollar.
Results of operations and cash flows are translated at average
exchange rates during the period, and assets and liabilities are
translated at end-of-period exchange rates. Translation
adjustments arising from fluctuations in foreign exchange rates
for these subsidiaries are included as a separate component of
accumulated other comprehensive loss in stockholders
equity.

Other than the newly acquired international
subsidiaries, there have not been any material changes to our
foreign currency risk as described in Item 7A of our 2003
Annual Report on Form 10-K.






|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures

As of the end of the period ending March 31,
2004, the Company carried out an evaluation, under the
supervision and with the participation of the Companys
management, including the Companys Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design
and operation of the Companys disclosure controls and
procedures pursuant to Rule 13a-15(e) under the Securities
Exchange Act of 1934, as amended. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer
concluded that the Companys disclosure controls and
procedures are effective in timely alerting them to material
information relating to the Company required to be included in
the Companys periodic SEC filings. There have been no
significant changes in the Companys internal controls or
in other factors which could significantly affect internal
controls subsequent to the date the Company carried out its
evaluation.

29



---



##### Table of Contents






PART II.  OTHER INFORMATION




Item 1.     Legal
Proceedings

In November 2001, a shareholder class action
lawsuit was filed against us, certain of our current officers
and a director, and several investment banks that were the
underwriters of our initial public offering (the
Underwriters): Highstein v. Telecommunication
Systems, Inc., et al., United States District Court for the
Southern District of New York, Civil Action No.01-CV-9500. The
plaintiffs seek an unspecified amount of damages. The lawsuit
purports to be a class action suit filed on behalf of purchasers
of our common stock during the period August 8, 2000
through December 6, 2000. The plaintiffs allege that the
Underwriters agreed to allocate common stock offered for sale in
our initial public offering to certain purchasers in exchange
for excessive and undisclosed commissions and agreements by
those purchasers to make additional purchases of common stock in
the aftermarket at pre-determined prices. The plaintiffs allege
that all of the defendants violated Sections 11,12 and 15
of the Securities Act of 1933, as amended, and that the
underwriters violated Section 10(b) of the Securities
Exchange Act of 1934, as amended, and Rule 10b-5
promulgated thereunder. The claims against us of violation of
Rule 10b-5 have been dismissed with the plaintiffs having
the right to re-plead. We 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.

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




Item 2.     Changes
in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities

None.




Item 3.     Defaults
Upon Senior Securities

None.




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

None.




Item 5.     Other
Information

(a) None

(b) None.

30



---



##### Table of Contents






Item 6.     Exhibits
and Reports on Form 8-K

(a) Exhibits.

|        |      |             |  |                                                                                                                                
|------- | ---- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |            
|Numbers |      | Description
|        |      |            
|        | 31.1 |             |  | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 302 of
    the Sarbanes-Oxley Act of 2002.
|        | 31.2 |             |  | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 302 of
    the Sarbanes-Oxley Act of 2002.
|        | 32.1 |             |  | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.
|        | 32.2 |             |  | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K.

On January 23, 2004, we filed a
Form 8-K attaching a press release relating to the
Registrants acquisition of the Enterprise Mobility
Solutions business unit of Aether Systems, Inc.

On March 29, 2004, we filed a Form 8-K
containing the required financial statements and exhibits
relating to the acquisition of the Enterprise Mobility Solutions
business unit.

31



---



##### Table of Contents






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 on the
14th day of May 2004.



| |                                
| | -------------------------------
| | TELECOMMUNICATION SYSTEMS, INC.



| |     |                    
| | --- | -------------------
| | By: | /s/ MAURICE B. TOSÉ

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

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

|                                                                |  |                                                                                        
|--------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------
|/s/ MAURICE B. TOSÉMaurice B. Tosé
    May 14, 2004             |  | Chairman, President and Chief Executive
    Officer
    (Principal Executive Officer)  
|                                                               
|/s/ THOMAS M. BRANDT, JR.Thomas M. Brandt, Jr.
    May 14, 2004 |  | Senior Vice President and Chief Financial
    Officer
    (Principal Financial Officer)

32