##### 









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 September 30,
    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 October 31, 
|Title of Each Class                                 |  | 2004              
|                                                    |  |                   
|Class A Common Stock, par value
    $0.01 per share |  |                    | 27,412,945 | 
|Class B Common Stock, par value
    $0.01 per share |  |                    | 8,529,101  | 
|                                                    |  |                    |            | 
|Total Common Stock Outstanding                      |  |                    | 35,942,046 | 
|                                                    |  |                    |            | 



---








---



##### 



INDEX

TELECOMMUNICATION SYSTEMS, INC.

|                              |  |            |  |                                                                                                            |    |      |    | 
|----------------------------- |  | ---------- |  | ---------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                              |  |            |  |                                                                                                            |    | Page
|                              |  |            |  |                                                                                                            |    |     
|PART I. FINANCIAL INFORMATION |  |            |  |                                                                                                           
|                              |  | Item 1.    |  | Financial Statements (Unaudited)                                                                           |    |      |    | 
|                              |  |            |  | Consolidated Statements of Operations for the
    three- and nine-months ended September 30, 2004 and 2003 |    |      | 3  | 
|                              |  |            |  | Consolidated Balance Sheets as of
    September 30, 2004 and December 31, 2003                             |    |      | 4  | 
|                              |  |            |  | Consolidated Statement of Stockholders
    Equity for the nine-months ended September 30, 2004            |    |      | 5  | 
|                              |  |            |  | Consolidated Statements of Cash Flows for the
    nine-months ended September 30, 2004 and 2003            |    |      | 6  | 
|                              |  |            |  | Notes to Consolidated Financial Statements                                                                 |    |      | 7  | 
|                              |  | Item 2.    |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations                  |    |      | 18 | 
|                              |  | Item 3.    |  | Quantitative and Qualitative Disclosures About
    Market Risk                                             |    |      | 33 | 
|                              |  | Item 4.    |  | Controls and Procedures                                                                                    |    |      | 34 | 
|PART II. OTHER INFORMATION    |  |            |  |                                                                                                           
|                              |  | Item 1.    |  | Legal Proceedings                                                                                          |    |      | 35 | 
|                              |  | Item 2.    |  | Unregistered Sales of Equity Securities and Use
    of Proceeds                                            |    |      | 35 | 
|                              |  | Item 3.    |  | Defaults Upon Senior Securities                                                                            |    |      | 35 | 
|                              |  | Item 4.    |  | Submission of Matters to a Vote of Security
    Holders                                                    |    |      | 35 | 
|                              |  | Item 5.    |  | Other Information                                                                                          |    |      | 36 | 
|                              |  | Item 6.    |  | Exhibits                                                                                                   |    |      | 36 | 
|                              |  | SIGNATURES |  |                                                                                                            | 37 |     





---



##### 



TeleCommunication Systems, Inc.

Consolidated Statements of
Operations

(amounts in thousands, except per share
data)


(unaudited)


|                                                        |                                                                                                                                                    |                               |                                    |                   |       |        |        |        |       |        |        |        |       |         |         |        |       |        | 
|------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------- | ---------------------------------- | ----------------- | ----- | ------ | ------ | ------ | ----- | ------ | ------ | ------ | ----- | ------- | ------- | ------ | ----- | ------ | 
|                                                        |                                                                                                                                                    |                               |                                    |                  
|                                                        |                                                                                                                                                    | Three months ended            |                                    | Nine months ended
|                                                        |                                                                                                                                                    | September 30,                 |                                    | September 30,    
|                                                        |                                                                                                                                                    |                               |                                    |                  
|                                                        |                                                                                                                                                    | 2004                          |                                    | 2003              |       | 2004   |        | 2003  
|                                                        |                                                                                                                                                    |                               |                                    |                   |       |        |        |       
|Revenue:                                                |                                                                                                                                                    |                               |                                    |                   |       |        |        |        |       |        |        |        |       |         |         |       
|                                                        | Service bureau and subscriber                                                                                                                      |                               | $                                  | 19,368            |       |        | $      | 8,832  |       |        | $      | 60,207 |       |         | $       | 24,697 |      
|                                                        | Software systems:                                                                                                                                  |                               |                                    |                   |       |        |        |        |       |        |        |        |       |         |         |        |      
|                                                        |                                                                                                                                                    | Software licenses             |                                    |                   | 1,358 |        |        |        | 2,177 |        |        |        | 8,862 |         |         |        | 5,432 |       
|                                                        |                                                                                                                                                    | Software systems and services |                                    |                   | 3,723 |        |        |        | 1,563 |        |        |        | 9,821 |         |         |        | 4,196 |       
|                                                        |                                                                                                                                                    |                               |                                    |                   |       |        |        |        |       |        |        |        |       |         |         |       
|                                                        | Software systems total                                                                                                                             |                               |                                    | 5,081             |       |        |        | 3,740  |       |        |        | 18,683 |       |         |         | 9,628  |      
|                                                        | Network solutions                                                                                                                                  |                               |                                    | 13,588            |       |        |        | 15,675 |       |        |        | 32,351 |       |         |         | 33,294 |      
|                                                        |                                                                                                                                                    |                               |                                    |                   |       |        |        |        |       |        |        |        |       |         |         |       
|                                                        |                                                                                                                                                    |                               | Total revenue                      |                   |       | 38,037 |        |        |       | 28,247 |        |        |       | 111,241 |         |        |       | 67,619 | 
|Direct costs of revenue:                                |                                                                                                                                                    |                               |                                    |                   |       |        |        |        |       |        |        |        |       |         |         |       
|                                                        | Direct cost of service bureau and subscriber
    revenue                                                                                           |                               |                                    | 11,959            |       |        |        | 4,138  |       |        |        | 37,944 |       |         |         | 12,105 |      
|                                                        | Direct cost of software systems revenue,
    including amortization of software development costs of $77,
    $123, $403, and $8,927, respectively |                               |                                    | 3,652             |       |        |        | 1,909  |       |        |        | 9,585  |       |         |         | 13,750 |      
|                                                        | Direct cost of network solutions revenue                                                                                                           |                               |                                    | 9,292             |       |        |        | 10,501 |       |        |        | 20,537 |       |         |         | 22,353 |      
|                                                        |                                                                                                                                                    |                               |                                    |                   |       |        |        |        |       |        |        |        |       |         |         |       
|                                                        |                                                                                                                                                    |                               | Total direct costs of revenue      |                   |       | 24,903 |        |        |       | 16,548 |        |        |       | 68,066  |         |        |       | 48,208 | 
|                                                        | Service bureau and subscriber gross profit                                                                                                         |                               |                                    | 7,409             |       |        |        | 4,694  |       |        |        | 22,263 |       |         |         | 12,592 |      
|                                                        | Software systems gross profit/(loss)                                                                                                               |                               |                                    | 1,429             |       |        |        | 1,831  |       |        |        | 9,098  |       |         |         | (4,122 | )    
|                                                        | Network solutions gross profit                                                                                                                     |                               |                                    | 4,296             |       |        |        | 5,174  |       |        |        | 11,814 |       |         |         | 10,941 |      
|                                                        |                                                                                                                                                    |                               |                                    |                   |       |        |        |        |       |        |        |        |       |         |         |       
|                                                        |                                                                                                                                                    |                               | Total gross profit                 |                   |       | 13,134 |        |        |       | 11,699 |        |        |       | 43,175  |         |        |       | 19,411 | 
|Operating costs and expenses:                           |                                                                                                                                                    |                               |                                    |                   |       |        |        |        |       |        |        |        |       |         |         |       
|                                                        | Research and development expense                                                                                                                   |                               |                                    | 4,798             |       |        |        | 4,109  |       |        |        | 14,399 |       |         |         | 12,688 |      
|                                                        | Sales and marketing expense                                                                                                                        |                               |                                    | 3,080             |       |        |        | 2,068  |       |        |        | 9,593  |       |         |         | 6,674  |      
|                                                        | General and administrative expense                                                                                                                 |                               |                                    | 5,121             |       |        |        | 2,725  |       |        |        | 14,374 |       |         |         | 8,335  |      
|                                                        | Non-cash stock compensation expense (see detail
    below)                                                                                         |                               |                                    | 247               |       |        |        | 412    |       |        |        | 950    |       |         |         | 1,174  |      
|                                                        | Depreciation and amortization of property and
    equipment                                                                                        |                               |                                    | 2,015             |       |        |        | 1,710  |       |        |        | 5,659  |       |         |         | 4,945  |      
|                                                        | Amortization of acquired intangible assets                                                                                                         |                               |                                    | 532               |       |        |        | 138    |       |        |        | 1,596  |       |         |         | 415    |      
|                                                        |                                                                                                                                                    |                               |                                    |                   |       |        |        |        |       |        |        |        |       |         |         |       
|                                                        |                                                                                                                                                    |                               | Total operating costs and expenses |                   |       | 15,793 |        |        |       | 11,162 |        |        |       | 46,571  |         |        |       | 34,231 | 
|                                                        |                                                                                                                                                    |                               |                                    |                   |       |        |        |        |       |        |        |        |       |         |         |       
|(Loss)/income from operations                           |                                                                                                                                                    |                               | (2,659                             | )                 |       |        | 537    |        |       |        | (3,396 | )      |       |         | (14,820 | )     
|Interest expense                                        |                                                                                                                                                    |                               | (665                               | )                 |       |        | (282   | )      |       |        | (2,329 | )      |       |         | (774    | )     
|Other income/(expense), net                             |                                                                                                                                                    |                               | 79                                 |                   |       |        | 251    |        |       |        | (103   | )      |       |         | 660     |       
|                                                        |                                                                                                                                                    |                               |                                    |                   |       |        |        |        |       |        |        |        |       |         |         |       
|Net (loss)/income                                       |                                                                                                                                                    | $                             | (3,245                             | )                 |       | $      | 506    |        |       | $      | (5,828 | )      |       | $       | (14,934 | )     
|                                                        |                                                                                                                                                    |                               |                                    |                   |       |        |        |        |       |        |        |        |       |         |         |       
|(Loss)/earnings per share  basic                       |                                                                                                                                                    | $                             | (0.10                              | )                 |       | $      | 0.02   |        |       | $      | (0.18  | )      |       | $       | (0.50   | )     
|                                                        |                                                                                                                                                    |                               |                                    |                   |       |        |        |        |       |        |        |        |       |         |         |       
|(Loss)/earnings per share  diluted                     |                                                                                                                                                    | $                             | (0.10                              | )                 |       | $      | 0.02   |        |       | $      | (0.18  | )      |       | $       | (0.50   | )     
|                                                        |                                                                                                                                                    |                               |                                    |                   |       |        |        |        |       |        |        |        |       |         |         |       
|Weighted average shares outstanding 
    basic         |                                                                                                                                                    |                               | 33,587                             |                   |       |        | 29,802 |        |       |        | 32,683 |        |       |         | 29,661  |       
|Weighted average shares outstanding 
    diluted       |                                                                                                                                                    |                               | 33,587                             |                   |       |        | 32,668 |        |       |        | 32,683 |        |       |         | 29,661  |       
|                                                       
|Composition of non-cash stock compensation
    expense: |                                                                                                                                                    |                               |                                    |                   |       |        |        |        |       |        |        |        |       |         |         |       
|                                                        | Direct costs of revenue                                                                                                                            |                               | $                                  | 9                 |       |        | $      | 23     |       |        | $      | 44     |       |         | $       | 76     |      
|                                                        | Research and development expense                                                                                                                   |                               |                                    | 28                |       |        |        | 62     |       |        |        | 114    |       |         |         | 212    |      
|                                                        | Sales and marketing expense                                                                                                                        |                               |                                    | 10                |       |        |        | 49     |       |        |        | 46     |       |         |         | 168    |      
|                                                        | General and administrative expense                                                                                                                 |                               |                                    | 200               |       |        |        | 278    |       |        |        | 746    |       |         |         | 718    |      
|                                                        |                                                                                                                                                    |                               |                                    |                   |       |        |        |        |       |        |        |        |       |         |         |       
|                                                        | Total non-cash stock compensation expense                                                                                                          |                               | $                                  | 247               |       |        | $      | 412    |       |        | $      | 950    |       |         | $       | 1,174  |      
|                                                        |                                                                                                                                                    |                               |                                    |                   |       |        |        |        |       |        |        |        |       |         |         |       

See accompanying Notes to Consolidated Financial
Statements

3



---



##### 



TeleCommunication Systems, Inc.

Consolidated Balance Sheets

(amounts in thousands, except share
data)


|                                                                                                                        |                                                                              |                                                                                                                     |                                            |              |     |         |        |          |     |        | 
|----------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------ | --- | ------- | ------ | -------- | --- | ------ | 
|                                                                                                                        |                                                                              | September 30,                                                                                                       |                                            | December 31,
|                                                                                                                        |                                                                              | 2004                                                                                                                |                                            | 2003        
|                                                                                                                        |                                                                              |                                                                                                                     |                                            |             
|                                                                                                                        |                                                                              | (unaudited)                                                                                                         |                                            |             
|Assets                                                                                                                  |                                                                              |                                                                                                                     |                                            |              |     |         |        |         
|Current assets:                                                                                                         |                                                                              |                                                                                                                     |                                            |              |     |         |        |         
|                                                                                                                        | Cash and cash equivalents                                                    |                                                                                                                     | $                                          | 14,985       |     |         | $      | 18,785   |    
|                                                                                                                        | Accounts receivable, net of allowance of $1,632
    in 2004 and $393 in 2003 |                                                                                                                     |                                            | 28,930       |     |         |        | 20,208   |    
|                                                                                                                        | Unbilled receivables                                                         |                                                                                                                     |                                            | 13,621       |     |         |        | 8,862    |    
|                                                                                                                        | Inventory                                                                    |                                                                                                                     |                                            | 3,386        |     |         |        | 451      |    
|                                                                                                                        | Other current assets                                                         |                                                                                                                     |                                            | 4,678        |     |         |        | 1,915    |    
|                                                                                                                        |                                                                              |                                                                                                                     |                                            |              |     |         |        |         
|                                                                                                                        |                                                                              |                                                                                                                     | Total current assets                       |              |     | 65,600  |        |          |     | 50,221 | 
|Property and equipment, net of accumulated
    depreciation and amortization of $26,584 in 2004 and $20,925 in
    2003 |                                                                              |                                                                                                                     | 16,917                                     |              |     |         | 11,449 |         
|Software development costs, net of accumulated
    amortization of $1,157 in 2004 and $754 in 2003                      |                                                                              |                                                                                                                     | 2,985                                      |              |     |         | 518    |         
|Acquired intangible assets, net of accumulated
    amortization of $1,596 in 2004                                       |                                                                              |                                                                                                                     | 6,411                                      |              |     |         |       |         
|Goodwill                                                                                                                |                                                                              |                                                                                                                     | 15,563                                     |              |     |         |       |         
|Other assets                                                                                                            |                                                                              |                                                                                                                     | 2,531                                      |              |     |         | 3,092  |         
|                                                                                                                        |                                                                              |                                                                                                                     |                                            |              |     |         |        |         
|                                                                                                                        |                                                                              |                                                                                                                     | Total assets                               |              | $   | 110,007 |        |          | $   | 65,280 | 
|                                                                                                                        |                                                                              |                                                                                                                     |                                            |              |     |         |        |         
|                                                                                                                       
|Liabilities and stockholders
    equity                                                                                |                                                                              |                                                                                                                     |                                            |              |     |         |        |         
|Current liabilities:                                                                                                    |                                                                              |                                                                                                                     |                                            |              |     |         |        |         
|                                                                                                                        | Accounts payable and accrued expenses                                        |                                                                                                                     | $                                          | 15,466       |     |         | $      | 8,817    |    
|                                                                                                                        | Accrued payroll and related liabilities                                      |                                                                                                                     |                                            | 4,228        |     |         |        | 3,331    |    
|                                                                                                                        | Deferred revenue                                                             |                                                                                                                     |                                            | 5,649        |     |         |        | 1,683    |    
|                                                                                                                        | Current portion of notes payable                                             |                                                                                                                     |                                            | 11,662       |     |         |        | 5,698    |    
|                                                                                                                        | Current portion of capital lease obligations                                 |                                                                                                                     |                                            | 2,498        |     |         |        | 2,154    |    
|                                                                                                                        |                                                                              |                                                                                                                     |                                            |              |     |         |        |         
|                                                                                                                        |                                                                              |                                                                                                                     | Total current liabilities                  |              |     | 39,503  |        |          |     | 21,683 | 
|Capital lease obligations and notes payable, less
    current portion                                                   |                                                                              |                                                                                                                     | 5,409                                      |              |     |         | 6,746  |         
|Convertible subordinated debentures, net of
    discount of $5,804 in 2004                                              |                                                                              |                                                                                                                     | 9,196                                      |              |     |         |       |         
|Stockholders equity:                                                                                                   |                                                                              |                                                                                                                     |                                            |              |     |         |        |         
|                                                                                                                        | Class A Common Stock; $0.01 par value:                                       |                                                                                                                     |                                            |              |     |         |        |          |    
|                                                                                                                        |                                                                              | Authorized shares  225,000,000; issued
    and outstanding shares of 27,252,986 in 2004 and 22,062,974 in
    2003 |                                            |              | 273 |         |        |          | 221 |       
|                                                                                                                        | Class B Common Stock; $0.01 par value:                                       |                                                                                                                     |                                            |              |     |         |        |          |    
|                                                                                                                        |                                                                              | Authorized shares  75,000,000; issued
    and outstanding shares of 8,686,801 in 2004 and 9,363,688 in 2003        |                                            |              | 87  |         |        |          | 94  |       
|                                                                                                                        | Deferred compensation                                                        |                                                                                                                     |                                            | (932         | )   |         |        | (1,399   | )  
|                                                                                                                        | Additional paid-in capital                                                   |                                                                                                                     |                                            | 193,655      |     |         |        | 169,256  |    
|                                                                                                                        | Accumulated other comprehensive loss:                                        |                                                                                                                     |                                            |              |     |         |        |          |    
|                                                                                                                        |                                                                              | Cumulative foreign currency translation adjustment                                                                  |                                            |              | (35 | )       |        |          |    |       
|                                                                                                                        | Accumulated deficit                                                          |                                                                                                                     |                                            | (137,149     | )   |         |        | (131,321 | )  
|                                                                                                                        |                                                                              |                                                                                                                     |                                            |              |     |         |        |         
|                                                                                                                        |                                                                              |                                                                                                                     | Total stockholders equity                 |              |     | 55,899  |        |          |     | 36,851 | 
|                                                                                                                        |                                                                              |                                                                                                                     |                                            |              |     |         |        |         
|                                                                                                                        |                                                                              |                                                                                                                     | Total liabilities and stockholders equity |              | $   | 110,007 |        |          | $   | 65,280 | 
|                                                                                                                        |                                                                              |                                                                                                                     |                                            |              |     |         |        |         

See accompanying Notes to Consolidated Financial
Statements

4



---



##### 



TeleCommunication Systems, Inc.

Consolidated Statement 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
    460,656 shares of Class A Common Stock                                                                        |  |         | 5   |         |  |              |   |            |  |               |       |             |  |       | 963     |   |  |   |    |   |  |   |         |   |  |   | 968    |  
|Issuance of 57,454 shares of Class A
    Common Stock under Employee Stock Purchase Plan                                                                |  |         | 1   |         |  |              |   |            |  |               |       |             |  |       | 269     |   |  |   |    |   |  |   |         |   |  |   | 270    |  
|Issuance of 1,568,308 shares of Class A
    Common Stock in connection with the Enterprise acquisition and
    related financing, net of issuance costs |  |         | 16  |         |  |              |   |            |  |               |       |             |  |       | 8,366   |   |  |   |    |   |  |   |         |   |  |   | 8,382  |  
|Issuance of 2,500,000 shares of Class A
    Common Stock in connection with a private equity offering, net
    of issuance costs                        |  |         | 25  |         |  |              |   |            |  |               |       |             |  |       | 9,395   |   |  |   |    |   |  |   |         |   |  |   | 9,420  |  
|Issuance of 45,376 shares of Class A
    Common Stock for interest incurred on convertible subordinated
    debentures                                  |  |         |    |         |  |              |   |            |  |               |       |             |  |       | 210     |   |  |   |    |   |  |   |         |   |  |   | 210    |  
|Surrender of 79,563 restricted shares of
    Class A Common Stock as payment for payroll tax withholdings                                               |  |         | (1  | )       |  |              |   |            |  |               |       |             |  |       | (449    | ) |  |   |    |   |  |   |         |   |  |   | (450   | )
|Fair value of beneficial conversion feature of
    convertible subordinated debentures                                                                  |  |         |    |         |  |              |   |            |  |               |       |             |  |       | 3,662   |   |  |   |    |   |  |   |         |   |  |   | 3,662  |  
|Issuance of warrants to
    purchase 341,072 shares of Class A Common Stock                                                                             |  |         |    |         |  |              |   |            |  |               |       |             |  |       | 1,395   |   |  |   |    |   |  |   |         |   |  |   | 1,395  |  
|Conversion of 676,887 shares of Class B
    Common Stock to Class A Common Stock                                                                        |  |         | 6   |         |  |              | (6 | )          |  |               |       |             |  |       |        |   |  |   |    |   |  |   |         |   |  |   |       |  
|Stock compensation expense for issuance of
    Class A Common Stock options at below fair market value                                                  |  |         |    |         |  |              |   |            |  |               |       |             |  |       | 483     |   |  |   |    |   |  |   |         |   |  |   | 483    |  
|Amortization of deferred compensation expense                                                                                                           |  |         |    |         |  |              |   |            |  |               | 467    |             |  |       |        |   |  |   |    |   |  |   |         |   |  |   | 467    |  
|Change in value of options issued to
    non-employees for service                                                                                      |  |         |    |         |  |              |   |            |  |               |       |             |  |       | 105     |   |  |   |    |   |  |   |         |   |  |   | 105    |  
|Foreign currency translation adjustment                                                                                                                 |  |         |    |         |  |              |   |            |  |               |       |             |  |       |        |   |  |   | (35 | ) |  |   |         |   |  |   | (35    | )
|Net loss for the nine months ended
    September 30, 2004                                                                                               |  |         |    |         |  |              |   |            |  |               |       |             |  |       |        |   |  |   |    |   |  |   | (5,828   | ) |  |   | (5,828 | )
|                                                                                                                                                        |  |         |     |         |  |              |    |            |  |               |        |             |  |       |         |   |  |   |     |   |  |   |          |   |  |   |        |  
|Balance at September 30, 2004                                                                                                                           |  | $       | 273 |         |  | $            | 87 |            |  | $             | (932   | )           |  | $     | 193,655 |   |  | $ | (35 | ) |  | $ | (137,149 | ) |  | $ | 55,899 |  
|                                                                                                                                                        |  |         |     |         |  |              |    |            |  |               |        |             |  |       |         |   |  |   |     |   |  |   |          |   |  |   |        |  

See accompanying Notes to Consolidated Financial
Statements

5



---



##### 



TeleCommunication Systems, Inc.

Consolidated Statements of Cash
Flows

(amounts in thousands)


(unaudited)


|                                                                                                       |                                                                          |                                         |         |       |        |   |         |       |        |  
|------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------ | --------------------------------------- | ------- | ----- | ------ | - | ------- | ----- | ------ | -
|                                                                                                       |                                                                          |                                        
|                                                                                                       |                                                                          | Nine months ended                      
|                                                                                                       |                                                                          | September 30,                          
|                                                                                                       |                                                                          |                                        
|                                                                                                       |                                                                          | 2004                                    |         | 2003 
|                                                                                                       |                                                                          |                                         |         |      
|Operating activities:                                                                                  |                                                                          |                                         |         |       |        |   |         |      
|Net loss                                                                                               |                                                                          | $                                       | (5,828  | )     |        | $ | (14,934 | )    
|Adjustments to reconcile net loss to net cash
    used in operating activities:                        |                                                                          |                                         |         |       |        |   |         |      
|                                                                                                       | Depreciation and amortization of property and
    equipment              |                                         |         | 5,659 |        |   |         | 5,149 |       
|                                                                                                       | Amortization of acquired intangible assets                               |                                         |         | 1,596 |        |   |         | 415   |       
|                                                                                                       | Non-cash employee compensation expense                                   |                                         |         | 950   |        |   |         | 1,144 |       
|                                                                                                       | Amortization of software development costs                               |                                         |         | 403   |        |   |         | 8,927 |       
|                                                                                                       | Amortization of debt discount                                            |                                         |         | 893   |        |   |         |      |       
|                                                                                                       | Amortization of deferred financing fees included
    in interest expense |                                         |         | 328   |        |   |         | 111   |       
|                                                                                                       | Other non-cash expenses                                                  |                                         |         | 179   |        |   |         |      |       
|                                                                                                       | State of Maryland loan forgiveness                                       |                                         |         | (100  | )      |   |         | (100  | )     
|                                                                                                       | Changes in operating assets and liabilities:                             |                                         |         |       |        |   |         |       |       
|                                                                                                       |                                                                          | Accounts receivable, net                |         |       | (1,512 | ) |         |       | 1,503  |  
|                                                                                                       |                                                                          | Unbilled receivables                    |         |       | (4,759 | ) |         |       | (4,013 | )
|                                                                                                       |                                                                          | Inventory                               |         |       | (2,329 | ) |         |       |       |  
|                                                                                                       |                                                                          | Other current assets                    |         |       | (784   | ) |         |       | (1,288 | )
|                                                                                                       |                                                                          | Accounts payable and accrued expenses   |         |       | (2,255 | ) |         |       | (3,837 | )
|                                                                                                       |                                                                          | Accrued payroll and related liabilities |         |       | (138   | ) |         |       | 168    |  
|                                                                                                       |                                                                          | Deferred revenue                        |         |       | 1,162  |   |         |       | (580   | )
|                                                                                                       |                                                                          |                                         |         |       |        |   |         |      
|Net cash used in operating activities                                                                  |                                                                          |                                         | (6,535  | )     |        |   | (7,335  | )    
|Investing activities:                                                                                  |                                                                          |                                         |         |       |        |   |         |      
|Acquisitions, net of cash acquired                                                                     |                                                                          |                                         | (24,476 | )     |        |   |        |      
|Purchases of property and equipment                                                                    |                                                                          |                                         | (5,320  | )     |        |   | (3,345  | )    
|Change in other assets                                                                                 |                                                                          |                                         | 1,837   |       |        |   | (529    | )    
|Capitalized software development costs                                                                 |                                                                          |                                         |        |       |        |   | (1,865  | )    
|                                                                                                       |                                                                          |                                         |         |       |        |   |         |      
|Net cash used in investing activities                                                                  |                                                                          |                                         | (27,959 | )     |        |   | (5,739  | )    
|Financing activities:                                                                                  |                                                                          |                                         |         |       |        |   |         |      
|Payments on long-term debt and capital lease
    obligations                                           |                                                                          |                                         | (6,375  | )     |        |   | (3,840  | )    
|Proceeds from issuance of Class A Common
    Stock and Convertible subordinated debentures             |                                                                          |                                         | 29,970  |       |        |   |        |      
|Financing fees related to issuance of
    Class A Common Stock and Convertible subordinated debentures |                                                                          |                                         | (1,650  | )     |        |   |        |      
|Proceeds from draws on short-term line of credit,
    net                                              |                                                                          |                                         | 5,000   |       |        |   |        |      
|Proceeds from issuance of long-term debt                                                               |                                                                          |                                         | 2,500   |       |        |   | 5,266   |      
|Proceeds from exercise of employee stock options
    and sale of stock                                 |                                                                          |                                         | 1,238   |       |        |   | 372     |      
|                                                                                                       |                                                                          |                                         |         |       |        |   |         |      
|Net cash provided by financing activities                                                              |                                                                          |                                         | 30,683  |       |        |   | 1,798   |      
|                                                                                                       |                                                                          |                                         |         |       |        |   |         |      
|Net decrease in cash                                                                                   |                                                                          |                                         | (3,811  | )     |        |   | (11,276 | )    
|Effect of exchange rates on cash and cash
    equivalents                                              |                                                                          |                                         | 11      |       |        |   |        |      
|Cash and cash equivalents at the beginning of the
    period                                           |                                                                          |                                         | 18,785  |       |        |   | 27,402  |      
|                                                                                                       |                                                                          |                                         |         |       |        |   |         |      
|Cash and cash equivalents at the end of the
    period                                                 |                                                                          | $                                       | 14,985  |       |        | $ | 16,126  |      
|                                                                                                       |                                                                          |                                         |         |       |        |   |         |      

See accompanying Notes to Consolidated Financial
Statements

6



---



##### 



TeleCommunication Systems, Inc.

Notes to Consolidated Financial
Statements

September 30, 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
U.S. generally accepted accounting principles
(GAAP) 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 GAAP 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- and nine-month periods ended
September 30, 2004 are not necessarily indicative of the
results that may be expected for the year ending
December 31, 2004. These unaudited 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. (the Enterprise segment) in accordance with a
Purchase Agreement dated as of December 18, 2003 (the
Enterprise Acquisition). The operations for this
newly acquired segment have been included in the consolidated
financial statements as of January 1, 2004. All
intercompany balances and transactions have been eliminated.

Effective September 20, 2004, we acquired
substantially all of the assets of Kivera, Inc.
(Kivera) in accordance with a Purchase Agreement
dated as of August 31, 2004 (the Kivera
Acquisition). The operations for this newly acquired
business have been included in the consolidated financial
statements as of September 20, 2004. All intercompany
balances and transactions have been eliminated.

Use of Estimates.The preparation of financial statements in conformity with GAAP
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.

Inventory.We
maintain inventory of component parts and finished product for
certain SwiftLink® units. Additionally, we maintain
inventory in conjunction with the Enterprise segment. The
Enterprise inventory consists 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.

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.

7



---



##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

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

For costs incurred by the Company, amortization
is computed on a product-by-product basis using the
straight-line method over the products estimated useful
life, which is never greater than three years. Amortization is
also computed using the ratio that current revenue for the
product bears to the total of current and anticipated future
revenue for that product. If this revenue curve method results
in amortization greater than the amount computed using the
straight-line method, amortization is recorded at that greater
amount. Our policies to determine when to capitalize software
development costs and how much to amortize in a given period
require us to make subjective estimates and judgments. If our
software products do not achieve the level of market acceptance
that we expect and our future revenue estimates for these
products change, the amount of amortization that we record may
increase compared to prior periods. Amortization for acquired
technology is calculated using the ratio of the estimated future
cash flows generated in each period to the estimated total cash
flows to be contributed from each product.

The amortization of capitalized software
development costs has been recorded as a component of the direct
cost of software systems revenue in the accompanying
Consolidated Statement of Operations.

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

The intangible assets acquired in the Enterprise
Acquisition were determined to have useful lives of
3  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.

The intangible assets acquired in the Kivera
Acquisition were determined to have useful lives of
5  19 years, with a weighted-average useful
life of 7.3 years, based on the estimated cash flows to be
contributed from each asset. We expect the valuation of these
assets to be completed in the fourth quarter of 2004, and we
will amortize the assets using the straight-line method
beginning in the fourth quarter of 2004.

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

Other Comprehensive
Income/loss.Comprehensive income
includes changes in the equity of a business during a period
from transactions and other events and circumstances from
non-owner sources. Other comprehensive income/loss refers to
revenue, expenses, gains and losses that under generally
accepted accounting principles are included in comprehensive
income, but

8



---



##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

excluded from net income. For operations outside
the U.S. that prepare financial statements in currencies
other than the U.S. dollar, results of operations and cash
flows are translated at average exchange rates during the
period, and assets and liabilities are translated at
end-of-period exchange rates. Translation adjustments for our
international subsidiaries are included as a separate component
of accumulated other comprehensive loss in stockholders
equity.

Stock-Based Compensation and Deferred
Compensation.We have two stock-based
employee compensation plans, which are described more fully in
Note 9. We record compensation expense for all stock-based
compensation plans using the intrinsic value method prescribed
by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees(APB
No. 25) and related interpretations. Under APB
No. 25, compensation expense is recorded pro-rata over the
vesting period to the extent that the fair value of the
underlying stock on the date of grant exceeds the exercise or
acquisition price of the stock or stock-based award. The related
compensation constitutes portions of our direct cost of revenue,
research and development expense, sales and marketing expense,
and general and administrative expense as detailed in the table
presented with our Consolidated Statement of Operations.

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

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

Significant Accounting Policies Related to our
Newly Acquired Enterprise Segment:

Revenue.Our
Enterprise segment sells mobile office, mobile finance, and
mobile asset services and products to enterprise customers. We
derive revenues primarily from subscriber-based service fees,
device sales, installation, activation fees, software system,
and software services. Revenue from service fees, device sales,
and installation is recognized in the period earned. Revenue
from activation fees is recognized ratably over the determinable
portion of the customer contract, which is typically twelve
months. Software systems and services revenue is recognized in
accordance with our existing policy for software revenue as
described in our Annual Report on Form 10-K.



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

Effective January 1, 2004, we acquired the
Enterprise segment from Aether Systems, Inc. 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 BlackberryTM 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, we believe that we
have expanded our product offerings to both new and existing
customers, expanded international sales, and provided broader
technology and expertise to our customers.

The aggregate purchase price for the Enterprise
segment was approximately $22,406, consisting of cash payments
of $18,150, a note payable in the amount of $1,000, bearing
interest

9



---



##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

at the prime interest rate, and
204,020 shares of our Class A Common Stock, valued at
$1,056, based on the average closing price for the five days
immediately preceding the closing of the Enterprise Acquisition.
In addition, management expects to incur approximately $2,200 of
costs directly related to the acquisition. The total purchase
price has been allocated based on valuation procedures performed
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. The valuation has resulted
in the recognition of $13,802 of goodwill. This goodwill has
been allocated to the Enterprise segment, and we expect it to be
deductible for tax purposes.

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

|                                        |                   |   |        |        | 
|--------------------------------------- | ----------------- | - | ------ | ------ | 
|Assets:                                 |                   |   |        |       
|Cash                                    |                   | $ | 1,882  |       
|Accounts receivable, net                |                   |   | 7,047  |       
|Inventory                               |                   |   | 606    |       
|Other current assets                    |                   |   | 718    |       
|Property and equipment                  |                   |   | 750    |       
|Acquired software development costs     |                   |   | 287    |       
|Acquired intangible assets              |                   |   | 6,819  |       
|Goodwill                                |                   |   | 13,802 |       
|Other assets                            |                   |   | 30     |       
|                                        |                   |   |        |       
|                                        | Total assets      |   |        | 31,941 | 
|Liabilities:                            |                   |   |        |       
|Accounts payable and accrued expenses   |                   |   | 6,188  |       
|Accrued payroll and related liabilities |                   |   | 1,032  |       
|Deferred revenue                        |                   |   | 2,315  |       
|                                        |                   |   |        |       
|                                        | Total liabilities |   |        | 9,535  | 
|                                        |                   |   |        |       
|Net assets acquired                     |                   | $ | 22,406 |       
|                                        |                   |   |        |       

The following unaudited consolidated pro forma
results of operations of the Company for the three- and
nine-month periods ended September 30, 2003, gives effect
to the Enterprise Acquisition (which was effective as of
January 1, 2004) as though it had occurred on
January 1, 2003:

|                       |                   |                    |        |                    |   |   |         |       |  
|---------------------- | ----------------- | ------------------ | ------ | ------------------ | - | - | ------- | ----- | -
|                       |                   | Three months       |        | Nine months       
|                       |                   | Ended              |        | Ended             
|                       |                   | September 30, 2003 |        | September 30, 2003
|                       |                   |                    |        |                   
|Revenue                |                   | $                  | 41,746 |                    |   | $ | 108,792 |      
|Loss from operations   |                   |                    | (985   | )                  |   |   | (17,841 | )    
|Net loss               |                   |                    | (1,507 | )                  |   |   | (19,446 | )    
|                       |                   |                    |        |                    |   |   |         |      
|Loss per common share: |                   |                    |        |                    |   |   |         |      
|                       | Basic and diluted |                    | $      | (0.05              | ) |   | $       | (0.62 | )
|                       |                   |                    |        |                    |   |   |         |      

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

10



---



##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

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. | Kivera Acquisition

On September 20, 2004, we acquired
substantially all of the assets of Kivera, Inc., a provider of
internet-based location application software and geo-data
professional services for approximately $5,500 in cash. In
addition, management expects to incur approximately $10 of costs
directly related to the acquisition. This step provided a
buy-vs.-build opportunity for the Company, as Kiveras
software platform integrates easily with existing wireless
carrier network elements and location platforms. Kiveras
technology can interoperate with our Xypoint® Location
Platform (XLP).

The purchase price has been preliminarily
allocated to the assets acquired and liabilities, assumed,
pending the completion of a final valuation and purchase price
allocation. We expect to have the valuation completed during
2004. The preliminary purchase price allocation has resulted in
the excess purchase price over net assets acquired being
allocated to goodwill.

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

|                                      |                   |   |       |       | 
|------------------------------------- | ----------------- | - | ----- | ----- | 
|Assets:                               |                   |   |       |      
|Accounts receivable, net              |                   | $ | 156   |      
|Other current assets                  |                   |   | 182   |      
|Property and equipment                |                   |   | 216   |      
|Acquired software development costs   |                   |   | 2,583 |      
|Acquired intangible assets            |                   |   | 1,188 |      
|Goodwill                              |                   |   | 1,761 |      
|Other assets                          |                   |   | 70    |      
|                                      |                   |   |       |      
|                                      | Total assets      |   |       | 6,156 | 
|                                      |                   |   |       |      
|Liabilities:                          |                   |   |       |      
|Accounts payable and accrued expenses |                   |   | 164   |      
|Deferred revenue                      |                   |   | 482   |      
|                                      |                   |   |       |      
|                                      | Total liabilities |   |       | 646   | 
|                                      |                   |   |       |      
|Net assets acquired                   |                   | $ | 5,510 |      
|                                      |                   |   |       |      

The Consolidated Balance Sheet as of
September 30, 2004 reflects this preliminary allocation.
The Kivera operations have been included in our consolidated
results of operations as of September 20, 2004. The pro
forma statement of operations information is omitted because the
Kivera Acquisition did not have a significant impact on our
results of operations or loss per share attributable to common
stockholders for the periods ended September 30, 2004 and
2003.



|   |                                                     
|-- | ----------------------------------------------------
|4. | Supplemental Disclosure of Cash Flow
    Information

Property and equipment acquired under capital
leases totaled $3,176 during the three months ended
September 30, 2004. We did not acquire any property and
equipment under capital leases during the three months ended
September 30, 2003. Property and equipment acquired under
capital leases totaled $4,841 and $179 during the nine months
ended September 30, 2004 and 2003, respectively.

11



---



##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

Interest paid totaled $337 and $236 during the
three months ended September 30, 2004 and 2003,
respectively, and $898 and $728 during the nine months ended
September 30, 2004 and 2003, respectively.



|   |                    
|-- | -------------------
|5. | Segment Information

Subsequent to the Enterprise Acquisition in
January 2004, we realigned 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 offers 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 non-cash stock compensation expense, which
under GAAP, is considered in determining gross profit. We have
restated prior period segment information for comparative
purposes.

|                              |                               |                                       |       |                                      |        |            |        |       |        |         |       |            |        |            |        |       |        |   |        |       |        |   |        |   |        |   |        |       |        |   |        |       |         | 
|----------------------------- | ----------------------------- | ------------------------------------- | ----- | ------------------------------------ | ------ | ---------- | ------ | ----- | ------ | ------- | ----- | ---------- | ------ | ---------- | ------ | ----- | ------ | - | ------ | ----- | ------ | - | ------ | - | ------ | - | ------ | ----- | ------ | - | ------ | ----- | ------- | 
|                              |                               |                                       |       |                                     
|                              |                               | Three months ended September 30, 2004 |       | Nine months ended September 30, 2004
|                              |                               |                                       |       |                                     
|                              |                               | Wireless                              |       |                                      |        | Wireless   |        |      
|                              |                               | Carrier                               |       | Government                           |        | Enterprise |        | Total |        | Carrier |       | Government |        | Enterprise |        | Total
|                              |                               |                                       |       |                                      |        |            |        |       |        |         |       |            |        |            |        |      
|Revenue:                      |                               |                                       |       |                                      |        |            |        |       |        |         |       |            |        |            |        |       |        |   |        |       |        |   |        |   |        |   |        |       |        |   |        |      
|Service bureau and subscriber |                               | $                                     | 9,383 |                                      |        | $          |       |       |        | $       | 9,985 |            |        | $          | 19,368 |       |        | $ | 28,078 |       |        | $ |       |   |        | $ | 32,129 |       |        | $ | 60,207 |      
|Software systems:             |                               |                                       |       |                                      |        |            |        |       |        |         |       |            |        |            |        |       |        |   |        |       |        |   |        |   |        |   |        |       |        |   |        |      
|                              | Software licenses             |                                       |       | 1,238                                |        |            |        |      |        |         |       | 120        |        |            |        | 1,358 |        |   |        | 8,681 |        |   |        |  |        |   |        | 181   |        |   |        | 8,862 |        
|                              | Software systems and services |                                       |       | 2,381                                |        |            |        |      |        |         |       | 1,342      |        |            |        | 3,723 |        |   |        | 6,706 |        |   |        |  |        |   |        | 3,115 |        |   |        | 9,821 |        
|                              |                               |                                       |       |                                      |        |            |        |       |        |         |       |            |        |            |        |       |        |   |        |       |        |   |        |   |        |   |        |       |        |   |        |      
|Software systems total        |                               |                                       | 3,619 |                                      |        |            |       |       |        |         | 1,462 |            |        |            | 5,081  |       |        |   | 15,387 |       |        |   |       |   |        |   | 3,296  |       |        |   | 18,683 |      
|Network solutions             |                               |                                       |      |                                      |        |            | 13,588 |       |        |         |      |            |        |            | 13,588 |       |        |   |       |       |        |   | 32,351 |   |        |   |       |       |        |   | 32,351 |      
|                              |                               |                                       |       |                                      |        |            |        |       |        |         |       |            |        |            |        |       |        |   |        |       |        |   |        |   |        |   |        |       |        |   |        |      
|                              |                               | Total revenue                         |       | $                                    | 13,002 |            |        | $     | 13,588 |         |       | $          | 11,447 |            |        | $     | 38,037 |   |        | $     | 43,465 |   |        | $ | 32,351 |   |        | $     | 35,425 |   |        | $     | 111,241 | 
|                              |                               |                                       |       |                                      |        |            |        |       |        |         |       |            |        |            |        |       |        |   |        |       |        |   |        |   |        |   |        |       |        |   |        |      
|Segment gross profit:         |                               |                                       |       |                                      |        |            |        |       |        |         |       |            |        |            |        |       |        |   |        |       |        |   |        |   |        |   |        |       |        |   |        |      
|Service bureau and subscriber |                               | $                                     | 5,250 |                                      |        | $          |       |       |        | $       | 2,159 |            |        | $          | 7,409  |       |        | $ | 14,791 |       |        | $ |       |   |        | $ | 7,472  |       |        | $ | 22,263 |      
|Software systems              |                               |                                       | 1,105 |                                      |        |            |       |       |        |         | 324   |            |        |            | 1,429  |       |        |   | 8,408  |       |        |   |       |   |        |   | 690    |       |        |   | 9,098  |      
|Network solutions             |                               |                                       |      |                                      |        |            | 4,296  |       |        |         |      |            |        |            | 4,296  |       |        |   |       |       |        |   | 11,814 |   |        |   |       |       |        |   | 11,814 |      
|                              |                               |                                       |       |                                      |        |            |        |       |        |         |       |            |        |            |        |       |        |   |        |       |        |   |        |   |        |   |        |       |        |   |        |      
|                              |                               | Total segment gross profit            |       | $                                    | 6,355  |            |        | $     | 4,296  |         |       | $          | 2,483  |            |        | $     | 13,134 |   |        | $     | 23,199 |   |        | $ | 11,814 |   |        | $     | 8,162  |   |        | $     | 43,175  | 
|                              |                               |                                       |       |                                      |        |            |        |       |        |         |       |            |        |            |        |       |        |   |        |       |        |   |        |   |        |   |        |       |        |   |        |      

12



---



##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

|                              |                               |                                       |       |                                      |        |            |        |       |        |         |   |            |   |            |        |       |        |   |        |       |        |   |        |   |        |   |   |   |   |   |        |       |        | 
|----------------------------- | ----------------------------- | ------------------------------------- | ----- | ------------------------------------ | ------ | ---------- | ------ | ----- | ------ | ------- | - | ---------- | - | ---------- | ------ | ----- | ------ | - | ------ | ----- | ------ | - | ------ | - | ------ | - | - | - | - | - | ------ | ----- | ------ | 
|                              |                               |                                       |       |                                     
|                              |                               | Three months ended September 30, 2003 |       | Nine months ended September 30, 2003
|                              |                               |                                       |       |                                     
|                              |                               | Wireless                              |       |                                      |        | Wireless   |        |      
|                              |                               | Carrier                               |       | Government                           |        | Enterprise |        | Total |        | Carrier |   | Government |   | Enterprise |        | Total
|                              |                               |                                       |       |                                      |        |            |        |       |        |         |   |            |   |            |        |      
|Revenue:                      |                               |                                       |       |                                      |        |            |        |       |        |         |   |            |   |            |        |       |        |   |        |       |        |   |        |   |        |   |   |   |   |   |        |      
|Service bureau and subscriber |                               | $                                     | 8,832 |                                      |        | $          |       |       |        | $       |  |            |   | $          | 8,832  |       |        | $ | 24,697 |       |        | $ |       |   |        | $ |  |   |   | $ | 24,697 |      
|Software systems:             |                               |                                       |       |                                      |        |            |        |       |        |         |   |            |   |            |        |       |        |   |        |       |        |   |        |   |        |   |   |   |   |   |        |      
|                              | Software licenses             |                                       |       | 2,177                                |        |            |        |      |        |         |   |           |   |            |        | 2,177 |        |   |        | 5,432 |        |   |        |  |        |   |   |  |   |   |        | 5,432 |       
|                              | Software systems and services |                                       |       | 1,563                                |        |            |        |      |        |         |   |           |   |            |        | 1,563 |        |   |        | 4,196 |        |   |        |  |        |   |   |  |   |   |        | 4,196 |       
|                              |                               |                                       |       |                                      |        |            |        |       |        |         |   |            |   |            |        |       |        |   |        |       |        |   |        |   |        |   |   |   |   |   |        |      
|Software systems total        |                               |                                       | 3,740 |                                      |        |            |       |       |        |         |  |            |   |            | 3,740  |       |        |   | 9,628  |       |        |   |       |   |        |   |  |   |   |   | 9,628  |      
|Network solutions             |                               |                                       |      |                                      |        |            | 15,675 |       |        |         |  |            |   |            | 15,675 |       |        |   |       |       |        |   | 33,294 |   |        |   |  |   |   |   | 33,294 |      
|                              |                               |                                       |       |                                      |        |            |        |       |        |         |   |            |   |            |        |       |        |   |        |       |        |   |        |   |        |   |   |   |   |   |        |      
|                              |                               | Total revenue                         |       | $                                    | 12,572 |            |        | $     | 15,675 |         |   | $          |  |            |        | $     | 28,247 |   |        | $     | 34,325 |   |        | $ | 33,294 |   |   | $ |  |   |        | $     | 67,619 | 
|                              |                               |                                       |       |                                      |        |            |        |       |        |         |   |            |   |            |        |       |        |   |        |       |        |   |        |   |        |   |   |   |   |   |        |      
|Segment gross profit:         |                               |                                       |       |                                      |        |            |        |       |        |         |   |            |   |            |        |       |        |   |        |       |        |   |        |   |        |   |   |   |   |   |        |      
|Service bureau and subscriber |                               | $                                     | 4,694 |                                      |        | $          |       |       |        | $       |  |            |   | $          | 4,694  |       |        | $ | 12,592 |       |        | $ |       |   |        | $ |  |   |   | $ | 12,592 |      
|Software systems              |                               |                                       | 1,831 |                                      |        |            |       |       |        |         |  |            |   |            | 1,831  |       |        |   | (4,122 | )     |        |   |       |   |        |   |  |   |   |   | (4,122 | )    
|Network solutions             |                               |                                       |      |                                      |        |            | 5,174  |       |        |         |  |            |   |            | 5,174  |       |        |   |       |       |        |   | 10,941 |   |        |   |  |   |   |   | 10,941 |      
|                              |                               |                                       |       |                                      |        |            |        |       |        |         |   |            |   |            |        |       |        |   |        |       |        |   |        |   |        |   |   |   |   |   |        |      
|                              |                               | Total segment gross profit            |       | $                                    | 6,525  |            |        | $     | 5,174  |         |   | $          |  |            |        | $     | 11,699 |   |        | $     | 8,470  |   |        | $ | 10,941 |   |   | $ |  |   |        | $     | 19,411 | 
|                              |                               |                                       |       |                                      |        |            |        |       |        |         |   |            |   |            |        |       |        |   |        |       |        |   |        |   |        |   |   |   |   |   |        |      

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

|                           |                                                             |                    |        |                   |  |      |        |       |  |   |        |        |   |   |         |        | 
|-------------------------- | ----------------------------------------------------------- | ------------------ | ------ | ----------------- |  | ---- | ------ | ----- |  | - | ------ | ------ | - | - | ------- | ------ | 
|                           |                                                             |                    |        |                  
|                           |                                                             | Three months ended |        | Nine months ended
|                           |                                                             | September 30,      |        | September 30,    
|                           |                                                             |                    |        |                  
|                           |                                                             | 2004               |        | 2003              |  | 2004 |        | 2003 
|                           |                                                             |                    |        |                   |  |      |        |      
|Total segment gross profit |                                                             | $                  | 13,134 |                   |  | $    | 11,699 |       |  | $ | 43,175 |        |   | $ | 19,411  |       
|                           | Research and development expense                            |                    |        | 4,798             |  |      |        | 4,109 |  |   |        | 14,399 |   |   |         | 12,688 | 
|                           | Sales and marketing expense                                 |                    |        | 3,080             |  |      |        | 2,068 |  |   |        | 9,593  |   |   |         | 6,674  | 
|                           | General and administrative expense                          |                    |        | 5,121             |  |      |        | 2,725 |  |   |        | 14,374 |   |   |         | 8,335  | 
|                           | Non-cash stock compensation expense                         |                    |        | 247               |  |      |        | 412   |  |   |        | 950    |   |   |         | 1,174  | 
|                           | Depreciation and amortization of property and
    equipment |                    |        | 2,015             |  |      |        | 1,710 |  |   |        | 5,659  |   |   |         | 4,945  | 
|                           | Amortization of acquired intangible assets                  |                    |        | 532               |  |      |        | 138   |  |   |        | 1,596  |   |   |         | 415    | 
|                           | Interest expense                                            |                    |        | 665               |  |      |        | 282   |  |   |        | 2,329  |   |   |         | 774    | 
|                           | Other income/(expense)                                      |                    |        | 79                |  |      |        | 251   |  |   |        | (103   | ) |   |         | 660    | 
|                           |                                                             |                    |        |                   |  |      |        |       |  |   |        |        |   |   |         |       
|Net (loss)/income          |                                                             | $                  | (3,245 | )                 |  | $    | 506    |       |  | $ | (5,828 | )      |   | $ | (14,934 | )     
|                           |                                                             |                    |        |                   |  |      |        |       |  |   |        |        |   |   |         |       



|   |          
|-- | ---------
|6. | Inventory

We maintain inventory of component parts and
finished product for certain SwiftLink® units and finished
goods inventory of handheld computers, pagers, wireless modems
for Enterprise customers. Our inventory consists of:

|                |       |                    |       |                   |  |   |     |     | 
|--------------- | ----- | ------------------ | ----- | ----------------- |  | - | --- | --- | 
|                |       | September 30, 2004 |       | December 31, 2003
|                |       |                    |       |                  
|Component parts |       | $                  | 1,575 |                   |  | $ | 346 |    
|Finished goods  |       |                    | 1,811 |                   |  |   | 105 |    
|                |       |                    |       |                   |  |   |     |    
|                | Total |                    | $     | 3,386             |  |   | $   | 451 | 
|                |       |                    |       |                   |  |   |     |    

13



---



##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

Inventory is stated at the lower of cost or
market. Cost is determined using the first-in, first-out method.



|   |                                                                          
|-- | -------------------------------------------------------------------------
|7. | Acquired Intangible Assets and Capitalized
    Software Development Costs

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

|                                          |                      |                    |       |                   |        |       |   |          |       |              |   |       |       |  |   |       |       |  |   |     |     |  |   |     |     | 
|----------------------------------------- | -------------------- | ------------------ | ----- | ----------------- | ------ | ----- | - | -------- | ----- | ------------ | - | ----- | ----- |  | - | ----- | ----- |  | - | --- | --- |  | - | --- | --- | 
|                                          |                      |                    |       |                  
|                                          |                      | September 30, 2004 |       | December 31, 2003
|                                          |                      |                    |       |                  
|                                          |                      | Gross              |       |                   |        | Gross |   |         
|                                          |                      | Carrying           |       | Accumulated       |        |       |   | Carrying |       | Accumulated  |   |      
|                                          |                      | Amount             |       | Amortization      |        | Net   |   | Amount   |       | Amortization |   | Net  
|                                          |                      |                    |       |                   |        |       |   |          |       |              |   |      
|Acquired intangible assets:               |                      |                    |       |                   |        |       |   |          |       |              |   |       |       |  |   |       |       |  |   |     |     |  |   |    
|                                          | Customer Contracts   |                    | $     | 4,208             |        |       | $ | 1,036    |       |              | $ | 3,172 |       |  | $ |      |       |  | $ |    |     |  | $ |    |    
|                                          | Customer Lists       |                    |       | 2,518             |        |       |   | 478      |       |              |   | 2,040 |       |  |   |      |       |  |   |    |     |  |   |    |    
|                                          | Trademarks & Patents |                    |       | 1,281             |        |       |   | 82       |       |              |   | 1,199 |       |  |   |      |       |  |   |    |     |  |   |    |    
|Software development costs,               |                      |                    |       |                   |        |       |   |          |       |              |   |       |       |  |   |       |       |  |   |     |     |  |   |    
|                                          | including acquired   |                    |       |                   |        |       |   |          |       |              |   |       |       |  |   |       |       |  |   |     |     |  |   |     |    
|                                          | technology           |                    |       | 4,142             |        |       |   | 1,157    |       |              |   | 2,985 |       |  |   | 1,272 |       |  |   | 754 |     |  |   | 518 |    
|                                          |                      |                    |       |                   |        |       |   |          |       |              |   |       |       |  |   |       |       |  |   |     |     |  |   |    
|                                          |                      | Total              |       | $                 | 12,149 |       |   | $        | 2,753 |              |   | $     | 9,396 |  |   | $     | 1,272 |  |   | $   | 754 |  |   | $   | 518 | 
|                                          |                      |                    |       |                   |        |       |   |          |       |              |   |       |       |  |   |       |       |  |   |     |     |  |   |    
|Estimated future amortization expense:    |                      |                    |       |                   |        |       |   |          |       |              |   |       |       |  |   |      
|Three months ending December 31,
    2004 |                      | $                  | 798   |                   |        |       |   |          |       |              |   |       |       |  |   |      
|Year ending December 31, 2005             |                      | $                  | 3,130 |                   |        |       |   |          |       |              |   |       |       |  |   |      
|Year ending December 31, 2006             |                      | $                  | 2,467 |                   |        |       |   |          |       |              |   |       |       |  |   |      
|Year ending December 31, 2007             |                      | $                  | 1,230 |                   |        |       |   |          |       |              |   |       |       |  |   |      
|Year ending December 31, 2008             |                      | $                  | 823   |                   |        |       |   |          |       |              |   |       |       |  |   |      
|Year ending December 31, 2009             |                      | $                  | 506   |                   |        |       |   |          |       |              |   |       |       |  |   |      
|Thereafter                                |                      | $                  | 442   |                   |        |       |   |          |       |              |   |       |       |  |   |      

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 Enterprise Acquisition and the
Kivera Acquisition. Management uses these estimates as the basis
for evaluating the carrying values of the respective assets.



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

14



---



##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

The following table summarizes revenue
concentrations from our significant customers:

|                 |  |                  |  |                    |               |                    |  |                |     |                |  |  |               |  |  |  |               | 
|---------------- |  | ---------------- |  | ------------------ | ------------- | ------------------ |  | -------------- | --- | -------------- |  |  | ------------- |  |  |  | ------------- | 
|                 |  |                  |  |                    |               |                   
|                 |  |                  |  | % of Total Revenue |               | % of Total Revenue
|                 |  |                  |  |                    |               |                   
|                 |  |                  |  | For the three      |               | For the three      |  | For the nine   |     | For the nine  
|                 |  |                  |  | months ended       |               | months ended       |  | months ended   |     | months ended  
|Customer         |  | Segment          |  | Sept. 30, 2004     |               | Sept. 30, 2003     |  | Sept. 30, 2004 |     | Sept. 30, 2003
|                 |  |                  |  |                    |               |                    |  |                |     |               
|Federal Agencies |  | Government       |  |                    | 24%           |                    |  |                | 38% |                |  |  | 16%           |  |  |  | 31%           | 
|Customer A       |  | Wireless Carrier |  |                    | 10%           |                    |  |                | 12% |                |  |  | 14%           |  |  |  | 15%           | 
|Customer B       |  | Wireless Carrier |  |                    | Less than 10% |                    |  |                | 10% |                |  |  | Less than 10% |  |  |  | Less than 10% | 

|                 |  |                  |  |                          |     |             |  |  |               | 
|---------------- |  | ---------------- |  | ------------------------ | --- | ----------- |  |  | ------------- | 
|                 |  |                  |  |                         
|                 |  |                  |  | As of September 30, 2004
|                 |  |                  |  |                         
|                 |  |                  |  | Accounts                 |     | Unbilled   
|Customer         |  | Segment          |  | Receivable               |     | Receivables
|                 |  |                  |  |                          |     |            
|Federal Agencies |  | Government       |  |                          | 24% |             |  |  | 43%           | 
|Customer C       |  | Wireless Carrier |  |                          | 13% |             |  |  | Less than 10% | 



|   |                                                       
|-- | ------------------------------------------------------
|9. | Stock-Based Compensation and Deferred
    Compensation

We have two stock-based employee compensation
plans: our Fourth 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 related compensation constitutes
portions of our direct cost of revenue, research and development
expense, sales and marketing expense, and general and
administrative expense as detailed in the table presented with
our Consolidated Statement of Operations. 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 |        | Nine months ended
|                                                                                                                    |                                 | September 30,      |        | September 30,    
|                                                                                                                    |                                 |                    |        |                  
|                                                                                                                    |                                 | 2004               |        | 2003              |   | 2004 |        | 2003 
|                                                                                                                    |                                 |                    |        |                   |   |      |        |      
|Net (loss)/income, as reported                                                                                      |                                 | $                  | (3,245 | )                 |   | $    | 506    |       |   | $ | (5,828  | )     |   | $ | (14,934 | )    
|Add: Stock-based employee compensation expense
    included in reported net loss                                    |                                 |                    | 247    |                   |   |      | 412    |       |   |   | 950     |       |   |   | 1,174   |      
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards |                                 |                    | (2,315 | )                 |   |      | (1,321 | )     |   |   | (7,154  | )     |   |   | (3,904  | )    
|                                                                                                                    |                                 |                    |        |                   |   |      |        |       |   |   |         |       |   |   |         |      
|Pro forma net loss                                                                                                  |                                 | $                  | (5,313 | )                 |   | $    | (403   | )     |   | $ | (12,032 | )     |   | $ | (17,664 | )    
|                                                                                                                    |                                 |                    |        |                   |   |      |        |       |   |   |         |       |   |   |         |      
|(Loss)/earnings per common share:                                                                                   |                                 |                    |        |                   |   |      |        |       |   |   |         |       |   |   |         |      
|                                                                                                                    | Basic and diluted  as reported |                    | $      | (0.10             | ) |      | $      | 0.02  |   |   | $       | (0.18 | ) |   | $       | (0.50 | )
|                                                                                                                    |                                 |                    |        |                   |   |      |        |       |   |   |         |       |   |   |         |      
|                                                                                                                    | Basic and diluted  pro forma   |                    | $      | (0.16             | ) |      | $      | (0.01 | ) |   | $       | (0.37 | ) |   | $       | (0.60 | )
|                                                                                                                    |                                 |                    |        |                   |   |      |        |       |   |   |         |       |   |   |         |      

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

15



---



##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

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 116%.

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)/income, as reported, includes $102 and $249
of non-cash stock compensation expense related to these grants
for the three-months ended September 30, 2004 and 2003,
respectively, and $484 and $844 of expense for the nine-months
then ended. We expect to record future stock compensation
expense of $289 as a result of these option grants that will be
recognized over the remaining vesting period of one year.

In the second quarter of 2003, we issued
restricted stock to directors and certain key executives. The
restrictions expired at the end of one year for directors and
expire in annual increments over three years for executives and
are based on continued employment. The fair value of the
restricted stock at issuance has been recorded as deferred
compensation and is being amortized to non-cash stock
compensation expense using the straight-line method over the
period during which the restrictions expire. Net (loss)/income,
as reported, includes $145 and $163 of non-cash stock
compensation expense related to these grants for the
three-months ended September 30, 2004 and 2003,
respectively, and $466 and $330 of expense for the nine-months
then ended. We expect to record future stock compensation
expense of $932 as a result of these restricted stock grants
that will be recognized over the remaining vesting period for
executives.



|    |               
|--- | --------------
|10. | Long-Term Debt

To fund the Enterprise Acquisition, on
January 13, 2004 we raised $21,000 in cash from
third-parties through the issuance of (i) a convertible
subordinated debenture with a face value of $15,000 (the
Debenture), 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 Company Class A Common Stock at
our option (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
Class A Common Stock issued was $7,640 based on the quoted
closing price of our Class A 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 provided 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 was
being amortized over its five-year term using the effective
interest method, yielding an effective interest rate of 12.6%.
As of September 30, 2004, the subordinated convertible
debentures had a carrying value of $9,196. The terms of the
Debenture described above in clause (i) were amended
effective as of August 30, 2004. See Note 11 below.

Additionally, during the three and nine months
ended September 30, 2004, we borrowed $2,606, primarily to
fund equipment purchases, under the terms of a note payable,
bearing interest at 7.75% and payable monthly through October
2005. The note is secured by the accounts receivable owed to us
by certain customers.

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

16



---



##### 



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)

interest at the prime rate plus 1.25% for
equipment loans at date of borrowing 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 5.75%, respectively, at
October 31, 2004). Our bank line of credit with Silicon
Valley Bank contains covenants requiring us to maintain at least
$25 million of tangible net worth, as defined, and at least
$10 million in cash and cash availability as well as
restrictive covenants, including, among others, restrictions on
our ability to merge, acquire assets above prescribed
thresholds, undertake actions outside the ordinary course of our
business (including the incurrence of indebtedness), guarantee
debt, distribute dividends, and repurchase our stock. As of
September 30, 2004, we were in compliance with all of these
covenants. 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. As of September 30,
2004, there was approximately $1.9 million outstanding
under the equipment loan. As of September 30, 2004, we have
borrowed $5.0 million under the line of credit and had
$5.2 million of unused availability. As of
September 30, 2004 and October 31, 2004, there were no
other borrowings outstanding under the bank agreement. We are
also subject to minimal unused commitment and collateral
monitoring fees related to our line of credit, which are waived
if we maintain certain levels of deposits. The line of credit
will expire in April 2006.



|    |                                              
|--- | ---------------------------------------------
|11. | Securities Purchase and Waiver
    Agreements

On August 30, 2004 the Company entered a
Securities Purchase Agreement (the August 2004 Securities
Purchase Agreement) with the same third party investors
who purchased our securities used to finance the Enterprise
Acquisition. Pursuant to the August 2004 Securities Purchase
Agreement, we raised $10,000 in cash through the sale of
2,500,000 shares of our Class A Common Stock.

As of the same date, we entered into a Waiver
Agreement (the Waiver) with the holder of the
Debenture. The Waiver modified certain provisions of the
Debenture as follows: (1) the holder of the Debenture is
required to convert the entire $15,000 principal amount into
shares of our Class A Common Stock by the end of 2004,
(2) all of the material restrictive covenants contained in
the Debenture were nullified and (3) the conversion price
set forth in the Debenture was decreased from $5.3753 to
$5.01581 as an inducement to enter into the Waiver (an
adjustment such that conversion of the Debenture will yield an
additional 200,000 shares of Class A Common Stock). As
additional consideration for the holder of the Debenture
agreeing to the Waiver, we paid the holder of the Debenture a
$1,000 one-time fee in cash. The $1,000 fee has been recorded as
a prepaid expense as of September 30, 2004 and will be
recognized ratably to expense as the Debenture is converted. The
fair value of the additional shares of Class A Common Stock
to be issued as an inducement, measured as of the date of the
Waiver, was $900, which will be recognized ratably to expense as
the Debenture is converted. The remaining deferred debt discount
of approximately $5,800 and deferred financing fees of $700 will
be recognized as expense ratably as the Debentures are converted
through the end of 2004. As of September 30, 2004, no
principal amount of the Debenture had been converted.

17



---



##### 





|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|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,
(b) regarding our belief that general and administrative
expenses will remain higher than 2003 levels and (c) that
we expect to realize approximately $20 million of backlog
in the balance of this year and $58 million in the next
12 months are forward-looking statements. 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 (ix) 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 unaudited
consolidated financial statements, which have been prepared in
accordance with GAAP for interim financial information. 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, revenue
recognition for our newly acquired Enterprise segment, the
relevant accounting related to valuation allowances, capitalized
software development costs, acquired intangible assets, stock
compensation expense, and deferred compensation. We describe
these

18



---



##### 



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.


Overview

We are a leading provider of mission critical
wireless data solutions to carrier, enterprise and government
customers. Our wireless data offerings include location-based
E9-1-1 services, and messaging and location service
infrastructure for wireless operators, real-time market data and
alerts to financial institutions, mobile asset management and
mobile office solutions for enterprises, and encrypted satellite
communications for government customers.

Recent Acquisitions

On January 13, 2004, we consummated the
Enterprise Acquisition and acquired the assets which now
comprise our Enterprise segment. This segment added 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 Enterprise Acquisition, we managed
our business in three operating segments: Network Software,
Service Bureau and Network Solutions. Subsequent to the
Enterprise Acquisition, we realigned our segments to better
manage the business we operate. Our operating segments include
(i) our Wireless Carrier segment, which consists
principally of the previous Network Software and Service Bureau
segments, and which principally includes 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 consists principally of
the previous Network Solutions segment, and which includes the
design, development, and deployment of information processing
and communication systems and related services, and
(iii) our Enterprise segment, which offers subscriber-based
services as well as software licenses and services for
Enterprise customers. The information in this section is
presented based on the operating segments through which we
currently manage our business.

On September 20, 2004, we consummated the
purchase of substantially all of the assets of Kivera, Inc, a
provider of internet-based location application software and
geo-data professional services. Kiveras technology can
interoperate with our Xypoint® Location Platform (XLP).

Indicators of Our Financial and Operating
Performance

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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | 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, amortization of software
    development costs, 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

19



---



##### 



| |  |                                                                                                                                                                                                                                               
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | in our Enterprise segment. Amortization of
    software development costs, including acquired technology, is
    associated with the recognition of software systems revenue, and
    relates to our Wireless Carrier and Enterprise segments.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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, and
    amortization 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 in 2000, our January 2004 financing in
    connection with our Enterprise Acquisition (as described below
    under Liquidity and Capital Resources), our
    September 2004 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.                                                                                                                                                                                                                                                                                                                                                                                                                 

SwiftLink®, XYPOINT® and Wireless
Internet GatewayTM are trademarks or service marks of
TeleCommunication Systems, Inc. or our subsidiaries. This
Quarterly Report on Form 10-Q also contains trademarks,
trade names and services marks of other companies that are the
property of their respective owners.

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-
and nine-months ended September 30, 2004 and 2003,
respectively, a period-over-period comparison of the key
components of the revenue and cost of revenue of our Wireless
Carrier segment:

|                                             |                               |                                 |      |                                |  |   |      |               |  |      |      |      |   |   |     |     |    |   |      |     |  |   |      |     |  |   |      |     |  |  |     |    |  
|-------------------------------------------- | ----------------------------- | ------------------------------- | ---- | ------------------------------ |  | - | ---- | ------------- |  | ---- | ---- | ---- | - | - | --- | --- | -- | - | ---- | --- |  | - | ---- | --- |  | - | ---- | --- |  |  | --- | -- | -
|                                             |                               |                                 |      |                               
|                                             |                               | Three Months Ended September 30 |      | Nine Months Ended September 30
|                                             |                               |                                 |      |                               
|                                             |                               |                                 |      |                                |  |   |      |              
|                                             |                               |                                 |      | 2004 vs. 2003                  |  |   |      | 2004 vs. 2003
|                                             |                               |                                 |      |                                |  |   |      |              
|($ in millions)                              |                               | 2004                            |      | 2003                           |  | $ |      | %             |  | 2004 |      | 2003 |   | $ |     | %  
|                                             |                               |                                 |      |                                |  |   |      |               |  |      |      |      |   |   |     |    
|Service bureau and subscriber revenue        |                               | $                               | 9.4  |                                |  | $ | 8.8  |               |  | $    | 0.6  |      |   |   | 6   | %   |    | $ | 28.1 |     |  | $ | 24.7 |     |  | $ | 3.4  |     |  |  | 14  | % 
|Software systems revenue:                    |                               |                                 |      |                                |  |   |      |               |  |      |      |      |   |   |     |     |    |   |      |     |  |   |      |     |  |   |      |     |  |  |     |   
|                                             | Software licenses             |                                 |      | 1.2                            |  |   |      | 2.2           |  |      |      | (0.9 | ) |   |     | (43 | %) |   |      | 8.7 |  |   |      | 5.4 |  |   |      | 3.2 |  |  |     | 60 | %
|                                             | Software systems and services |                                 |      | 2.4                            |  |   |      | 1.6           |  |      |      | 0.8  |   |   |     | 52  | %  |   |      | 6.7 |  |   |      | 4.2 |  |   |      | 2.5 |  |  |     | 60 | %
|                                             |                               |                                 |      |                                |  |   |      |               |  |      |      |      |   |   |     |     |    |   |      |     |  |   |      |     |  |   |      |     |  |  |     |   
|Software systems total                       |                               |                                 | 3.6  |                                |  |   | 3.7  |               |  |      | (0.1 | )    |   |   | (3  | %)  |    |   | 15.4 |     |  |   | 9.6  |     |  |   | 5.8  |     |  |  | 60  | % 
|Segment revenue                              |                               |                                 | 13.0 |                                |  |   | 12.6 |               |  |      | 0.4  |      |   |   | 3   | %   |    |   | 43.5 |     |  |   | 34.3 |     |  |   | 9.1  |     |  |  | 27  | % 
|Direct cost of service bureau and subscriber |                               |                                 | 4.1  |                                |  |   | 4.1  |               |  |      |     |      |   |   | N/M |     |    |   | 13.3 |     |  |   | 12.1 |     |  |   | 1.2  |     |  |  | 10  | % 
|Direct cost of software systems              |                               |                                 | 2.5  |                                |  |   | 1.9  |               |  |      | 0.7  |      |   |   | 32  | %   |    |   | 7.0  |     |  |   | 13.8 |     |  |   | (6.8 | )   |  |  | (49 | %)
|                                             |                               |                                 |      |                                |  |   |      |               |  |      |      |      |   |   |     |     |    |   |      |     |  |   |      |     |  |   |      |     |  |  |     |   
|Segment gross profit*                        |                               | $                               | 6.4  |                                |  | $ | 6.5  |               |  | $    | (0.2 | )    |   |   | (3  | %)  |    | $ | 23.2 |     |  | $ | 8.5  |     |  | $ | 14.7 |     |  |  | N/M |   
|                                             |                               |                                 |      |                                |  |   |      |               |  |      |      |      |   |   |     |     |    |   |      |     |  |   |      |     |  |   |      |     |  |  |     |   



---



|  |                                                                                                          
|- | ---------------------------------------------------------------------------------------------------------
|* | See discussion of segment reporting in
    Note 5 to the accompanying unaudited financial
    statements.

20



---



##### 



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 carrier cell sites. As the carriers number of
subscribers, PSAPs, or cell sites increases, the monthly
recurring service fees increase. MDC revenue is priced based on
message volume. In both the three- and nine-month periods ended
September 30, 2004, our revenue reflected an increase in
the number of wireless carriers served as well as the volume
served from the customer client base that existed in the
corresponding periods of 2003.

The direct cost of our service bureau revenue
consists primarily of compensation, benefits, 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 both the three-
and nine-month periods ended September 30, 2004, we
incurred increased costs related to increased headcount as well
as increased circuit costs required to support the increase in
PSAPs served.

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 Short
Message Service Center (SMSC), TCS Xypoint® Location
Platform products, Wireless Messaging Gateway (WMG), 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
typically 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 channel relationships. This
sales process typically involves our engineers along with
original equipment manufacturers in presenting our products to
prospective customers. We record sales under these arrangements
net of any related commissions. In the three-month period ended
September 30, 2004, software license revenue decreased to
$1.2 million from $2.2 million in the comparable
period last year. Software license revenue decreased in the
three-month period ended September 30, 2004 due to the
timing of orders closing in the second quarter as compared to
prior years including revenue from a large customer software
project in 2003 that was not replaced in 2004 and license
revenue related to an upgrade in 2003. In the nine-month period
ended September 30, 2004 software license revenue increased
to $8.7 million from $5.4 million in the

21



---



##### 



comparable period last year primarily due to a
large order for an upgrade of license fees during the second
quarter of 2004 as required based on usage increases. Software
license revenue was positively impacted in the nine-month period
ended September 30, 2004 primarily due to revenue that was
recorded in the second quarter of 2004 related to a large sale
of messaging license capacity.


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 the three-month period ended
September 30, 2004, 62% of software service revenues
related to maintenance fees, while 38% related to custom
development and implementation fees associated with the delivery
of related software applications. In the comparable period in
2003, 61% of service revenue was related to maintenance fees,
while 37% of service revenue was associated with custom
development and implementation 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 the nine-month period ended
September 30, 2004, 63% of software service revenues
related to maintenance fees, while 35% related to custom
development and implementation 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 the comparable period in 2003, 61%
of service revenue was related to maintenance fees, while 38% of
service revenue was associated with custom development and
implementation fees associated with the delivery of related
software applications, and the remaining 1% related to
third-party hardware and software delivered as part of our
packaged software sales.

The direct cost of our software systems revenue
consists primarily of compensation, benefits, purchased
equipment, third-party software, amortization of software
development costs, travel expenses and consulting fees incurred
when providing our services and, other than the amortization of
software development costs, predominantly relates to the cost of
services. In the three-month periods ended September 30,
2004 and 2003, direct cost of software systems revenue included
$41 and $123, respectively, of amortization of software
development costs. In the nine-month periods ended
September 30, 2004 and 2003, direct cost of software
systems revenue included $293 and $8,927, respectively, of
amortization of software development costs. The amortization for
the nine-month period ended September 30, 2003 includes
$7,000 of accelerated amortization recorded in the second
quarter of 2003 when it was determined that the expected margins
to be realized from the sales of certain products exceeded
remaining book values plus costs to complete. In the three-month
periods ended September 30, 2004 and 2003, 22% and 1%,
respectively of total direct costs related to the cost of
purchased equipment and third-party software delivered as part
of our packaged software sales. In the nine-month period ended
September 30, 2004 and 2003, 22% and 1%, respectively, of
the total direct costs related to the cost of purchased
equipment and third-party software delivered as part of our
packaged software sales.

Gross profit for the Wireless Carrier segment
decreased to 49% of revenue for the three month period ended
September 30, 2004 from 52% of revenue for the comparable
period in 2003 and increased to 53% of revenue for the nine
month period ended September 30, 2004 from 25% of revenue
for comparable period of 2003. The fluctuations for the three-
month periods are primarily attributable to the volume and
timing of high margin software license sales versus lower margin
custom development license revenue and lower margin service
revenue. The fluctuation for the nine-month period ended
September 30, 2003 is primarily attributable to the higher
costs associated with the significantly higher amount of
amortization of software development costs,

22



---



##### 



including $7,000 of accelerated amortization,
included in direct cost of software systems revenue and the
volume and timing of high margin software license sales compared
to other, lower margin, types of revenue.


Government Segment:

The following table sets forth, for the three-
and nine-months ended September 30, 2004 and 2003,
respectively, a period-over-period comparison of the key
components of our Government segment revenue and cost of revenue:

|                                 |  |                                 |      |                                |  |   |      |          |  |      |      |      |  |   |     |    |  |   |      |  |  |   |      |  |  |   |      |   |  |  |    |   
|-------------------------------- |  | ------------------------------- | ---- | ------------------------------ |  | - | ---- | -------- |  | ---- | ---- | ---- |  | - | --- | -- |  | - | ---- |  |  | - | ---- |  |  | - | ---- | - |  |  | -- | --
|                                 |  |                                 |      |                               
|                                 |  | Three Months Ended September 30 |      | Nine Months Ended September 30
|                                 |  |                                 |      |                               
|                                 |  |                                 |      |                                |  |   |      |         
|                                 |  |                                 |      | 2004 vs.                       |  |   |      | 2004 vs.
|                                 |  |                                 |      | 2003                           |  |   |      | 2003    
|                                 |  |                                 |      |                                |  |   |      |         
|($ in millions)                  |  | 2004                            |      | 2003                           |  | $ |      | %        |  | 2004 |      | 2003 |  | $ |     | % 
|                                 |  |                                 |      |                                |  |   |      |          |  |      |      |      |  |   |     |   
|Network solutions revenue        |  | $                               | 13.6 |                                |  | $ | 15.7 |          |  | $    | (2.1 | )    |  |   | (13 | %) |  | $ | 32.4 |  |  | $ | 33.3 |  |  | $ | (0.9 | ) |  |  | (3 | %)
|Direct cost of network solutions |  |                                 | 9.3  |                                |  |   | 10.5 |          |  |      | (1.2 | )    |  |   | (12 | %) |  |   | 20.5 |  |  |   | 22.4 |  |  |   | (1.8 | ) |  |  | (8 | %)
|                                 |  |                                 |      |                                |  |   |      |          |  |      |      |      |  |   |     |    |  |   |      |  |  |   |      |  |  |   |      |   |  |  |    |   
|Segment gross profit*            |  | $                               | 4.3  |                                |  | $ | 5.2  |          |  | $    | (0.9 | )    |  |   | (17 | %) |  | $ | 11.8 |  |  | $ | 10.9 |  |  | $ | 0.9  |   |  |  | 8  | % 
|                                 |  |                                 |      |                                |  |   |      |          |  |      |      |      |  |   |     |    |  |   |      |  |  |   |      |  |  |   |      |   |  |  |    |   



---



|  |                                                                                                          
|- | ---------------------------------------------------------------------------------------------------------
|* | See discussion of segment reporting in
    Note 5 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 system, 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, Maryland
and Manassas, Virginia, 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 a small proportion of
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.
Historically, there has not been any adjustments resulting from
their audit. We record revenue under these contracts at
estimated net realizable amounts.

In the three- and nine- month periods ended
September 30, 2004, approximately 26% and 44%,
respectively, of network solutions revenue resulted from the
sale of SwiftLink® and related deployable communications
systems. 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 the three-and nine- month periods ended
September 30, 2003, approximately 48% and 45%,
respectively, 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.

23



---



##### 



The direct cost of our network solutions revenue
consists of compensation, benefits, travel, satellite
space segment and airtime. In the three-and
nine-month periods ended September 30, 2004, approximately
77% and 68%, respectively, of costs were 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. Such costs represented
76% and 66% of direct cost of network solutions revenue in the
three-month and nine-month periods ended September 30,
2003, respectively.

Gross profit for the Government segment was 32%
of revenue and 33% of revenue for the three-month periods ended
September 30, 2004 and 2003, respectively, and increased to
37% of revenue from 33% of revenue for the nine-month periods
ended September 30, 2004 and 2003, respectively. For the
three-month period ended September 30, 2004, the margins
reflect a decreased proportion of sales of our SwiftLink®
products and related deployable communications systems, which
yield higher margins than various other types of projects. For
the nine-month periods, the increase in margins is attributable
to a slightly increased proportion of sales of higher margin
SwiftLink®products and related deployable communications
systems augmented by the previously discussed cost savings.

Enterprise Segment:

The following table sets forth, for the three and
nine-month periods ended September 30, 2004, the key
components of subscriber and software systems revenue and
related cost of revenue for the Enterprise segment:

|                                             |                               |                    |      |                    |  |   |      |     | 
|-------------------------------------------- | ----------------------------- | ------------------ | ---- | ------------------ |  | - | ---- | --- | 
|                                             |                               | Three months ended |      | Nine months ended 
|($ in millions)                              |                               | September 30, 2004 |      | September 30, 2004
|                                             |                               |                    |      |                   
|Service bureau and subscriber revenue        |                               | $                  | 10.0 |                    |  | $ | 32.1 |    
|Software systems revenue:                    |                               |                    |      |                    |  |   |      |    
|                                             | Software systems licenses     |                    |      | 0.1                |  |   |      | 0.2 | 
|                                             | Software systems and services |                    |      | 1.3                |  |   |      | 3.1 | 
|                                             |                               |                    |      |                    |  |   |      |    
|Software systems total                       |                               |                    | 1.4  |                    |  |   | 3.3  |    
|                                             |                               |                    |      |                    |  |   |      |    
|Total revenue                                |                               |                    | 11.4 |                    |  |   | 35.4 |    
|                                             |                               |                    |      |                    |  |   |      |    
|Direct cost of service bureau and subscriber |                               |                    | 7.8  |                    |  |   | 24.7 |    
|Direct cost of software systems              |                               |                    | 1.1  |                    |  |   | 2.6  |    
|                                             |                               |                    |      |                    |  |   |      |    
|Segment gross profit*                        |                               | $                  | 2.5  |                    |  | $ | 8.2  |    
|                                             |                               |                    |      |                    |  |   |      |    



---



|  |                                                                                                          
|- | ---------------------------------------------------------------------------------------------------------
|* | See discussion of segment reporting in
    Note 5 to the accompanying unaudited financial
    statements.

No period-over-period comparison between 2003 and
2004 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 January
2004.

Our Enterprise segment sells mobile office,
mobile finance, and mobile asset services and products to
enterprise customers. Subscriber-based revenue is generated from
all three segments. The table below summarizes subscriber-based
revenue categorized by type of subscriber:

|                           |  |                    |    |                    |  |  |    |  
|-------------------------- |  | ------------------ | -- | ------------------ |  |  | -- | -
|                           |  | Three months ended |    | Nine months ended 
|Subscriber Type            |  | September 30, 2004 |    | September 30, 2004
|                           |  |                    |    |                   
|Mobile office subscribers  |  |                    | 67 | %                  |  |  | 68 | %
|Mobile finance subscribers |  |                    | 27 | %                  |  |  | 26 | %
|Mobile asset subscribers   |  |                    | 6  | %                  |  |  | 6  | %

24



---



##### 



Subscriber-based 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 airtime charges, compensation, benefits,
travel expenses, content access fees, amortization of software
development costs, and consulting fees incurred when providing
our services, third party hardware and software costs incurred,
and the equipment maintenance and circuit costs of our network
operations centers circuits utilized for connectivity to
customer devices. In the three- and nine-month periods ended
September 30, 2004, direct cost of software systems revenue
included $36 and $110, respectively, of amortization of software
development costs.

Major Customers

For both the three and nine month periods ended
September 30, 2004, customers that accounted for 10% or
more of total revenue were Verizon Wireless and various
U.S. Government agencies. The loss of any of these
customers would have a material adverse impact on our business.
For the both the three and nine month periods ended
September 30, 2003, customers that accounted for 10% or
more of total revenue were Verizon Wireless, United States
Cellular Corporation, and various U.S. Government agencies.
Verizon Wireless and United States Cellular Corporation are
primarily customers of our Wireless Carrier segment, and the
various U.S. government agencies are primarily a customer
of our Government segment.

Revenue Backlog

As of September 30, 2004, we had unfilled
orders, or backlog, of approximately $87.2 million, of
which $68.1 million related to our Wireless Carrier
segment, $11.2 million related to our Government segment
and $7.9 million related to our Enterprise segment. We
expect to realize approximately $20.4 million of this
backlog in the balance of this year and $57.9 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
September 30, 2003 was $87.4 million, of which
$68.5 million related to our Wireless Carrier segment, and
$18.9 million related to our Government segment.

Management utilizes backlog to evaluate financial
position as an indicator of committed future revenues. Our
backlog at any given time may be affected by a number of
factors, including contracts being renewed or new contracts
being signed before existing contracts are completed. Some of
our backlog could be canceled for causes such as late delivery,
poor performance, and other factors. Accordingly, a comparison
of backlog from period to period is not necessarily meaningful
and may not be indicative of eventual actual revenue.

Operating Expenses

Research and development expense:

The following table sets forth, for the three-
and nine-months ended September 30, 2004 and 2003,
respectively, a period-over-period comparison of our research
and development expense:

|                                 |  |                    |     |                   |  |   |     |          |  |      |     |      |  |   |    |   |  |   |      |   |  |   |      |   |  |   |     |  |  |  |    |  
|-------------------------------- |  | ------------------ | --- | ----------------- |  | - | --- | -------- |  | ---- | --- | ---- |  | - | -- | - |  | - | ---- | - |  | - | ---- | - |  | - | --- |  |  |  | -- | -
|                                 |  |                    |     |                  
|                                 |  | Three Months Ended |     | Nine Months Ended
|                                 |  | September 30       |     | September 30     
|                                 |  |                    |     |                  
|                                 |  |                    |     |                   |  |   |     |         
|                                 |  |                    |     | 2004 vs.          |  |   |     | 2004 vs.
|                                 |  |                    |     | 2003              |  |   |     | 2003    
|                                 |  |                    |     |                   |  |   |     |         
|($ in millions)                  |  | 2004               |     | 2003              |  | $ |     | %        |  | 2004 |     | 2003 |  | $ |    | %
|                                 |  |                    |     |                   |  |   |     |          |  |      |     |      |  |   |    |  
|Research and development expense |  | $                  | 4.8 |                   |  | $ | 4.1 |          |  | $    | 0.7 |      |  |   | 17 | % |  | $ | 14.4 |   |  | $ | 12.7 |   |  | $ | 1.7 |  |  |  | 14 | %
|Percent of revenue               |  |                    | 13  | %                 |  |   | 15  | %        |  |      |     |      |  |   |    |   |  |   | 13   | % |  |   | 19   | % |  |   |     |  |  |  |    |  

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

25



---



##### 



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. 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.


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 an emphasis on expanded
functionality of our location platform software and E9-1-1
application. In 2003, the research and development expenditures
were primarily incurred for the same software applications,
excluding the Enterprise applications which were acquired in
2004. Research and development expenditures decreased as a
percentage of revenue in 2004. The decrease as a percentage of
revenue is the result of increased revenues in 2004 primarily
due to the Enterprise Acquisition and the significant increase
of software license revenue in 2004. 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-
and nine-months ended September 30, 2004 and 2003,
respectively, a period-over-period comparison of our sales and
marketing expenses:

|                            |  |                    |     |                   |  |   |     |          |  |      |     |      |  |   |    |   |  |   |     |   |  |   |     |   |  |   |     |  |  |  |    |  
|--------------------------- |  | ------------------ | --- | ----------------- |  | - | --- | -------- |  | ---- | --- | ---- |  | - | -- | - |  | - | --- | - |  | - | --- | - |  | - | --- |  |  |  | -- | -
|                            |  |                    |     |                  
|                            |  | Three Months Ended |     | Nine Months Ended
|                            |  | September 30       |     | September 30     
|                            |  |                    |     |                  
|                            |  |                    |     |                   |  |   |     |         
|                            |  |                    |     | 2004 vs.          |  |   |     | 2004 vs.
|                            |  |                    |     | 2003              |  |   |     | 2003    
|                            |  |                    |     |                   |  |   |     |         
|($ in millions)             |  | 2004               |     | 2003              |  | $ |     | %        |  | 2004 |     | 2003 |  | $ |    | %
|                            |  |                    |     |                   |  |   |     |          |  |      |     |      |  |   |    |  
|Sales and marketing expense |  | $                  | 3.1 |                   |  | $ | 2.1 |          |  | $    | 1.0 |      |  |   | 49 | % |  | $ | 9.6 |   |  | $ | 6.7 |   |  | $ | 2.9 |  |  |  | 44 | %
|Percent of total revenue    |  |                    | 8   | %                 |  |   | 7   | %        |  |      |     |      |  |   |    |   |  |   | 9   | % |  |   | 10  | % |  |   |     |  |  |  |    |  

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 a result of
our acquisition of the Enterprise segment. 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-
and nine-months ended September 30, 2004 and 2003,
respectively, a period-over-period comparison of our general and
administrative expense:

|                                   |  |                                 |     |                                |  |   |     |          |  |      |     |      |  |   |    |   |  |   |      |   |  |   |     |   |  |   |     |  |  |  |    |  
|---------------------------------- |  | ------------------------------- | --- | ------------------------------ |  | - | --- | -------- |  | ---- | --- | ---- |  | - | -- | - |  | - | ---- | - |  | - | --- | - |  | - | --- |  |  |  | -- | -
|                                   |  |                                 |     |                               
|                                   |  | Three Months Ended September 30 |     | Nine Months Ended September 30
|                                   |  |                                 |     |                               
|                                   |  |                                 |     |                                |  |   |     |         
|                                   |  |                                 |     | 2004 vs.                       |  |   |     | 2004 vs.
|                                   |  |                                 |     | 2003                           |  |   |     | 2003    
|                                   |  |                                 |     |                                |  |   |     |         
|($ in millions)                    |  | 2004                            |     | 2003                           |  | $ |     | %        |  | 2004 |     | 2003 |  | $ |    | %
|                                   |  |                                 |     |                                |  |   |     |          |  |      |     |      |  |   |    |  
|General and administrative expense |  | $                               | 5.1 |                                |  | $ | 2.7 |          |  | $    | 2.4 |      |  |   | 88 | % |  | $ | 14.4 |   |  | $ | 8.3 |   |  | $ | 6.0 |  |  |  | 73 | %
|Percent of total revenue           |  |                                 | 14  | %                              |  |   | 10  | %        |  |      |     |      |  |   |    |   |  |   | 13   | % |  |   | 12  | % |  |   |     |  |  |  |    |  

26



---



##### 



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,
professional services fees, changes in our allowance for
doubtful accounts, 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, to increase our
allowance for doubtful accounts, increased legal fees, and costs
incurred to comply with the Sarbanes Oxley Act. 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-
and nine-months ended September 30, 2004 and 2003,
respectively, a period-over-period comparison of our non-cash
stock compensation expense:

|                                    |  |                                 |     |                                |  |   |     |               |  |      |      |      |  |   |     |    |  |   |     |  |  |   |     |  |  |   |      |   |  |  |     |   
|----------------------------------- |  | ------------------------------- | --- | ------------------------------ |  | - | --- | ------------- |  | ---- | ---- | ---- |  | - | --- | -- |  | - | --- |  |  | - | --- |  |  | - | ---- | - |  |  | --- | --
|                                    |  |                                 |     |                               
|                                    |  | Three Months Ended September 30 |     | Nine Months Ended September 30
|                                    |  |                                 |     |                               
|                                    |  |                                 |     |                                |  |   |     |              
|                                    |  |                                 |     | 2004 vs. 2003                  |  |   |     | 2004 vs. 2003
|                                    |  |                                 |     |                                |  |   |     |              
|($ in millions)                     |  | 2004                            |     | 2003                           |  | $ |     | %             |  | 2004 |      | 2003 |  | $ |     | % 
|                                    |  |                                 |     |                                |  |   |     |               |  |      |      |      |  |   |     |   
|Non-cash stock compensation expense |  | $                               | 0.2 |                                |  | $ | 0.4 |               |  | $    | (0.2 | )    |  |   | (40 | %) |  | $ | 1.0 |  |  | $ | 1.2 |  |  | $ | (0.2 | ) |  |  | (19 | %)

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)/income, as reported, includes $102,000 and
$249,000 of non-cash stock compensation expense related to these
grants for the three month periods ended September 30, 2004
and 2003, respectively, and $484,000 and $844,000 of expense for
the nine month periods then ended. We expect to record future
stock compensation expense of $289,000 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 expired at the end of one year for directors and
expire in annual increments over three years for executives and
are based on continued employment. Net (loss)/income, as
reported, includes $145,000 and $163,000 of non-cash stock
compensation expense related to these grants for the three month
periods ended September 30, 2004 and 2003, respectively,
and $466,000 and $330,000 of expense for the nine month periods
then ended. We expect to record future stock compensation
expense of $932,000 as a result of these restricted stock grants
that will be recognized over the remaining vesting period for
executives.

Non-cash stock compensation expense constitutes
portions of our direct cost of revenue, research and development
expense, sales and marketing expense, and general and
administrative expense as detailed in the table presented with
our Consolidated Statement of Operations.

Depreciation and amortization of property and
equipment:

The following table sets forth, for the three-
and nine-months ended September 30, 2004 and 2003,
respectively, a period-over-period comparison of our
depreciation and amortization of property and equipment:

|                                                            |  |                                 |      |                                |  |   |      |          |  |      |      |      |  |   |    |   |  |   |      |  |  |   |      |  |  |   |      |  |  |  |    |  
|----------------------------------------------------------- |  | ------------------------------- | ---- | ------------------------------ |  | - | ---- | -------- |  | ---- | ---- | ---- |  | - | -- | - |  | - | ---- |  |  | - | ---- |  |  | - | ---- |  |  |  | -- | -
|                                                            |  |                                 |      |                               
|                                                            |  | Three Months Ended September 30 |      | Nine Months Ended September 30
|                                                            |  |                                 |      |                               
|                                                            |  |                                 |      |                                |  |   |      |         
|                                                            |  |                                 |      | 2004 vs.                       |  |   |      | 2004 vs.
|                                                            |  |                                 |      | 2003                           |  |   |      | 2003    
|                                                            |  |                                 |      |                                |  |   |      |         
|($ in millions)                                             |  | 2004                            |      | 2003                           |  | $ |      | %        |  | 2004 |      | 2003 |  | $ |    | %
|                                                            |  |                                 |      |                                |  |   |      |          |  |      |      |      |  |   |    |  
|Depreciation and amortization of property and
    equipment |  | $                               | 2.0  |                                |  | $ | 1.7  |          |  | $    | 0.3  |      |  |   | 18 | % |  | $ | 5.7  |  |  | $ | 4.9  |  |  | $ | 0.7  |  |  |  | 14 | %
|Gross cost of property and equipment at period-end          |  | $                               | 43.5 |                                |  | $ | 29.3 |          |  | $    | 14.2 |      |  |   | 49 | % |  | $ | 43.5 |  |  | $ | 29.3 |  |  | $ | 14.2 |  |  |  | 49 | %

27



---



##### 



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

Interest expense:

The following table sets forth, for the three-
and nine-months ended September 30, 2004 and 2003,
respectively, a period-over-period comparison of our components
of interest expense:

|                                                                     |  |                                 |     |                                |  |   |     |          |  |      |     |      |  |   |     |    |  |   |     |  |  |   |     |  |  |   |      |   |  |  |     |   
|-------------------------------------------------------------------- |  | ------------------------------- | --- | ------------------------------ |  | - | --- | -------- |  | ---- | --- | ---- |  | - | --- | -- |  | - | --- |  |  | - | --- |  |  | - | ---- | - |  |  | --- | --
|                                                                     |  |                                 |     |                               
|                                                                     |  | Three Months Ended September 30 |     | Nine Months Ended September 30
|                                                                     |  |                                 |     |                               
|                                                                     |  |                                 |     |                                |  |   |     |         
|                                                                     |  |                                 |     | 2004 vs.                       |  |   |     | 2004 vs.
|                                                                     |  |                                 |     | 2003                           |  |   |     | 2003    
|                                                                     |  |                                 |     |                                |  |   |     |         
|($ in millions)                                                      |  | 2004                            |     | 2003                           |  | $ |     | %        |  | 2004 |     | 2003 |  | $ |     | % 
|                                                                     |  |                                 |     |                                |  |   |     |          |  |      |     |      |  |   |     |   
|Interest expense incurred on notes payable                           |  | $                               | 0.2 |                                |  | $ | 0.1 |          |  | $    | 0.1 |      |  |   | 43  | %  |  | $ | 0.6 |  |  | $ | 0.3 |  |  | $ | 0.3  |   |  |  | N/M |   
|Interest expense incurred on capital lease
    obligations           |  |                                 | 0.1 |                                |  |   | 0.1 |          |  |      |    |      |  |   | (42 | %) |  |   | 0.2 |  |  |   | 0.4 |  |  |   | (0.2 | ) |  |  | (53 | %)
|Interest expense incurred on convertible
    subordinated debentures |  |                                 | 0.1 |                                |  |   |    |          |  |      | 0.1 |      |  |   | N/M |    |  |   | 0.3 |  |  |   |    |  |  |   | 0.3  |   |  |  | N/M |   
|Amortization of deferred commitment fees                             |  |                                 | 0.1 |                                |  |   | 0.1 |          |  |      | 0.1 |      |  |   | N/M |    |  |   | 0.3 |  |  |   | 0.1 |  |  |   | 0.2  |   |  |  | N/M |   
|Amortization of debt discount                                        |  |                                 | 0.2 |                                |  |   |    |          |  |      | 0.2 |      |  |   | N/M |    |  |   | 0.9 |  |  |   |    |  |  |   | 0.9  |   |  |  | N/M |   
|                                                                     |  |                                 |     |                                |  |   |     |          |  |      |     |      |  |   |     |    |  |   |     |  |  |   |     |  |  |   |      |   |  |  |     |   
|Total interest expense                                               |  | $                               | 0.7 |                                |  | $ | 0.3 |          |  | $    | 0.4 |      |  |   |     |    |  | $ | 2.3 |  |  | $ | 0.7 |  |  | $ | 1.6  |   |  |  |     |   

Interest expense is incurred under notes payable,
equipment loan a line of credit, and capital lease obligations.
Interest, under the terms of our notes payable, is primarily at
stated interest rates of 7.75% while an equipment loan is at
5.5% and any line of credit borrowing is at variable rates equal
to 5.75%, as of October 31, 2004. We borrowed
$5.0 million on our line of credit in September 2004.
Because the balance of notes payable has increased versus the
three- and nine-month periods ended September 30, 2003, the
related interest expense has also increased in the comparable
periods in 2004. 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. Prior to entering several new capital leases near
the end of the third quarter of 2004, the balance of our capital
leases had decreased throughout the year. Therefore, the related
interest expense was also lower for 2004. Interest expense
incurred on the Debenture issued in connection with the
Enterprise Acquisition accrued at the rate of 3% of the face
value of the Debenture prior to the date of the Waiver (see
Note 11 to the Consolidated Financial Statements). Debt
discount relates to the amount of discount computed as part of
the financing for the Enterprise Acquisition. Such discount is
recorded as a reduction of debt and is being amortized over the
life of the convertible subordinated debenture. Subsequent to
the date of the Waiver, the discount will be recorded ratably to
expense as the Debenture is converted. The deferred commitment
fees relate to deferred financing fees paid to secure the
Debenture and related stock issuance as well as the up-front
payment of fees that were incurred to secure our notes payable
and our revolving line of credit facility. Subsequent to the
date of the Waiver, the remaining deferred financing fees will
be recorded ratably to expense as the Debenture is converted.
All other deferred commitment fees are being amortized over the
term of the note or, in the case of the line of credit, the life
of the facility, which expires in April 2006.

28



---



##### 



Other income/(expense), net:

Other income/(expense) consists primarily of
foreign currency translation/transaction gain or loss. We record
the effects of foreign currency translation on our receivables
that are stated in currencies other than our functional
currency. Investment income earned on cash equivalents, income
related to a loan-to-grant program provided by the State of
Maryland, and miscellaneous other gains or losses are also
recorded as a component of other income/(expense). The other
components of other income/(expense) typically remain comparable
between periods, and changes in other income/(expense) are
primarily attributable to changes in the foreign currency
translation/transaction gain or loss recorded for the period.

Income taxes:

Because we have generated significant net
operating losses since 1999, no provision for federal or state
income taxes has been made for the three or nine month periods
ended September 30, 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 carry-forwards.

29



---



##### 



Liquidity and Capital Resources

The following table sets forth, for the
nine-months ended September 30, 2004 and 2003,
respectively, 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 |                                         | $    | (6.5  | )     |               | $    | (7.3 | )    |   | $    | 0.8   |      |   |     | (11 | %)
|                                                                                                                | Investing activities |                                         |      | (28.0 | )     |               |      | (5.7 | )    |   |      | (22.2 | )    |   |     | N/M |   
|                                                                                                                | Financing activities |                                         |      | 30.7  |       |               |      | 1.8  |      |   |      | 28.9  |      |   |     | N/M |   
|Adjusted operating income/(loss)(see
    reconciliation below)                                                  |                      |                                         | 4.2  |       |       |               | 0.6  |      |      |   | 3.6  |       |      |   | N/M |    
|Purchases of property and equipment                                                                             |                      |                                         | (5.3 | )     |       |               | (3.3 | )    |      |   | (2.0 | )     |      |   | 59  | %  
|Capitalized software development costs                                                                          |                      |                                         |     |       |       |               | (1.9 | )    |      |   | 1.9  |       |      |   | N/M |    
|Payments under long-term debt and lease
    obligations                                                         |                      |                                         | (6.4 | )     |       |               | (3.8 | )    |      |   | (2.5 | )     |      |   | 66  | %  
|Proceeds from issuance of Class A Common
    Stock and Convertible subordinated debentures                      |                      |                                         | 30.0 |       |       |               |     |      |      |   | 30.0 |       |      |   | N/M |    
|Proceeds from long-term debt                                                                                    |                      |                                         | 2.5  |       |       |               | 5.3  |      |      |   | (2.8 | )     |      |   | (53 | %) 
|Proceeds from draw on short-term line of credit,
    net                                                        |                      |                                         | 5.0  |       |       |               |     |      |      |   | 5.0  |       |      |   | N/M |    
|Proceeds from exercise of employee stock options                                                                |                      |                                         | 1.2  |       |       |               | 0.4  |      |      |   | 0.9  |       |      |   | N/M |    
|Financing fees paid related to the issuance of
    Class A Common Stock and Convertible subordinated debentures |                      |                                         | (1.7 | )     |       |               |     |      |      |   | (1.7 | )     |      |   | N/M |    
|Effect of change in foreign currency exchange
    rates on cash                                                 |                      |                                         |     |       |       |               |     |      |      |   |     |       |      |   | N/M |    
|                                                                                                                |                      |                                         |      |       |       |               |      |      |      |   |      |       |      |   |     |    
|Cash and cash equivalents                                                                                       |                      |                                         | 15.0 |       |       |               | 16.1 |      |      |   | (1.1 | )     |      |   | (7  | %) 
|Changes in:                                                                                                     |                      |                                         |      |       |       |               |      |      |      |   |      |       |      |   |     |    
|                                                                                                                |                      | Accounts receivable, net                |      |       | (1.5  | )             |      |      | 1.5  |   |      |       | (3.0 | ) |     |     |    | 
|                                                                                                                |                      | Unbilled receivables                    |      |       | (4.8  | )             |      |      | (4.0 | ) |      |       | (0.7 | ) |     |     |    | 
|                                                                                                                |                      | Inventory                               |      |       | (2.3  | )             |      |      |     |   |      |       | (2.3 | ) |     |     |    | 
|                                                                                                                |                      | Other current assets                    |      |       | (0.8  | )             |      |      | (1.3 | ) |      |       | 0.5  |   |     |     |    | 
|                                                                                                                |                      | Accounts payable and accrued expenses   |      |       | (2.3  | )             |      |      | (3.8 | ) |      |       | 1.6  |   |     |     |    | 
|                                                                                                                |                      | Accrued payroll and related liabilities |      |       | (0.1  | )             |      |      | 0.2  |   |      |       | (0.3 | ) |     |     |    | 
|                                                                                                                |                      | Deferred revenue                        |      |       | 1.2   |               |      |      | (0.6 | ) |      |       | 1.7  |   |     |     |    | 
|                                                                                                                |                      | Change in working capital               |      |       | (10.6 | )             |      |      | (8.0 | ) |      |       | (2.6 | ) |     |     |    | 
|Days revenue outstanding in accounts receivable
    including unbilled receivables                              |                      |                                         | 101  |       |       |               | 103  |      |      |   | 2    |       |      |   |     |    

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 net
proceeds of the financings in connection with the Enterprise
Acquisition in January 2004 and the Kivera Acquisition in August
2004 (as described in Notes 10 and 11 to our Consolidated
Financial Statements and below).

We currently believe that we have sufficient
capital resources and with cash generated from operations as
well as cash on hand will meet our anticipated cash operating
expenses, working capital, and capital expenditure and debt
service needs for the next twelve months. We have borrowing
capacity available to us in the form of capital leases as well
as a line of credit arrangement with our bank. We may also
consider raising capital in the public markets as a means to
meet our capital needs and to invest in our business. Although
we may need to return to the

30



---



##### 



capital markets, establish new credit facilities
or raise capital in private transactions in order to meet our
capital requirements, we can offer no assurances that we will be
able to access these potential sources of funds on terms
acceptable to us or at all


Operating cash flows improved in 2004 primarily
as a result of improvements in gross profit from higher revenue.
Management believes that adjusted operating income/(loss), which
reflects GAAP net income/(loss) excluding non-cash charges, is
an important measure of our operating performance because it
indicates the achievement of operating goals and provides the
basis of comparison to peer companies which may have differing
accounting policies with respect to items such as the
capitalization and depreciation and amortization of software and
fixed assets. The use of this non-GAAP measure is a complement
to the GAAP measure of net income/(loss) which recognizes the
depreciation and amortization of previously committed cash
expenditures.

The following table sets forth a reconciliation
of adjusted operating income/(loss) to net (loss)/income for the
three- and nine-month periods ended September 30, 2004 and
2003:

|                                                                 |                                                                                |              |      |                   |  |      |     |      |  |   |      |     |  |   |       |     | 
|---------------------------------------------------------------- | ------------------------------------------------------------------------------ | ------------ | ---- | ----------------- |  | ---- | --- | ---- |  | - | ---- | --- |  | - | ----- | --- | 
|                                                                 |                                                                                |              |      |                   |  |     
|                                                                 |                                                                                | Three Months |      |                  
|                                                                 |                                                                                | Ended        |      | Nine Months Ended
|                                                                 |                                                                                | September 30 |      | September 30     
|                                                                 |                                                                                |              |      |                  
|($ in millions)                                                  |                                                                                | 2004         |      | 2003              |  | 2004 |     | 2003
|                                                                 |                                                                                |              |      |                   |  |      |     |     
|Net (loss)/income                                                |                                                                                | $            | (3.2 | )                 |  | $    | 0.5 |      |  | $ | (5.8 | )   |  | $ | (14.9 | )  
|Non-cash charges included in net loss:                           |                                                                                |              |      |                   |  |      |     |      |  |   |      |     |  |   |       |    
|                                                                 | Depreciation and amortization of property and
    equipment                    |              |      | 2.0               |  |      |     | 1.7  |  |   |      | 5.7 |  |   |       | 4.9 | 
|                                                                 | Non-cash stock compensation expense                                            |              |      | 0.3               |  |      |     | 0.4  |  |   |      | 0.9 |  |   |       | 1.2 | 
|                                                                 | Amortization of acquired intangible assets                                     |              |      | 0.5               |  |      |     | 0.1  |  |   |      | 1.6 |  |   |       | 0.4 | 
|                                                                 | Amortization of software development costs                                     |              |      | 0.1               |  |      |     | 0.1  |  |   |      | 0.4 |  |   |       | 8.9 | 
|                                                                 | Amortization of deferred debt discount, financing
    fees and commitment fees |              |      | 0.3               |  |      |     | 0.1  |  |   |      | 1.4 |  |   |       | 0.1 | 
|                                                                 |                                                                                |              |      |                   |  |      |     |      |  |   |      |     |  |   |       |    
|Adjusted operating income/(loss), excluding
    non-cash charges |                                                                                | $            |     |                   |  | $    | 2.9 |      |  | $ | 4.2  |     |  | $ | 0.6   |    
|                                                                 |                                                                                |              |      |                   |  |      |     |      |  |   |      |     |  |   |       |    

Adjusted operating income/(loss) decreased to
breakeven for the three-month period ended September 30,
2004 from $2.9 million in the comparable period of 2003.
The decline is primarily attributable to increases in general
and administrative expenses and other indirect expenses. For the
nine-month period ended September 30, 2004, adjusted
operating income/(loss) increased to $4.2 million from
$0.6 million in the comparable period in 2003. The increase
was primarily driven by increased gross profit from Wireless
Carrier software sales. The increase in adjusted operating
income for the nine-month period provided funding for increased
capital expenditures as well as operating activities.

Net cash used in investing activities increased
in 2004 from 2003 primarily related to the Enterprise
Acquisition and the Kivera Acquisition. For the nine-month
period ended September 30, 2004, the total cash used for
the purchase of property and equipment and development of our
software products was $5.3 million while they were
$5.2 million in the comparable period of 2003. The increase
in 2004 is primarily related to an increase in the purchase of
property and equipment 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. This increase
is offset by a reduction in capitalized software development
costs due to completion of certain software development projects
that were under development in prior years.

Net cash provided by financing activities
increased in 2004 from previous year levels as we secured a
total of $30.0 million in financing in the first and third
quarters of 2004 to fund the Enterprise Acquisition and the
Kivera Acquisition. This amount was somewhat offset by financing
fees totaling $1.7 million paid to secure such funding and
as consideration for the Waiver in connection with the
Debenture. Additionally, we received $2.5 million under the
terms of a note

31



---



##### 



payable and $5.0 million borrowed against
our bank line of credit, 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
at date of borrowing 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 5.75%, respectively, at October 31, 2004). Our
bank line of credit with Silicon Valley Bank contains covenants
requiring us to maintain at least $25 million of tangible
net worth, as defined, and at least $10 million of cash and
cash availability as well as restrictive covenants, including,
among others, restrictions on our ability to merge, acquire
assets above prescribed thresholds, undertake actions outside
the ordinary course of our business (including the incurrence of
indebtedness), guarantee debt, distribute dividends, and
repurchase our stock. As of September 30, 2004, we were in
compliance with all of these covenants. 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.
As of September 30, 2004, there was approximately
$1.9 million outstanding under the equipment loan. As of
September 30, 2004, we have borrowed $5.0 million
against the line of credit and had $5.2 million of unused
availability. As of September 30, 2004 and October 31,
2004, there were no other borrowings outstanding under the bank
agreement. We are also subject to minimal unused commitment and
collateral monitoring fees associated with our line of credit,
which are waived if we maintain certain levels of deposits. The
line of credit will expire in April 2006.

Effective January 1, 2004, we acquired 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,
$1.0 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
included a subordinated convertible debenture with stated
principal of $15 million, bearing interest at a stated rate
of 3% per annum and originally 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 an exercise price of $6.50 per
share, expiring in January 2007. The majority of the proceeds
from this financing transaction were used to fund the purchase
of the acquired assets. See Notes 2 and 10 to our
Consolidated Financial Statements.

On September 20, 2004, we acquired
substantially all of the net assets of Kivera, Inc., a provider
of internet-based location application software and geo-data
professional services for approximately $5.5 million in
cash. Kiveras software platform integrates easily with
existing wireless carrier network elements and location
platforms. Kiveras technology can interoperate with our
Xypoint® Location Platform (XLP) and our E9-1-1
service. To fund the Kivera Acquisition, we raised
$10.0 million in cash through the sale of
2,500,000 shares of our Class A Common Stock which was
consummated on August 30, 2004. The majority of the
proceeds from this financing transaction were used to fund the
purchase of the acquired assets. As of the same date, we entered
into the Waiver with the holder of the Debenture. The Waiver
modified certain provisions of the Debenture as follows:
(1) the holder of the Debenture is required to convert the
entire $15 million principal amount into shares of our
Class A Common Stock by the end of 2004, (2) all of
the material restrictive covenants contained in the Debenture
were nullified and (3) the conversion price set forth in
the Debenture was decreased from $5.3753 to $5.01581 (an
adjustment such that conversion of the Debenture will yield an
additional 200,000 shares of Class A Common Stock). As
consideration for the holder of the Debenture agreeing to the
Waiver, we paid the holder of the Debenture $1.0 million
one-time fee in cash. As of September 30, 2004, no
principal amount of the Debenture had been converted. See
Notes 3 and 11 to our Consolidated Financial Statements.

32



---



##### 



Off-Balance Sheet Arrangements

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

Commitments

As of September 30, 2004, our most
significant commitments consisted of long-term debt, obligations
under capital leases and non-cancelable operating leases. We
lease certain furniture and computer equipment under capital
leases. We lease office space and equipment under non-cancelable
operating leases. As of September 30, 2004 our commitments
consisted of the following:

|                          |  |           |        |       |  |       |       |           |  |       |       |  |  |   |       |  |  |   |        | 
|------------------------- |  | --------- | ------ | ----- |  | ----- | ----- | --------- |  | ----- | ----- |  |  | - | ----- |  |  | - | ------ | 
|                          |  | Within 12 |        | 1-3   |  | 3-5   |       | More than |  |      
|($ in millions)           |  | Months    |        | Years |  | Years |       | 5 Years   |  | Total
|                          |  |           |        |       |  |       |       |           |  |      
|Notes payable             |  | $         | 11,662 |       |  | $     | 2,861 |           |  | $     | 1     |  |  | $ |      |  |  | $ | 14,524 | 
|Capital lease obligations |  |           | 2,498  |       |  |       | 2,547 |           |  |       |      |  |  |   |      |  |  |   | 5,045  | 
|Operating leases          |  |           | 2,743  |       |  |       | 3,038 |           |  |       | 2,789 |  |  |   | 1,317 |  |  |   | 9,887  | 
|                          |  |           |        |       |  |       |       |           |  |       |       |  |  |   |       |  |  |   |        | 
|                          |  | $         | 16,903 |       |  | $     | 8,446 |           |  | $     | 2,790 |  |  | $ | 1,317 |  |  | $ | 29,456 | 
|                          |  |           |        |       |  |       |       |           |  |       |       |  |  |   |       |  |  |   |        | 

Related Party Transactions

The leases for substantially all of our
Annapolis, Maryland office facilities, including our principal
executive office, are currently set to expire in early 2005. We
are in the process of extending these leases until 2008, and
expect to finalize the agreements during the fourth quarter of
2004. 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.



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

Interest Rate Risk

As of September 30, 2004, we had
$5.2 million available and unused under the line of credit.
As of October 31, 2004, $1.8 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. As of the same date,
$5.0 million was outstanding against the line of credit and
secured by accounts receivable, bearing interest at 5.75% and
payable upon the collection of the receivables collateralizing
the loan. A hypothetical 100 basis point adverse movement
(increase) in the prime rate would have increased our interest
expense for the three- and nine-month periods ended
September 30, 2004 by approximately $17,000 and $52,000,
respectively, resulting in no significant impact on our
consolidated financial position, results of operations or cash
flows.

At September 30, 2004, we had cash and cash
equivalents of $15.0 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

33



---



##### 



decreased our interest income for the three- and
nine-month periods ended September 30, 2004 by
approximately $38,000 and $129,000, respectively, resulting in
no significant impact on our consolidated financial position,
results of operations or cash flows.


There have not been any material changes to our
interest rate risk as described in Item 7A of our 2003
Annual Report on Form 10-K.

Foreign Currency Risk

As of September 30, 2004, we had
approximately $1.0 million in accounts receivable and
$1.2 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. 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
September 30, 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.

34



---



##### 



PART II.  OTHER INFORMATION



|        |                  
|------- | -----------------
|Item 1. | Legal Proceedings

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



|        |                                                                
|------- | ---------------------------------------------------------------
|Item 2. | Unregistered Sales of Equity Securities and
    Use of Proceeds

Information with respect to our issuance of
unregistered securities on August 30, 2004 is as provided
in our Current Report on Form 8-K dated as of
August 30, 2004.



|        |                                    
|------- | -----------------------------------
|Item 3. | Defaults Upon Senior
    Securities

None.



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

On July 15, 2004, we held our Annual Meeting
of Stockholders. Six matters were submitted to the stockholders
for consideration:



| |   |                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Election of five Directors (being all of our
    Directors).                                                                                                                                                     
|
| |  | To approve the possible issuance of shares of our
    Class A Common Stock equal to more than 20% of our
    outstanding Class A Common Stock in connection with the
    financing of the Enterprise acquisition.
|
| |  | To approve the Third Amended and Restated 1997
    Stock Incentive Plan.                                                                                                                                         
|
| |  | To adopt a staggered board of directors.                                                                                                                                                                         
|
| |  | To eliminate the ability of stockholders to act
    without a meeting through less than unanimous written consent.                                                                                               
|
| |  | To approve changes to our articles of
    incorporation which would require a supermajority vote of our
    stockholders in order to amend certain specified provisions of
    our articles.                     

Each share of our Class A Common Stock is
entitled to one vote per share and each share of our
Class B Common Stock is entitled to three votes per share.
All of the matters were approved by our stockholders in the
following manner:

1. Election of five Directors.

|                     |  |     |            |   |  |          |    |   |  |  |           |  |  |  |   |  
|-------------------- |  | --- | ---------- | - |  | -------- | -- | - |  |  | --------- |  |  |  | - | -
|                     |  | For |            | % |  | Withhold |    | %
|                     |  |     |            |   |  |          |    |  
|Maurice B. Tosé      |  |     | 43,881,025 |   |  |          | 97 | % |  |  | 1,356,645 |  |  |  | 3 | %
|Clyde A. Heintzelman |  |     | 44,700,524 |   |  |          | 99 | % |  |  | 537,146   |  |  |  | 1 | %
|Richard A. Kozak     |  |     | 44,754,043 |   |  |          | 99 | % |  |  | 483,627   |  |  |  | 1 | %
|Weldon H. Latham     |  |     | 44,729,009 |   |  |          | 99 | % |  |  | 508,661   |  |  |  | 1 | %
|Byron F. Marchant    |  |     | 44,752,543 |   |  |          | 99 | % |  |  | 485,127   |  |  |  | 1 | %

2. To approve the possible issuance of
shares of our Class A Common Stock equal to more than 20%
of our outstanding Class A Common Stock in connection with
the financing of the Enterprise acquisition.

|         |  |  |            | 
|-------- |  |  | ---------- | 
|For      |  |  | 32,202,584 | 
|Against  |  |  | 103,165    | 
|Withheld |  |  | 1,474,954  | 

35



---



##### 



3. To approve the Fourth Amended and
Restated 1997 Stock Incentive Plan.

|         |  |  |            | 
|-------- |  |  | ---------- | 
|For      |  |  | 30,022,955 | 
|Against  |  |  | 49,545     | 
|Withheld |  |  | 3,708,203  | 

4. To adopt a staggered board of directors.

|         |  |  |            | 
|-------- |  |  | ---------- | 
|For      |  |  | 31,322,096 | 
|Against  |  |  | 41,585     | 
|Withheld |  |  | 2,417,022  | 

5. To eliminate the ability of stockholders
to act without a meeting through less than unanimous written
consent.

|         |  |  |            | 
|-------- |  |  | ---------- | 
|For      |  |  | 30,385,829 | 
|Against  |  |  | 62,087     | 
|Withheld |  |  | 3,332,787  | 

6. To approve changes to our articles of
incorporation which would require a supermajority vote of our
stockholders in order to amend certain specified provisions of
our articles.

|         |  |  |            | 
|-------- |  |  | ---------- | 
|For      |  |  | 30,993,427 | 
|Against  |  |  | 56,335     | 
|Withheld |  |  | 2,730,941  | 



|        |                  
|------- | -----------------
|Item 5. | Other Information

(a) None.

(b) None.



|        |         
|------- | --------
|Item 6. | Exhibits

|        |    |             |  |                                                                                                                                
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Numbers |    | Description
|        |    |            
|        | 10 | .46         |  | Amended and Restated Loan and Security Agreement
    by and between the Company and Silicon Valley Bank.                       
|        | 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.

36



---



##### 



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
3rd day of August 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
    November 15, 2004             |  | Chairman, President and Chief Executive
    Officer
    (Principal Executive Officer)  
|                                                                    
|/s/ THOMAS M. BRANDT, JR.Thomas M. Brandt, Jr.
    November 15, 2004 |  | Senior Vice President and Chief Financial
    Officer
    (Principal Financial Officer)

37