##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q


|                                         |  |                                                                                              
|---------------------------------------- |  | ---------------------------------------------------------------------------------------------
|þ                                        |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
    THE SECURITIES EXCHANGE ACT OF 1934  
|For the quarter ended September 30, 2005
|OR                                      
|o                                        |  | TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
    THE SECURITIES EXCHANGE ACT OF 1934



TELECOMMUNICATION SYSTEMS, INC.




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

(410) 263-7616




þ o


þ o


o þ




|                                                    |  |                    |            | 
|--------------------------------------------------- |  | ------------------ | ---------- | 
|                                                    |  | Shares outstanding |           
|                                                    |  | as of October 31,  |           
|Title of Each Class                                 |  | 2005               |           
|                                                    |  |                    |           
|Class A Common Stock, par value
    $0.01 per share |  |                    | 31,304,005 | 
|Class B Common Stock, par value
    $0.01 per share |  |                    | 8,035,963  | 
|                                                    |  |                    |           
|Total Common Stock Outstanding                      |  |                    | 39,339,968 | 
|                                                    |  |                    |           









---










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, 2005 and
    2004 |    |      | 3  | 
|                              |  |            |  | Consolidated Balance Sheets as of
    September 30, 2005 and December 31, 2004                                 |    |      | 4  | 
|                              |  |            |  | Consolidated Statement of
    Stockholders Equity for the nine-months ended
    September 30, 2005            |    |      | 5  | 
|                              |  |            |  | Consolidated Statements of Cash Flows for
    the nine-months ended September 30, 2005 and 2004                |    |      | 6  | 
|                              |  |            |  | Notes to Consolidated Financial
    Statements                                                                 |    |      | 7  | 
|                              |  | Item 2.    |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                      |    |      | 14 | 
|                              |  | Item 3.    |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                 |    |      | 29 | 
|                              |  | Item 4.    |  | Controls and Procedures                                                                                        |    |      | 29 | 
|PART II. OTHER INFORMATION   
|                              |  | Item 1.    |  | Legal Proceedings                                                                                              |    |      | 30 | 
|                              |  | Item 2.    |  | Unregistered Sales of Equity Securities and
    Use of Proceeds                                                |    |      | 30 | 
|                              |  | Item 3.    |  | Defaults Upon Senior Securities                                                                                |    |      | 30 | 
|                              |  | Item 4.    |  | Submission of Matters to a Vote of Security
    Holders                                                        |    |      | 30 | 
|                              |  | Item 5.    |  | Other Information                                                                                              |    |      | 30 | 
|                              |  | Item 6.    |  | Exhibits                                                                                                       |    |      | 30 | 
|                              |  | SIGNATURES |  |                                                                                                                | 31 |     
|Ex-10.46                     
|Ex-31.1                      
|Ex-31.2                      
|Ex-32.1                      
|Ex-32.2                      







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##### Table of Contents



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,     |  
|                                                      |                                                                                                                                        |                                           |        |        |                   |  
|                                                      |                                                                                                                                        | 2005                                      |        |        | 2004              |   |        | 2005   |        |   | 2004   |       
|                                                      |                                                                                                                                        |                                           |        |        |                   |   |        |        |        |   |        |       
|Revenue                                               |                                                                                                                                        |                                           |        |        |                   |   |        |        |        |   |        |        |        |   |        |       
|                                                      | Hosted, subscriber, and maintenance                                                                                                    |                                           | $      | 19,129 |                   |   | $      | 20,230 |        |   | $      | 56,481 |        |   | $      | 62,377 |        
|                                                      | Services                                                                                                                               |                                           |        | 5,989  |                   |   |        | 3,938  |        |   |        | 16,108 |        |   |        | 10,846 |        
|                                                      | Systems                                                                                                                                |                                           |        | 9,428  |                   |   |        | 13,869 |        |   |        | 23,092 |        |   |        | 38,018 |        
|                                                      |                                                                                                                                        |                                           |        |        |                   |   |        |        |        |   |        |       
|                                                      |                                                                                                                                        | Total revenue                             |        |        | 34,546            |   |        |        | 38,037 |   |        |        | 95,681 |   |        |        | 111,241 | 
|                                                      |                                                                                                                                        |                                           |        |        |                   |   |        |        |        |   |        |       
|Direct costs of revenue                               |                                                                                                                                        |                                           |        |        |                   |   |        |        |        |   |        |        |        |   |        |       
|                                                      | Direct cost of hosted, subscriber, and maintenance revenue                                                                             |                                           |        | 10,231 |                   |   |        | 12,496 |        |   |        | 30,452 |        |   |        | 38,873 |        
|                                                      | Direct cost of services revenue                                                                                                        |                                           |        | 3,976  |                   |   |        | 2,651  |        |   |        | 9,996  |        |   |        | 6,760  |        
|                                                      | Direct cost of systems revenue, including amortization of
    software development costs of $205, $77, $613 and $403,
    respectively |                                           |        | 7,532  |                   |   |        | 9,756  |        |   |        | 15,938 |        |   |        | 22,433 |        
|                                                      |                                                                                                                                        |                                           |        |        |                   |   |        |        |        |   |        |       
|                                                      |                                                                                                                                        | Total direct cost of revenue              |        |        | 21,739            |   |        |        | 24,903 |   |        |        | 56,386 |   |        |        | 68,066  | 
|                                                      |                                                                                                                                        |                                           |        |        |                   |   |        |        |        |   |        |       
|Hosted, subscriber, and maintenance gross profit      |                                                                                                                                        |                                           | 8,898  |        |                   |   | 7,734  |        |        |   | 26,029 |        |        |   | 23,504 |       
|Services gross profit                                 |                                                                                                                                        |                                           | 2,013  |        |                   |   | 1,287  |        |        |   | 6,112  |        |        |   | 4,086  |       
|Systems gross profit                                  |                                                                                                                                        |                                           | 1,896  |        |                   |   | 4,113  |        |        |   | 7,154  |        |        |   | 15,585 |       
|                                                      |                                                                                                                                        |                                           |        |        |                   |   |        |        |        |   |        |       
|                                                      |                                                                                                                                        | Total gross profit                        |        |        | 12,807            |   |        |        | 13,134 |   |        |        | 39,295 |   |        |        | 43,175  | 
|                                                      |                                                                                                                                        |                                           |        |        |                   |   |        |        |        |   |        |       
|Operating costs and expenses                          |                                                                                                                                        |                                           |        |        |                   |   |        |        |        |   |        |        |        |   |        |       
|                                                      | Research and development expense                                                                                                       |                                           |        | 3,624  |                   |   |        | 4,798  |        |   |        | 11,820 |        |   |        | 14,399 |        
|                                                      | Sales and marketing expense                                                                                                            |                                           |        | 3,292  |                   |   |        | 3,080  |        |   |        | 10,621 |        |   |        | 9,593  |        
|                                                      | General and administrative expense                                                                                                     |                                           |        | 4,771  |                   |   |        | 5,121  |        |   |        | 14,831 |        |   |        | 14,374 |        
|                                                      | Depreciation and amortization of property and equipment                                                                                |                                           |        | 2,279  |                   |   |        | 2,015  |        |   |        | 6,633  |        |   |        | 5,659  |        
|                                                      | Amortization of acquired intangible assets                                                                                             |                                           |        | 680    |                   |   |        | 532    |        |   |        | 2,166  |        |   |        | 1,596  |        
|                                                      | Non-cash stock compensation expense                                                                                                    |                                           |        | 153    |                   |   |        | 247    |        |   |        | 565    |        |   |        | 950    |        
|                                                      |                                                                                                                                        |                                           |        |        |                   |   |        |        |        |   |        |       
|                                                      |                                                                                                                                        | Total operating costs and expenses        |        |        | 14,799            |   |        |        | 15,793 |   |        |        | 46,636 |   |        |        | 46,571  | 
|                                                      |                                                                                                                                        |                                           |        |        |                   |   |        |        |        |   |        |       
|Loss from operations                                  |                                                                                                                                        |                                           | (1,992 | )      |                   |   | (2,659 | )      |        |   | (7,341 | )      |        |   | (3,396 | )     
|Interest expense                                      |                                                                                                                                        |                                           | (249   | )      |                   |   | (665   | )      |        |   | (781   | )      |        |   | (2,329 | )     
|Other income/(expense), net                           |                                                                                                                                        |                                           | 29     |        |                   |   | 79     |        |        |   | (215   | )      |        |   | (103   | )     
|                                                      |                                                                                                                                        |                                           |        |        |                   |   |        |        |        |   |        |       
|Net loss                                              |                                                                                                                                        | $                                         | (2,212 | )      |                   | $ | (3,245 | )      |        | $ | (8,337 | )      |        | $ | (5,828 | )     
|                                                      |                                                                                                                                        |                                           |        |        |                   |   |        |        |        |   |        |       
|Loss per share-basic and diluted                      |                                                                                                                                        | $                                         | (0.06  | )      |                   | $ | (0.10  | )      |        | $ | (0.22  | )      |        | $ | (0.18  | )     
|                                                      |                                                                                                                                        |                                           |        |        |                   |   |        |        |        |   |        |       
|Weighted average shares outstanding-basic and diluted |                                                                                                                                        |                                           | 39,003 |        |                   |   | 33,587 |        |        |   | 38,743 |        |        |   | 32,683 |       
|                                                      |                                                                                                                                        |                                           |        |        |                   |   |        |        |        |   |        |       
|Composition of non-cash stock compensation expense:   |                                                                                                                                        |                                           |        |        |                   |   |        |        |        |   |        |        |        |   |        |       
|                                                      | Direct costs of revenue                                                                                                                |                                           | $      |       |                   |   | $      | 9      |        |   | $      | 16     |        |   | $      | 44     |        
|                                                      | Research and development expense                                                                                                       |                                           |        |       |                   |   |        | 28     |        |   |        | 11     |        |   |        | 114    |        
|                                                      | Sales and marketing expense                                                                                                            |                                           |        | 1      |                   |   |        | 10     |        |   |        | 17     |        |   |        | 46     |        
|                                                      | General and administrative expense                                                                                                     |                                           |        | 152    |                   |   |        | 200    |        |   |        | 521    |        |   |        | 746    |        
|                                                      |                                                                                                                                        |                                           |        |        |                   |   |        |        |        |   |        |       
|                                                      |                                                                                                                                        | Total non-cash stock compensation expense |        | $      | 153               |   |        | $      | 247    |   |        | $      | 565    |   |        | $      | 950     | 
|                                                      |                                                                                                                                        |                                           |        |        |                   |   |        |        |        |   |        |       



3



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##### Table of Contents



TeleCommunication Systems, Inc.





Consolidated Balance Sheets


(amounts in thousands, except share data)


|                                                                                                                    |                                                                                |                                                                                                                 |                                            |          |              |        |        |          |     |         | 
|------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | -------- | ------------ | ------ | ------ | -------- | --- | ------- | 
|                                                                                                                    |                                                                                | September 30,                                                                                                   |                                            |          | December 31, |       
|                                                                                                                    |                                                                                | 2005                                                                                                            |                                            |          | 2004         |       
|                                                                                                                    |                                                                                |                                                                                                                 |                                            |          |              |       
|                                                                                                                    |                                                                                | (unaudited)                                                                                                     |                                            |          |             
|Assets                                                                                                             
|Current assets:                                                                                                     |                                                                                |                                                                                                                 |                                            |          |              |        |        |         
|                                                                                                                    | Cash and cash equivalents                                                      |                                                                                                                 | $                                          | 8,385    |              |        | $      | 18,251   |    
|                                                                                                                    | Accounts receivable, net of allowance of $1,080 in 2005 and
    $1,355 in 2004 |                                                                                                                 |                                            | 23,382   |              |        |        | 23,952   |    
|                                                                                                                    | Unbilled receivables                                                           |                                                                                                                 |                                            | 11,271   |              |        |        | 10,503   |    
|                                                                                                                    | Inventory                                                                      |                                                                                                                 |                                            | 3,932    |              |        |        | 3,985    |    
|                                                                                                                    | Other current assets                                                           |                                                                                                                 |                                            | 4,772    |              |        |        | 2,755    |    
|                                                                                                                    |                                                                                |                                                                                                                 |                                            |          |              |       
|                                                                                                                    |                                                                                |                                                                                                                 | Total current assets                       |          |              | 51,742 |        |          |     | 59,446  | 
|Property and equipment, net of accumulated depreciation and
    amortization of $32,587 in 2005 and $27,946 in 2004 |                                                                                |                                                                                                                 | 16,869                                     |          |              |        | 17,917 |         
|Software development costs, net of accumulated amortization of
    $1,964 in 2005 and $1,351 in 2004                |                                                                                |                                                                                                                 | 4,505                                      |          |              |        | 2,791  |         
|Acquired intangible assets, net of accumulated amortization of
    $4,331 in 2005 and $2,165 in 2004                |                                                                                |                                                                                                                 | 4,171                                      |          |              |        | 5,842  |         
|Goodwill                                                                                                            |                                                                                |                                                                                                                 | 14,446                                     |          |              |        | 14,798 |         
|Other assets                                                                                                        |                                                                                |                                                                                                                 | 2,896                                      |          |              |        | 1,588  |         
|                                                                                                                    |                                                                                |                                                                                                                 |                                            |          |              |       
|                                                                                                                    |                                                                                |                                                                                                                 | Total assets                               |          | $            | 94,629 |        |          | $   | 102,382 | 
|                                                                                                                    |                                                                                |                                                                                                                 |                                            |          |              |       
|                                                                                                                   
|Liabilities and stockholders equity                                                                               
|Current liabilities:                                                                                                |                                                                                |                                                                                                                 |                                            |          |              |        |        |         
|                                                                                                                    | Accounts payable and accrued expenses                                          |                                                                                                                 | $                                          | 15,692   |              |        | $      | 14,749   |    
|                                                                                                                    | Accrued payroll and related liabilities                                        |                                                                                                                 |                                            | 2,467    |              |        |        | 4,507    |    
|                                                                                                                    | Deferred revenue                                                               |                                                                                                                 |                                            | 8,412    |              |        |        | 5,228    |    
|                                                                                                                    | Current portion of notes payable, including credit line
    borrowings         |                                                                                                                 |                                            | 10,046   |              |        |        | 11,993   |    
|                                                                                                                    | Current portion of capital lease obligations                                   |                                                                                                                 |                                            | 2,622    |              |        |        | 2,765    |    
|                                                                                                                    |                                                                                |                                                                                                                 |                                            |          |              |       
|                                                                                                                    |                                                                                |                                                                                                                 | Total current liabilities                  |          |              | 39,239 |        |          |     | 39,242  | 
|Capital lease obligations and notes payable, less current portion                                                   |                                                                                |                                                                                                                 | 3,432                                      |          |              |        | 3,634  |         
|Stockholders equity:                                                                                               |                                                                                |                                                                                                                 |                                            |          |              |        |        |         
|                                                                                                                    | Class A Common Stock; $0.01 par value:                                         |                                                                                                                 |                                            |          |              |        |        |          |    
|                                                                                                                    |                                                                                | Authorized shares  225,000,000; issued and
    outstanding shares of 31,296,656 in 2005 and 30,626,454 in 2004 |                                            |          | 313          |        |        |          | 306 |        
|                                                                                                                    | Class B Common Stock; $0.01 par value:                                         |                                                                                                                 |                                            |          |              |        |        |          |    
|                                                                                                                    |                                                                                | Authorized shares  75,000,000; issued and outstanding
    shares of 8,035,963 in 2005 and 8,409,001 in 2004    |                                            |          | 81           |        |        |          | 84  |        
|                                                                                                                    | Deferred compensation                                                          |                                                                                                                 |                                            | (385     | )            |        |        | (787     | )  
|                                                                                                                    | Additional paid-in capital                                                     |                                                                                                                 |                                            | 210,161  |              |        |        | 209,778  |    
|                                                                                                                    | Accumulated other comprehensive loss:                                          |                                                                                                                 |                                            |          |              |        |        |          |    
|                                                                                                                    |                                                                                | Cumulative foreign currency translation adjustment                                                              |                                            |          | (6           | )      |        |          | (6  | )      
|                                                                                                                    | Accumulated deficit                                                            |                                                                                                                 |                                            | (158,206 | )            |        |        | (149,869 | )  
|                                                                                                                    |                                                                                |                                                                                                                 |                                            |          |              |       
|                                                                                                                    |                                                                                |                                                                                                                 | Total stockholders equity                 |          |              | 51,958 |        |          |     | 59,506  | 
|                                                                                                                    |                                                                                |                                                                                                                 |                                            |          |              |       
|                                                                                                                    |                                                                                |                                                                                                                 | Total liabilities and stockholders equity |          | $            | 94,629 |        |          | $   | 102,382 | 
|                                                                                                                    |                                                                                |                                                                                                                 |                                            |          |              |       



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##### Table of Contents



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, 2005                                                                                           |  | $       | 306 |   |         | $ | 84 |              |  | $           | (787    | ) |       | $             | 209,778 |   |             | $ | (6 | )     |  | $ | (149,869 | ) |  | $ | 59,506 |  
|Options exercised for the purchase of 268,929 shares of
    Class A Common Stock                                     |  |         | 3   |   |         |   |   |              |  |             |        |   |       |               | 271     |   |             |   |   |       |  |   |         |   |  |   | 274    |  
|Issuance of 143,983 shares of Class A Common Stock
    under Employee Stock Purchase Plan                            |  |         | 1   |   |         |   |   |              |  |             |        |   |       |               | 306     |   |             |   |   |       |  |   |         |   |  |   | 308    |  
|Issuance of 14,816 shares of restricted Class A Common
    Stock to directors and key executives                     |  |         | 1   |   |         |   |   |              |  |             | (40     | ) |       |               | 40      |   |             |   |   |       |  |   |         |   |  |   |       |  
|Issuance costs for 2,500,000 shares of Class A Common
    Stock in connection with a private equity offering in 2004 |  |         |    |   |         |   |   |              |  |             |        |   |       |               | (81     | ) |             |   |   |       |  |   |         |   |  |   | (81    | )
|Conversion of 373,038 shares of Class B Common Stock
    to Class A Common Stock                                     |  |         | 4   |   |         |   | (4 | )            |  |             |        |   |       |               |        |   |             |   |   |       |  |   |         |   |  |   |       |  
|Surrender of 100,564 shares of restricted Class A
    Common Stock as payment for payroll tax withholdings           |  |         | (1  | ) |         |   |   |              |  |             |        |   |       |               | (249    | ) |             |   |   |       |  |   |         |   |  |   | (250   | )
|Stock compensation expense for issuance of Class A Common
    Stock options at below fair market value               |  |         |    |   |         |   |   |              |  |             |        |   |       |               | 123     |   |             |   |   |       |  |   |         |   |  |   | 123    |  
|Amortization of deferred compensation expense                                                                        |  |         |    |   |         |   |   |              |  |             | 442     |   |       |               |        |   |             |   |   |       |  |   |         |   |  |   | 442    |  
|Change in value of options issued to non-employees for service                                                       |  |         |    |   |         |   |   |              |  |             |        |   |       |               | (28     | ) |             |   |   |       |  |   |         |   |  |   | (28    | )
|Net loss for the nine months ended September 30, 2005                                                                |  |         |    |   |         |   |   |              |  |             |        |   |       |               |        |   |             |   |   |       |  |   | (8,337   | ) |  |   | (8,337 | )
|                                                                                                                     |  |         |     |   |         |   |    |              |  |             |         |   |       |               |         |   |             |   |    |       | 
|Balance at September 30, 2005                                                                                        |  | $       | 313 |   |         | $ | 81 |              |  | $           | (385    | ) |       | $             | 210,161 |   |             | $ | (6 | )     |  | $ | (158,206 | ) |  | $ | 51,958 |  
|                                                                                                                     |  |         |     |   |         |   |    |              |  |             |         |   |       |               |         |   |             |   |    |       | 



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##### Table of Contents



TeleCommunication Systems, Inc.





Consolidated Statements of Cash Flows


(amounts in thousands)


(unaudited)


|                                                                                                       |                                                                          |                                         |        |       |        |   |         |       |        |  
|------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------ | --------------------------------------- | ------ | ----- | ------ | - | ------- | ----- | ------ | -
|                                                                                                       |                                                                          | Nine months ended                       |       
|                                                                                                       |                                                                          | September 30,                           |       
|                                                                                                       |                                                                          |                                         |       
|                                                                                                       |                                                                          | 2005                                    |        |       | 2004   |  
|                                                                                                       |                                                                          |                                         |        |       |        |  
|Operating activities:                                                                                  |                                                                          |                                         |        |       |        |   |         |      
|Net loss                                                                                               |                                                                          | $                                       | (8,337 | )     |        | $ | (5,828  | )    
|Adjustments to reconcile net loss to net cash provided by/(used
    in) operating activities:          |                                                                          |                                         |        |       |        |   |         |      
|                                                                                                       | Depreciation and amortization of property and equipment                  |                                         |        | 6,633 |        |   |         | 5,659 |       
|                                                                                                       | Amortization of acquired intangible assets                               |                                         |        | 2,166 |        |   |         | 1,596 |       
|                                                                                                       | Non-cash stock compensation expense                                      |                                         |        | 565   |        |   |         | 950   |       
|                                                                                                       | Amortization of software development costs                               |                                         |        | 613   |        |   |         | 403   |       
|                                                                                                       | Amortization of debt discount                                            |                                         |        |      |        |   |         | 893   |       
|                                                                                                       | Amortization of deferred financing fees included in interest
    expense |                                         |        | 259   |        |   |         | 328   |       
|                                                                                                       | Other non-cash (income)/expenses                                         |                                         |        | (102  | )      |   |         | 179   |       
|                                                                                                       | State of Maryland loan forgiveness                                       |                                         |        |      |        |   |         | (100  | )     
|                                                                                                       | Changes in operating assets and liabilities:                             |                                         |        |       |        |   |         |       |       
|                                                                                                       |                                                                          | Accounts receivable, net                |        |       | 396    |   |         |       | (1,512 | )
|                                                                                                       |                                                                          | Unbilled receivables                    |        |       | (768   | ) |         |       | (4,759 | )
|                                                                                                       |                                                                          | Inventory                               |        |       | 34     |   |         |       | (2,329 | )
|                                                                                                       |                                                                          | Other current assets                    |        |       | (2,107 | ) |         |       | (784   | )
|                                                                                                       |                                                                          | Accounts payable and accrued expenses   |        |       | 1,126  |   |         |       | (2,255 | )
|                                                                                                       |                                                                          | Accrued payroll and related liabilities |        |       | (2,275 | ) |         |       | (138   | )
|                                                                                                       |                                                                          | Deferred revenue                        |        |       | 3,264  |   |         |       | 1,162  |  
|                                                                                                       |                                                                          |                                         |        |       |        |  
|Net cash provided by/(used in) operating activities                                                    |                                                                          |                                         | 1,467  |       |        |   | (6,535  | )    
|Investing activities:                                                                                  |                                                                          |                                         |        |       |        |   |         |      
|Acquisitions, net of cash acquired                                                                     |                                                                          |                                         | (124   | )     |        |   | (24,476 | )    
|Purchases of property and equipment                                                                    |                                                                          |                                         | (3,442 | )     |        |   | (5,320  | )    
|Capitalized software development costs                                                                 |                                                                          |                                         | (2,327 | )     |        |   |        |      
|Change in other assets                                                                                 |                                                                          |                                         | (1,336 | )     |        |   | 1,837   |      
|                                                                                                       |                                                                          |                                         |        |       |        |  
|Net cash used in investing activities                                                                  |                                                                          |                                         | (7,229 | )     |        |   | (27,959 | )    
|Financing activities:                                                                                  |                                                                          |                                         |        |       |        |   |         |      
|Payments on long-term debt and capital lease obligations                                               |                                                                          |                                         | (7,517 | )     |        |   | (6,375  | )    
|Proceeds from draws under short-term line of credit, net                                               |                                                                          |                                         | 3,000  |       |        |   | 5,000   |      
|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 |                                                                          |                                         | (81    | )     |        |   | (1,650  | )    
|Proceeds from issuance of long-term debt                                                               |                                                                          |                                         |       |       |        |   | 2,500   |      
|Proceeds from exercise of employee stock options and sale of
    stock                                 |                                                                          |                                         | 582    |       |        |   | 1,238   |      
|                                                                                                       |                                                                          |                                         |        |       |        |  
|Net cash (used in)/provided by financing activities                                                    |                                                                          |                                         | (4,016 | )     |        |   | 30,683  |      
|                                                                                                       |                                                                          |                                         |        |       |        |  
|Net decrease in cash                                                                                   |                                                                          |                                         | (9,778 | )     |        |   | (3,811  | )    
|Effect of exchange rates on cash and cash equivalents                                                  |                                                                          |                                         | (88    | )     |        |   | 11      |      
|Cash and cash equivalents at the beginning of the period                                               |                                                                          |                                         | 18,251 |       |        |   | 18,785  |      
|                                                                                                       |                                                                          |                                         |        |       |        |  
|Cash and cash equivalents at the end of the period                                                     |                                                                          | $                                       | 8,385  |       |        | $ | 14,985  |      
|                                                                                                       |                                                                          |                                         |        |       |        |  



6



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##### Table of Contents



TeleCommunication Systems, Inc.





Notes to Consolidated Financial Statements


September 30, 2005


(amounts in thousands, except per share amounts)


(unaudited)




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

Basis of Presentation.


Reclassifications.


Use of Estimates.


Software Development Costs.






Stock-Based Compensation and Deferred Compensation. Accounting for Stock
Issued to Employees


7



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##### Table of Contents



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)


Accounting for Stock-Based Compensation,


|                                                                                                                    |                                              |                    |        |        |                   |   |        |        |   |   |         |        |   |   |         |        |  
|------------------------------------------------------------------------------------------------------------------- | -------------------------------------------- | ------------------ | ------ | ------ | ----------------- | - | ------ | ------ | - | - | ------- | ------ | - | - | ------- | ------ | -
|                                                                                                                    |                                              | Three months ended |        |        | Nine months ended |  
|                                                                                                                    |                                              | September 30,      |        |        | September 30,     |  
|                                                                                                                    |                                              |                    |        |        |                   |  
|                                                                                                                    |                                              | 2005               |        |        | 2004              |   |        | 2005   |   |   | 2004    |       
|                                                                                                                    |                                              |                    |        |        |                   |   |        |        |   |   |         |       
|Net loss, as reported                                                                                               |                                              | $                  | (2,212 | )      |                   | $ | (3,245 | )      |   | $ | (8,337  | )      |   | $ | (5,828  | )     
|Add: Stock-based employee compensation expense included in
    reported net loss                                    |                                              |                    | 153    |        |                   |   | 247    |        |   |   | 565     |        |   |   | 950     |       
|Deduct: Total stock-based employee compensation expense
    determined under fair value based method for all awards |                                              |                    | (1,326 | )      |                   |   | (2,315 | )      |   |   | (3,721  | )      |   |   | (7,154  | )     
|                                                                                                                    |                                              |                    |        |        |                   |   |        |        |   |   |         |       
|Pro forma net loss                                                                                                  |                                              | $                  | (3,385 | )      |                   | $ | (5,313 | )      |   | $ | (11,493 | )      |   | $ | (12,032 | )     
|Loss per common share:                                                                                              |                                              |                    |        |        |                   |   |        |        |   |   |         |        |   |   |         |       
|                                                                                                                    | Basic and diluted  as reported              |                    | $      | (0.06  | )                 |   | $      | (0.10  | ) |   | $       | (0.22  | ) |   | $       | (0.18  | )
|                                                                                                                    |                                              |                    |        |        |                   |   |        |        |   |   |         |       
|                                                                                                                    | Basic and diluted  pro forma                |                    | $      | (0.09  | )                 |   | $      | (0.16  | ) |   | $       | (0.30  | ) |   | $       | (0.37  | )
|                                                                                                                    |                                              |                    |        |        |                   |   |        |        |   |   |         |       
|Weighted average shares outstanding:                                                                                |                                              |                    |        |        |                   |   |        |        |   |   |         |        |   |   |         |       
|                                                                                                                    | Basic and diluted  as reported and proforma |                    |        | 39,003 |                   |   |        | 33,587 |   |   |         | 38,743 |   |   |         | 32,683 |  

Other Comprehensive Income/loss.


Recent Accounting Pronouncements. Share Based Payment






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



Accounting Changes and Error Corrections  A
Replacement of APB Opinion No. 20 and FASB Statement
No. 3


8



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##### Table of Contents



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)




|   |                                                 
|-- | ------------------------------------------------
|2. | Supplemental Disclosure of Cash Flow Information







|   |                    
|-- | -------------------
|3. | Segment Information







|                                                   |                    |                                  |        |        |      |   |       |        |  |   |        |        |  |      |        |        |       |   |       |        |  |   |        |        | 
|-------------------------------------------------- | ------------------ | -------------------------------- | ------ | ------ | ---- | - | ----- | ------ |  | - | ------ | ------ |  | ---- | ------ | ------ | ----- | - | ----- | ------ |  | - | ------ | ------ | 
|                                                   |                    | Three months ended September 30, |       
|                                                   |                    |                                  |       
|                                                   |                    | 2005                             |        |        | 2004 |  
|                                                   |                    |                                  |        |        |      |  
|                                                   |                    | Comm.                            |        |        |      |   | Comm. |        |  |  
|                                                   |                    | Apps                             |        |        | Gvmt |   |       | Total  |  |   | Apps   |        |  | Gvmt |        |        | Total |  
|                                                   |                    |                                  |        |        |      |   |       |        |  |   |        |        |  |      |        |        |       |  
|Revenue                                            |                    |                                  |        |        |      |   |       |        |  |   |        |        |  |      |        |        |       |   |       |        |  |   |        |       
|Hosted, subscriber and maintenance                 |                    | $                                | 19,053 |        |      | $ | 76    |        |  | $ | 19,129 |        |  | $    | 20,230 |        |       | $ |      |        |  | $ | 20,230 |       
|Services                                           |                    |                                  | 365    |        |      |   | 5,624 |        |  |   | 5,989  |        |  |      |       |        |       |   | 3,938 |        |  |   | 3,938  |       
|Systems                                            |                    |                                  | 3,160  |        |      |   | 6,268 |        |  |   | 9,428  |        |  |      | 4,219  |        |       |   | 9,650 |        |  |   | 13,869 |       
|                                                   |                    |                                  |        |        |      |   |       |        |  |   |        |        |  |      |        |        |       |  
|                                                   | Total revenue      |                                  |        | 22,578 |      |   |       | 11,968 |  |   |        | 34,546 |  |      |        | 24,449 |       |   |       | 13,588 |  |   |        | 38,037 | 
|                                                   |                    |                                  |        |        |      |   |       |        |  |   |        |        |  |      |        |        |       |  
|Operating costs and expenses                       |                    |                                  |        |        |      |   |       |        |  |   |        |        |  |      |        |        |       |   |       |        |  |   |        |       
|Direct cost of hosted, subscriber, and maintenance |                    |                                  | 10,210 |        |      |   | 21    |        |  |   | 10,231 |        |  |      | 12,496 |        |       |   |      |        |  |   | 12,496 |       
|Direct cost of services                            |                    |                                  | 135    |        |      |   | 3,841 |        |  |   | 3,976  |        |  |      |       |        |       |   | 2,651 |        |  |   | 2,651  |       
|Direct cost of systems                             |                    |                                  | 2,825  |        |      |   | 4,707 |        |  |   | 7,532  |        |  |      | 3,115  |        |       |   | 6,641 |        |  |   | 9,756  |       
|                                                   |                    |                                  |        |        |      |   |       |        |  |   |        |        |  |      |        |        |       |  
|                                                   | Total direct costs |                                  |        | 13,170 |      |   |       | 8,569  |  |   |        | 21,739 |  |      |        | 15,611 |       |   |       | 9,292  |  |   |        | 24,903 | 
|                                                   |                    |                                  |        |        |      |   |       |        |  |   |        |        |  |      |        |        |       |  
|Hosted, subscriber, and maintenance gross profit   |                    |                                  | 8,843  |        |      |   | 55    |        |  |   | 8,898  |        |  |      | 7,734  |        |       |   |      |        |  |   | 7,734  |       
|Services gross profit                              |                    |                                  | 230    |        |      |   | 1,783 |        |  |   | 2,013  |        |  |      |       |        |       |   | 1,287 |        |  |   | 1,287  |       
|Systems gross profit                               |                    |                                  | 335    |        |      |   | 1,561 |        |  |   | 1,896  |        |  |      | 1,104  |        |       |   | 3,009 |        |  |   | 4,113  |       
|                                                   |                    |                                  |        |        |      |   |       |        |  |   |        |        |  |      |        |        |       |  
|                                                   | Total gross profit |                                  | $      | 9,408  |      |   | $     | 3,399  |  |   | $      | 12,807 |  |      | $      | 8,838  |       |   | $     | 4,296  |  |   | $      | 13,134 | 
|                                                   |                    |                                  |        |        |      |   |       |        |  |   |        |        |  |      |        |        |       |  

9



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##### Table of Contents



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)


|                                                   |                    |                                 |        |        |      |   |        |        |  |   |        |        |  |      |        |        |       |   |        |        |  |   |        |         | 
|-------------------------------------------------- | ------------------ | ------------------------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ |  | ---- | ------ | ------ | ----- | - | ------ | ------ |  | - | ------ | ------- | 
|                                                   |                    | Nine months ended September 30, |       
|                                                   |                    |                                 |       
|                                                   |                    | 2005                            |        |        | 2004 |  
|                                                   |                    |                                 |        |        |      |  
|                                                   |                    | Comm.                           |        |        |      |   | Comm.  |        |  |  
|                                                   |                    | Apps                            |        |        | Gvmt |   |        | Total  |  |   | Apps   |        |  | Gvmt |        |        | Total |  
|                                                   |                    |                                 |        |        |      |   |        |        |  |   |        |        |  |      |        |        |       |  
|Revenue                                            |                    |                                 |        |        |      |   |        |        |  |   |        |        |  |      |        |        |       |   |        |        |  |   |        |        
|Hosted, subscriber and maintenance                 |                    | $                               | 56,248 |        |      | $ | 233    |        |  | $ | 56,481 |        |  | $    | 62,377 |        |       | $ |       |        |  | $ | 62,377 |        
|Services                                           |                    |                                 | 1,375  |        |      |   | 14,733 |        |  |   | 16,108 |        |  |      |       |        |       |   | 10,846 |        |  |   | 10,846 |        
|Systems                                            |                    |                                 | 11,484 |        |      |   | 11,608 |        |  |   | 23,092 |        |  |      | 16,513 |        |       |   | 21,505 |        |  |   | 38,018 |        
|                                                   |                    |                                 |        |        |      |   |        |        |  |   |        |        |  |      |        |        |       |  
|                                                   | Total revenue      |                                 |        | 69,107 |      |   |        | 26,574 |  |   |        | 95,681 |  |      |        | 78,890 |       |   |        | 32,351 |  |   |        | 111,241 | 
|                                                   |                    |                                 |        |        |      |   |        |        |  |   |        |        |  |      |        |        |       |  
|Operating costs and expenses                       |                    |                                 |        |        |      |   |        |        |  |   |        |        |  |      |        |        |       |   |        |        |  |   |        |        
|Direct cost of hosted, subscriber, and maintenance |                    |                                 | 30,406 |        |      |   | 46     |        |  |   | 30,452 |        |  |      | 38,873 |        |       |   |       |        |  |   | 38,873 |        
|Direct cost of services                            |                    |                                 | 631    |        |      |   | 9,365  |        |  |   | 9,996  |        |  |      |       |        |       |   | 6,760  |        |  |   | 6,760  |        
|Direct cost of systems                             |                    |                                 | 7,313  |        |      |   | 8,625  |        |  |   | 15,938 |        |  |      | 8,656  |        |       |   | 13,777 |        |  |   | 22,433 |        
|                                                   |                    |                                 |        |        |      |   |        |        |  |   |        |        |  |      |        |        |       |  
|                                                   | Total direct costs |                                 |        | 38,350 |      |   |        | 18,036 |  |   |        | 56,386 |  |      |        | 47,529 |       |   |        | 20,537 |  |   |        | 68,066  | 
|                                                   |                    |                                 |        |        |      |   |        |        |  |   |        |        |  |      |        |        |       |  
|Hosted, subscriber, and maintenance gross profit   |                    |                                 | 25,842 |        |      |   | 187    |        |  |   | 26,029 |        |  |      | 23,504 |        |       |   |       |        |  |   | 23,504 |        
|Services gross profit                              |                    |                                 | 744    |        |      |   | 5,368  |        |  |   | 6,112  |        |  |      |       |        |       |   | 4,086  |        |  |   | 4,086  |        
|Systems gross profit                               |                    |                                 | 4,171  |        |      |   | 2,983  |        |  |   | 7,154  |        |  |      | 7,857  |        |       |   | 7,728  |        |  |   | 15,585 |        
|                                                   |                    |                                 |        |        |      |   |        |        |  |   |        |        |  |      |        |        |       |  
|                                                   | Total gross profit |                                 | $      | 30,757 |      |   | $      | 8,538  |  |   | $      | 39,295 |  |      | $      | 31,361 |       |   | $      | 11,814 |  |   | $      | 43,175  | 
|                                                   |                    |                                 |        |        |      |   |        |        |  |   |        |        |  |      |        |        |       |  

|                           |                                                         |                    |        |        |                   |   |        |        |   |   |        |         |   |   |        |         |  
|-------------------------- | ------------------------------------------------------- | ------------------ | ------ | ------ | ----------------- | - | ------ | ------ | - | - | ------ | ------- | - | - | ------ | ------- | -
|                           |                                                         | Three months ended |        |        | Nine months ended |  
|                           |                                                         | September 30,      |        |        | September 30,     |  
|                           |                                                         |                    |        |        |                   |  
|                           |                                                         | 2005               |        |        | 2004              |   |        | 2005   |   |   | 2004   |        
|                           |                                                         |                    |        |        |                   |   |        |        |   |   |        |        
|Total segment gross profit |                                                         | $                  | 12,807 |        |                   | $ | 13,134 |        |   | $ | 39,295 |         |   | $ | 43,175 |        
|                           | Research and development expense                        |                    |        | (3,624 | )                 |   |        | (4,798 | ) |   |        | (11,820 | ) |   |        | (14,399 | )
|                           | Sales and marketing expense                             |                    |        | (3,292 | )                 |   |        | (3,080 | ) |   |        | (10,621 | ) |   |        | (9,593  | )
|                           | General and administrative expense                      |                    |        | (4,771 | )                 |   |        | (5,121 | ) |   |        | (14,831 | ) |   |        | (14,374 | )
|                           | Depreciation and amortization of property and equipment |                    |        | (2,279 | )                 |   |        | (2,015 | ) |   |        | (6,633  | ) |   |        | (5,659  | )
|                           | Amortization of acquired intangible assets              |                    |        | (680   | )                 |   |        | (532   | ) |   |        | (2,166  | ) |   |        | (1,596  | )
|                           | Non-cash stock compensation expense                     |                    |        | (153   | )                 |   |        | (247   | ) |   |        | (565    | ) |   |        | (950    | )
|                           | Interest expense                                        |                    |        | (249   | )                 |   |        | (665   | ) |   |        | (781    | ) |   |        | (2,329  | )
|                           | Other income/(expense), net                             |                    |        | 29     |                   |   |        | 79     |   |   |        | (215    | ) |   |        | (103    | )
|                           |                                                         |                    |        |        |                   |   |        |        |   |   |        |        
|Net loss                   |                                                         | $                  | (2,212 | )      |                   | $ | (3,245 | )      |   | $ | (8,337 | )       |   | $ | (5,828 | )      
|                           |                                                         |                    |        |        |                   |   |        |        |   |   |        |        



|   |          
|-- | ---------
|4. | Inventory



|                |       |               |       |       |              |   |       |       | 
|--------------- | ----- | ------------- | ----- | ----- | ------------ | - | ----- | ----- | 
|                |       | September 30, |       |       | December 31, |  
|                |       | 2005          |       |       | 2004         |  
|                |       |               |       |       |              |  
|Component parts |       | $             | 998   |       |              | $ | 1,928 |      
|Finished goods  |       |               | 2,934 |       |              |   | 2,057 |      
|                |       |               |       |       |              |  
|                | Total |               | $     | 3,932 |              |   | $     | 3,985 | 
|                |       |               |       |       |              |  

10



---



##### Table of Contents



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)




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



|                                                          |                      |                    |       |       |                   |  |       |       |       |          |        |       |             |              |       |       |        |  |       |       |       |  |       |       |       | 
|--------------------------------------------------------- | -------------------- | ------------------ | ----- | ----- | ----------------- |  | ----- | ----- | ----- | -------- | ------ | ----- | ----------- | ------------ | ----- | ----- | ------ |  | ----- | ----- | ----- |  | ----- | ----- | ----- | 
|                                                          |                      | September 30, 2005 |       |       | December 31, 2004 | 
|                                                          |                      |                    |       |       |                   | 
|                                                          |                      | Gross              |       |       |                   |  | Gross |       |       |         
|                                                          |                      | Carrying           |       |       | Accumulated       |  |       |       |       | Carrying |        |       | Accumulated |              |       |      
|                                                          |                      | Amount             |       |       | Amortization      |  |       | Net   |       |          | Amount |       |             | Amortization |       |       | Net    | 
|                                                          |                      |                    |       |       |                   |  |       |       |       |          |        |       |             |              |       |       |        | 
|Acquired intangible assets:                               |                      |                    |       |       |                   |  |       |       |       |          |        |       |             |              |       |       |        |  |       |       |       |  |       |      
|                                                          | Customer Contracts   |                    | $     | 4,519 |                   |  | $     | 2,651 |       |          | $      | 1,868 |             |              | $     | 4,208 |        |  | $     | 1,381 |       |  | $     | 2,827 |      
|                                                          | Customer Lists       |                    |       | 2,741 |                   |  |       | 1,386 |       |          |        | 1,355 |             |              |       | 2,518 |        |  |       | 666   |       |  |       | 1,852 |      
|                                                          | Trademarks & Patents |                    |       | 1,242 |                   |  |       | 294   |       |          |        | 948   |             |              |       | 1,281 |        |  |       | 118   |       |  |       | 1,163 |      
|Software development costs, including acquired technology |                      |                    | 6,469 |       |                   |  | 1,964 |       |       |          | 4,505  |       |             |              | 4,142 |       |        |  | 1,351 |       |       |  | 2,791 |      
|                                                          |                      |                    |       |       |                   |  |       |       |       |          |        |       |             |              |       |       |        | 
|                                                          |                      | Total              |       | $     | 14,971            |  |       | $     | 6,295 |          |        | $     | 8,676       |              |       | $     | 12,149 |  |       | $     | 3,516 |  |       | $     | 8,633 | 
|                                                          |                      |                    |       |       |                   |  |       |       |       |          |        |       |             |              |       |       |        | 
|Estimated future amortization expense:                    |                      |                    |       |       |                   |  |       |       |       |          |        |       |             |              |       |      
|Three-months ending December 31, 2005                     |                      | $                  | 896   |       |                   |  |       |       |       |          |        |       |             |              |       |      
|Year ending December 31, 2006                             |                      | $                  | 3,440 |       |                   |  |       |       |       |          |        |       |             |              |       |      
|Year ending December 31, 2007                             |                      | $                  | 2,017 |       |                   |  |       |       |       |          |        |       |             |              |       |      
|Year ending December 31, 2008                             |                      | $                  | 1,374 |       |                   |  |       |       |       |          |        |       |             |              |       |      
|Year ending December 31, 2009                             |                      | $                  | 506   |       |                   |  |       |       |       |          |        |       |             |              |       |      
|Thereafter                                                |                      | $                  | 443   |       |                   |  |       |       |       |          |        |       |             |              |       |      
|                                                          |                      |                    |       |       |                   |  |       |       |       |          |        |      
|Total                                                     |                      | $                  | 8,676 |       |                   |  |       |       |       |          |        |       |             |              |       |      







|   |                                                  
|-- | -------------------------------------------------
|6. | Concentrations of Credit Risk and Major Customers





|                 |  |                         |  |                    |    |   |                    |  |    |      |  |  |      |   |  |  |    |  
|---------------- |  | ----------------------- |  | ------------------ | -- | - | ------------------ |  | -- | ---- |  |  | ---- | - |  |  | -- | -
|                 |  |                         |  | % of Total Revenue |    |   | % of Total Revenue | 
|                 |  |                         |  | For the three      |    |   | For the nine       | 
|                 |  |                         |  | months ended       |    |   | months ended       | 
|                 |  |                         |  | September 30,      |    |   | September 30,      | 
|                 |  |                         |  |                    |    |   |                    | 
|Customer         |  | Segment                 |  | 2005               |    |   | 2004               |  |    | 2005 |  |  | 2004 |  
|                 |  |                         |  |                    |    |   |                    |  |    |      |  |  |      |  
|Federal Agencies |  | Government              |  |                    | 11 | % |                    |  | 24 | %    |  |  | 13   | % |  |  | 16 | %
|Verizon Wireless |  | Commercial Applications |  |                    | 11 | % |                    |  | 10 | %    |  |  | 14   | % |  |  | 14 | %

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##### Table of Contents



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)


|                 |  |                         |  |                          |    |   |             |  |               | 
|---------------- |  | ----------------------- |  | ------------------------ | -- | - | ----------- |  | ------------- | 
|                 |  |                         |  | As of September 30, 2005 |   
|                 |  |                         |  |                          |   
|                 |  |                         |  | Accounts                 |    |   | Unbilled    | 
|Customer         |  | Segment                 |  | Receivable               |    |   | Receivables | 
|                 |  |                         |  |                          |    |   |             | 
|Federal Agencies |  | Government              |  |                          | 15 | % |             |  | 20%           | 
|Customer A       |  | Commercial Applications |  |                          | 17 | % |             |  | 13%           | 
|Customer B       |  | Commercial Applications |  |                          | 12 | % |             |  | Less than 10% | 



|   |                                                   
|-- | --------------------------------------------------
|7. | Stock-Based Compensation and Deferred Compensation

Accounting for Stock
Issued to Employees Accounting for Stock-Based
Compensation,


|                                                                                                                    |                                              |                    |        |        |                   |   |        |        |   |   |         |        |   |   |         |        |  
|------------------------------------------------------------------------------------------------------------------- | -------------------------------------------- | ------------------ | ------ | ------ | ----------------- | - | ------ | ------ | - | - | ------- | ------ | - | - | ------- | ------ | -
|                                                                                                                    |                                              | Three months ended |        |        | Nine months ended |  
|                                                                                                                    |                                              | September 30,      |        |        | September 30,     |  
|                                                                                                                    |                                              |                    |        |        |                   |  
|                                                                                                                    |                                              | 2005               |        |        | 2004              |   |        | 2005   |   |   | 2004    |       
|                                                                                                                    |                                              |                    |        |        |                   |   |        |        |   |   |         |       
|Net loss, as reported                                                                                               |                                              | $                  | (2,212 | )      |                   | $ | (3,245 | )      |   | $ | (8,337  | )      |   | $ | (5,828  | )     
|Add: Stock-based employee compensation expense included in
    reported net loss                                    |                                              |                    | 153    |        |                   |   | 247    |        |   |   | 565     |        |   |   | 950     |       
|Deduct: Total stock-based employee compensation expense
    determined under fair value based method for all awards |                                              |                    | (1,326 | )      |                   |   | (2,315 | )      |   |   | (3,721  | )      |   |   | (7,154  | )     
|                                                                                                                    |                                              |                    |        |        |                   |   |        |        |   |   |         |       
|Pro forma net loss                                                                                                  |                                              | $                  | (3,385 | )      |                   | $ | (5,313 | )      |   | $ | (11,493 | )      |   | $ | (12,032 | )     
|Loss per common share:                                                                                              |                                              |                    |        |        |                   |   |        |        |   |   |         |        |   |   |         |       
|                                                                                                                    | Basic and diluted  as reported              |                    | $      | (0.06  | )                 |   | $      | (0.10  | ) |   | $       | (0.22  | ) |   | $       | (0.18  | )
|                                                                                                                    |                                              |                    |        |        |                   |   |        |        |   |   |         |       
|                                                                                                                    | Basic and diluted  pro forma                |                    | $      | (0.09  | )                 |   | $      | (0.16  | ) |   | $       | (0.30  | ) |   | $       | (0.37  | )
|                                                                                                                    |                                              |                    |        |        |                   |   |        |        |   |   |         |       
|Weighted average shares outstanding:                                                                                |                                              |                    |        |        |                   |   |        |        |   |   |         |        |   |   |         |       
|                                                                                                                    | Basic and diluted  as reported and proforma |                    |        | 39,003 |                   |   |        | 33,587 |   |   |         | 38,743 |   |   |         | 32,683 |  





|   |               
|-- | --------------
|8. | Line of Credit



12



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##### Table of Contents



TeleCommunication Systems, Inc.


Notes to Consolidated Financial
Statements  (Continued)








|   |                 
|-- | ----------------
|9. | Subsequent Event





13



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



Critical Accounting Policies and Estimates






14



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Overview








Indicators of Our Financial and Operating Performance






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



15



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##### Table of Contents



Results of Operations


Revenue and Cost of Revenue


|                                                           |                                      |               |      |      |               |   |       |               |             |   |               |      |   |      |     |     |      |   |      |      |   |   |      |       |   |   |       |       |   |  |     |     |   
|---------------------------------------------------------- | ------------------------------------ | ------------- | ---- | ---- | ------------- | - | ----- | ------------- | ----------- | - | ------------- | ---- | - | ---- | --- | --- | ---- | - | ---- | ---- | - | - | ---- | ----- | - | - | ----- | ----- | - |  | --- | --- | --
|                                                           |                                      | Three Months  |      |      |               |   |       |               | Nine Months |   |               |      |   |     
|                                                           |                                      | Ended         |      |      |               |   | Ended |               |             |  
|                                                           |                                      | September 30, |      |      | 2005 vs. 2004 |   |       | September 30, |             |   | 2005 vs. 2004 |     
|                                                           |                                      |               |      |      |               |   |       |               |             |   |               |     
|($ in millions)                                            |                                      | 2005          |      |      | 2004          |   |       | $             |             |   | %             |      |   | 2005 |     |     | 2004 |   |      | $    |   |   | %    |      
|                                                           |                                      |               |      |      |               |   |       |               |             |   |               |      |   |      |     |     |      |   |      |      |   |   |      |      
|Hosted, subscriber, and maintenance revenue                |                                      | $             | 19.1 |      |               | $ | 20.2  |               |             | $ | (1.1          | )    |   |      | (5  | %)  |      | $ | 56.5 |      |   | $ | 62.4 |       |   | $ | (5.9  | )     |   |  | (10 | %) 
|Services revenue                                           |                                      |               | 6.0  |      |               |   | 3.9   |               |             |   | 2.1           |      |   |      | 52  | %   |      |   | 16.1 |      |   |   | 10.8 |       |   |   | 5.3   |       |   |  | 49  | %  
|Systems revenue                                            |                                      |               | 9.4  |      |               |   | 13.9  |               |             |   | (4.5          | )    |   |      | (32 | %)  |      |   | 23.1 |      |   |   | 38.0 |       |   |   | (14.9 | )     |   |  | (40 | %) 
|                                                           |                                      |               |      |      |               |   |       |               |             |   |               |      |   |      |     |     |      |   |      |      |   |   |      |      
|                                                           | Total revenue                        |               |      | 34.5 |               |   |       | 38.0          |             |   |               | (3.5 | ) |      |     | (9  | %)   |   |      | 95.7 |   |   |      | 111.2 |   |   |       | (15.5 | ) |  |     | (14 | %)
|                                                           |                                      |               |      |      |               |   |       |               |             |   |               |      |   |      |     |     |      |   |      |      |   |   |      |      
|Direct cost of hosted, subscriber, and maintenance revenue |                                      |               | 10.2 |      |               |   | 12.5  |               |             |   | (2.3          | )    |   |      | (18 | %)  |      |   | 30.5 |      |   |   | 38.8 |       |   |   | (8.3  | )     |   |  | (22 | %) 
|Direct cost of services revenue                            |                                      |               | 4.0  |      |               |   | 2.7   |               |             |   | 1.3           |      |   |      | 50  | %   |      |   | 10.0 |      |   |   | 6.8  |       |   |   | 3.2   |       |   |  | 48  | %  
|Direct cost of systems revenue                             |                                      |               | 7.5  |      |               |   | 9.7   |               |             |   | (2.2          | )    |   |      | (23 | %)  |      |   | 15.9 |      |   |   | 22.4 |       |   |   | (6.5  | )     |   |  | (29 | %) 
|                                                           |                                      |               |      |      |               |   |       |               |             |   |               |      |   |      |     |     |      |   |      |      |   |   |      |      
|                                                           | Total direct cost of revenue         |               |      | 21.7 |               |   |       | 24.9          |             |   |               | (3.2 | ) |      |     | (13 | %)   |   |      | 56.4 |   |   |      | 68.0  |   |   |       | (11.6 | ) |  |     | (17 | %)
|                                                           |                                      |               |      |      |               |   |       |               |             |   |               |      |   |      |     |     |      |   |      |      |   |   |      |      
|Hosted, subscriber, and maintenance gross profit           |                                      |               | 8.9  |      |               |   | 7.7   |               |             |   | 1.2           |      |   |      | 15  | %   |      |   | 26.0 |      |   |   | 23.6 |       |   |   | 2.4   |       |   |  | 11  | %  
|Services gross profit                                      |                                      |               | 2.0  |      |               |   | 1.2   |               |             |   | 0.8           |      |   |      | 56  | %   |      |   | 6.1  |      |   |   | 4.0  |       |   |   | 2.1   |       |   |  | 50  | %  
|Systems gross profit                                       |                                      |               | 1.9  |      |               |   | 4.2   |               |             |   | (2.3          | )    |   |      | (54 | %)  |      |   | 7.2  |      |   |   | 15.6 |       |   |   | (8.4  | )     |   |  | (54 | %) 
|                                                           |                                      |               |      |      |               |   |       |               |             |   |               |      |   |      |     |     |      |   |      |      |   |   |      |      
|                                                           | Total gross profit                   |               | $    | 12.8 |               |   | $     | 13.1          |             |   | $             | (0.3 | ) |      |     | (3  | %)   |   | $    | 39.3 |   |   | $    | 43.2  |   |   | $     | (3.9  | ) |  |     | (9  | %)
|                                                           |                                      |               |      |      |               |   |       |               |             |   |               |      |   |      |     |     |      |   |      |      |   |   |      |      
|                                                           | Gross profit as a percent of revenue |               |      | 37   | %             |   |       | 35            | %           |   |               |      |   |      |     |     |      |   |      | 41   | % |   |      | 39    | % |   |       |       |   |  |     |     |   
|                                                           |                                      |               |      |      |               |   |       |               |             |   |               |      |   |      |     |     |      |   |      |      |   |   |      |      





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Commercial Applications Segment:


|                                                           |                                                     |               |      |      |               |   |       |               |             |   |               |      |   |      |     |     |      |   |      |      |   |   |      |      |   |   |      |      |   |  |     |     |   
|---------------------------------------------------------- | --------------------------------------------------- | ------------- | ---- | ---- | ------------- | - | ----- | ------------- | ----------- | - | ------------- | ---- | - | ---- | --- | --- | ---- | - | ---- | ---- | - | - | ---- | ---- | - | - | ---- | ---- | - |  | --- | --- | --
|                                                           |                                                     | Three Months  |      |      |               |   |       |               | Nine Months |   |               |      |   |     
|                                                           |                                                     | Ended         |      |      |               |   | Ended |               |             |  
|                                                           |                                                     | September 30, |      |      | 2005 vs. 2004 |   |       | September 30, |             |   | 2005 vs. 2004 |     
|                                                           |                                                     |               |      |      |               |   |       |               |             |   |               |     
|($ in millions)                                            |                                                     | 2005          |      |      | 2004          |   |       | $             |             |   | %             |      |   | 2005 |     |     | 2004 |   |      | $    |   |   | %    |     
|                                                           |                                                     |               |      |      |               |   |       |               |             |   |               |      |   |      |     |     |      |   |      |      |   |   |      |     
|Hosted, subscriber, and maintenance revenue                |                                                     | $             | 19.0 |      |               | $ | 20.2  |               |             | $ | (1.2          | )    |   |      | (6  | %)  |      | $ | 56.3 |      |   | $ | 62.4 |      |   | $ | (6.1 | )    |   |  | (10 | %) 
|Services revenue                                           |                                                     |               | 0.4  |      |               |   |      |               |             |   | 0.4           |      |   |      | NM  |     |      |   | 1.3  |      |   |   |     |      |   |   | 1.3  |      |   |  | NM  |    
|Systems revenue                                            |                                                     |               | 3.1  |      |               |   | 4.2   |               |             |   | (1.1          | )    |   |      | (25 | %)  |      |   | 11.5 |      |   |   | 16.5 |      |   |   | (5.0 | )    |   |  | (31 | %) 
|                                                           |                                                     |               |      |      |               |   |       |               |             |   |               |      |   |      |     |     |      |   |      |      |   |   |      |     
|                                                           | Commercial Applications segment revenue             |               |      | 22.5 |               |   |       | 24.4          |             |   |               | (1.9 | ) |      |     | (8  | %)   |   |      | 69.1 |   |   |      | 78.9 |   |   |      | (9.8 | ) |  |     | (12 | %)
|                                                           |                                                     |               |      |      |               |   |       |               |             |   |               |      |   |      |     |     |      |   |      |      |   |   |      |     
|Direct cost of hosted, subscriber, and maintenance revenue |                                                     |               | 10.2 |      |               |   | 12.5  |               |             |   | (2.3          | )    |   |      | (18 | %)  |      |   | 30.5 |      |   |   | 38.8 |      |   |   | (8.3 | )    |   |  | (22 | %) 
|Direct cost of services revenue                            |                                                     |               | 0.2  |      |               |   |      |               |             |   | 0.2           |      |   |      | NM  |     |      |   | 0.6  |      |   |   |     |      |   |   | 0.6  |      |   |  | NM  |    
|Direct cost of systems revenue                             |                                                     |               | 2.7  |      |               |   | 3.1   |               |             |   | (0.4          | )    |   |      | (9  | %)  |      |   | 7.3  |      |   |   | 8.6  |      |   |   | (1.3 | )    |   |  | (16 | %) 
|                                                           |                                                     |               |      |      |               |   |       |               |             |   |               |      |   |      |     |     |      |   |      |      |   |   |      |     
|                                                           | Commercial Applications segment cost of
    revenue |               |      | 13.1 |               |   |       | 15.6          |             |   |               | (2.5 | ) |      |     | (16 | %)   |   |      | 38.4 |   |   |      | 47.4 |   |   |      | (9.0 | ) |  |     | (19 | %)
|                                                           |                                                     |               |      |      |               |   |       |               |             |   |               |      |   |      |     |     |      |   |      |      |   |   |      |     
|Hosted, subscriber, and maintenance gross profit           |                                                     |               | 8.8  |      |               |   | 7.7   |               |             |   | 1.1           |      |   |      | 21  | %   |      |   | 25.8 |      |   |   | 23.6 |      |   |   | 2.2  |      |   |  | 10  | %  
|Services gross profit                                      |                                                     |               | 0.2  |      |               |   |      |               |             |   | 0.2           |      |   |      | NM  |     |      |   | 0.7  |      |   |   |     |      |   |   | 0.7  |      |   |  | NM  |    
|Systems gross profit                                       |                                                     |               | 0.4  |      |               |   | 1.1   |               |             |   | (0.7          | )    |   |      | (70 | %)  |      |   | 4.2  |      |   |   | 7.9  |      |   |   | (3.7 | )    |   |  | (47 | %) 
|                                                           |                                                     |               |      |      |               |   |       |               |             |   |               |      |   |      |     |     |      |   |      |      |   |   |      |     
|                                                           | Commercial Applications segment gross profit*       |               | $    | 9.4  |               |   | $     | 8.8           |             |   | $             | 0.6  |   |      |     | 12  | %    |   | $    | 30.7 |   |   | $    | 31.5 |   |   | $    | (0.8 | ) |  |     | (2  | %)
|                                                           |                                                     |               |      |      |               |   |       |               |             |   |               |      |   |      |     |     |      |   |      |      |   |   |      |     
|                                                           | Segment gross profit as a percent of revenue        |               |      | 42   | %             |   |       | 36            | %           |   |               |      |   |      |     |     |      |   |      | 45   | % |   |      | 40   | % |   |      |      |   |  |     |     |   
|                                                           |                                                     |               |      |      |               |   |       |               |             |   |               |      |   |      |     |     |      |   |      |      |   |   |      |     




* See discussion of segment reporting in Note 3 to
the accompanying unaudited consolidated financial statements.


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




Hosted


Subscriber tm


Maintenance


17



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##### Table of Contents









Commercial Services Revenue, Cost of Revenue, and Gross
Profit






Commercial Systems Revenue, Cost of Revenue, and Gross
Profit






18



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##### Table of Contents













Government Segment:


|                                                           |                                              |               |     |      |               |   |       |               |             |   |               |      |   |      |     |     |      |   |      |      |   |   |      |      |   |   |      |      |   |  |     |     |   
|---------------------------------------------------------- | -------------------------------------------- | ------------- | --- | ---- | ------------- | - | ----- | ------------- | ----------- | - | ------------- | ---- | - | ---- | --- | --- | ---- | - | ---- | ---- | - | - | ---- | ---- | - | - | ---- | ---- | - |  | --- | --- | --
|                                                           |                                              | Three Months  |     |      |               |   |       |               | Nine Months |   |               |      |   |     
|                                                           |                                              | Ended         |     |      |               |   | Ended |               |             |  
|                                                           |                                              | September 30, |     |      | 2005 vs. 2004 |   |       | September 30, |             |   | 2005 vs. 2004 |     
|                                                           |                                              |               |     |      |               |   |       |               |             |   |               |     
|($ in millions)                                            |                                              | 2005          |     |      | 2004          |   |       | $             |             |   | %             |      |   | 2005 |     |     | 2004 |   |      | $    |   |   | %    |     
|                                                           |                                              |               |     |      |               |   |       |               |             |   |               |      |   |      |     |     |      |   |      |      |   |   |      |     
|Hosted, subscriber, and maintenance revenue                |                                              | $             | 0.1 |      |               | $ |      |               |             | $ | 0.1           |      |   |      | NM  |     |      | $ | 0.2  |      |   | $ |     |      |   | $ | 0.2  |      |   |  | NM  |    
|Services revenue                                           |                                              |               | 5.6 |      |               |   | 3.9   |               |             |   | 1.7           |      |   |      | 43  | %   |      |   | 14.8 |      |   |   | 10.8 |      |   |   | 4.0  |      |   |  | 36  | %  
|Systems revenue                                            |                                              |               | 6.3 |      |               |   | 9.7   |               |             |   | (3.4          | )    |   |      | (35 | %)  |      |   | 11.6 |      |   |   | 21.5 |      |   |   | (9.9 | )    |   |  | (46 | %) 
|                                                           |                                              |               |     |      |               |   |       |               |             |   |               |      |   |      |     |     |      |   |      |      |   |   |      |     
|                                                           | Government segment revenue                   |               |     | 12.0 |               |   |       | 13.6          |             |   |               | (1.6 | ) |      |     | (12 | %)   |   |      | 26.6 |   |   |      | 32.3 |   |   |      | (5.7 | ) |  |     | (18 | %)
|                                                           |                                              |               |     |      |               |   |       |               |             |   |               |      |   |      |     |     |      |   |      |      |   |   |      |     
|Direct cost of hosted, subscriber, and maintenance revenue |                                              |               |    |      |               |   |      |               |             |   |              |      |   |      | NM  |     |      |   |     |      |   |   |     |      |   |   |     |      |   |  | NM  |    
|Direct cost of services revenue                            |                                              |               | 3.8 |      |               |   | 2.7   |               |             |   | 1.1           |      |   |      | 45  | %   |      |   | 9.4  |      |   |   | 6.8  |      |   |   | 2.6  |      |   |  | 39  | %  
|Direct cost of systems revenue                             |                                              |               | 4.8 |      |               |   | 6.6   |               |             |   | (1.8          | )    |   |      | (29 | %)  |      |   | 8.6  |      |   |   | 13.8 |      |   |   | (5.2 | )    |   |  | (37 | %) 
|                                                           |                                              |               |     |      |               |   |       |               |             |   |               |      |   |      |     |     |      |   |      |      |   |   |      |     
|                                                           | Government segment cost of revenue           |               |     | 8.6  |               |   |       | 9.3           |             |   |               | (0.7 | ) |      |     | (8  | %)   |   |      | 18.0 |   |   |      | 20.6 |   |   |      | (2.4 | ) |  |     | (12 | %)
|                                                           |                                              |               |     |      |               |   |       |               |             |   |               |      |   |      |     |     |      |   |      |      |   |   |      |     
|Hosted, subscriber, and maintenance gross profit           |                                              |               | 0.1 |      |               |   |      |               |             |   | 0.1           |      |   |      | NM  |     |      |   | 0.2  |      |   |   |     |      |   |   | 0.2  |      |   |  | NM  |    
|Services gross profit                                      |                                              |               | 1.8 |      |               |   | 1.2   |               |             |   | 0.6           |      |   |      | 39  | %   |      |   | 5.4  |      |   |   | 4.0  |      |   |   | 1.4  |      |   |  | 31  | %  
|Systems gross profit                                       |                                              |               | 1.5 |      |               |   | 3.1   |               |             |   | (1.6          | )    |   |      | (48 | %)  |      |   | 3.0  |      |   |   | 7.7  |      |   |   | (4.7 | )    |   |  | (61 | %) 
|                                                           |                                              |               |     |      |               |   |       |               |             |   |               |      |   |      |     |     |      |   |      |      |   |   |      |     
|                                                           | Government segment gross profit*             |               | $   | 3.4  |               |   | $     | 4.3           |             |   | $             | (0.9 | ) |      |     | (21 | %)   |   | $    | 8.6  |   |   | $    | 11.7 |   |   | $    | (3.1 | ) |  |     | (28 | %)
|                                                           |                                              |               |     |      |               |   |       |               |             |   |               |      |   |      |     |     |      |   |      |      |   |   |      |     
|                                                           | Segment gross profit as a percent of revenue |               |     | 28   | %             |   |       | 32            | %           |   |               |      |   |      |     |     |      |   |      | 32   | % |   |      | 37   | % |   |      |      |   |  |     |     |   
|                                                           |                                              |               |     |      |               |   |       |               |             |   |               |      |   |      |     |     |      |   |      |      |   |   |      |     






|  |                                                                                                                   
|- | ------------------------------------------------------------------------------------------------------------------
|* | See discussion of segment reporting in Note 3 to the
    accompanying unaudited consolidated financial statements.



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




Government Services Revenue, Cost of Revenue, and Gross
Profit:










Government Systems Revenue, Cost of Revenue, and Gross
Profit:




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Major Customers




Revenue Backlog






Operating Expenses


Research and development expense:


|                                 |  |               |     |   |               |   |       |               |             |   |               |   |  |      |     |    |      |   |      |   |  |   |      |   |  |   |      |   |  |  |     |   
|-------------------------------- |  | ------------- | --- | - | ------------- | - | ----- | ------------- | ----------- | - | ------------- | - |  | ---- | --- | -- | ---- | - | ---- | - |  | - | ---- | - |  | - | ---- | - |  |  | --- | --
|                                 |  | Three Months  |     |   |               |   |       |               | Nine Months |   |               |   |  |     
|                                 |  | Ended         |     |   |               |   | Ended |               |             |  
|                                 |  | September 30, |     |   | 2005 vs. 2004 |   |       | September 30, |             |   | 2005 vs. 2004 |  
|                                 |  |               |     |   |               |   |       |               |             |   |               |  
|($ in millions)                  |  | 2005          |     |   | 2004          |   |       | $             |             |   | %             |   |  | 2005 |     |    | 2004 |   |      | $ |  |   | %    |  
|                                 |  |               |     |   |               |   |       |               |             |   |               |   |  |      |     |    |      |   |      |   |  |   |      |  
|Research and development expense |  | $             | 3.6 |   |               | $ | 4.8   |               |             | $ | (1.2          | ) |  |      | (25 | %) |      | $ | 11.8 |   |  | $ | 14.4 |   |  | $ | (2.6 | ) |  |  | (18 | %)
|Percent of total revenue         |  |               | 10  | % |               |   | 13    | %             |             |   |               |   |  |      |     |    |      |   | 12   | % |  |   | 13   | % |  |   |      |   |  |  |     |   



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Sales and marketing expense:


|                            |  |               |     |   |               |   |       |               |             |   |               |  |  |      |   |   |      |   |      |   |  |   |     |   |  |   |     |  |  |  |    |  
|--------------------------- |  | ------------- | --- | - | ------------- | - | ----- | ------------- | ----------- | - | ------------- |  |  | ---- | - | - | ---- | - | ---- | - |  | - | --- | - |  | - | --- |  |  |  | -- | -
|                            |  | Three Months  |     |   |               |   |       |               | Nine Months |   |               |  |  |     
|                            |  | Ended         |     |   |               |   | Ended |               |             |  
|                            |  | September 30, |     |   | 2005 vs. 2004 |   |       | September 30, |             |   | 2005 vs. 2004 | 
|                            |  |               |     |   |               |   |       |               |             |   |               | 
|($ in millions)             |  | 2005          |     |   | 2004          |   |       | $             |             |   | %             |  |  | 2005 |   |   | 2004 |   |      | $ |  |   | %   |  
|                            |  |               |     |   |               |   |       |               |             |   |               |  |  |      |   |   |      |   |      |   |  |   |     |  
|Sales and marketing expense |  | $             | 3.3 |   |               | $ | 3.1   |               |             | $ | 0.2           |  |  |      | 7 | % |      | $ | 10.6 |   |  | $ | 9.6 |   |  | $ | 1.0 |  |  |  | 11 | %
|Percent of total revenue    |  |               | 9   | % |               |   | 8     | %             |             |   |               |  |  |      |   |   |      |   | 11   | % |  |   | 9   | % |  |   |     |  |  |  |    |  



General and administrative expense:


|                                   |  |               |     |   |               |   |       |               |             |   |               |   |  |      |     |   |      |   |      |   |  |   |      |   |  |   |     |  |  |  |    | 
|---------------------------------- |  | ------------- | --- | - | ------------- | - | ----- | ------------- | ----------- | - | ------------- | - |  | ---- | --- | - | ---- | - | ---- | - |  | - | ---- | - |  | - | --- |  |  |  | -- | 
|                                   |  | Three Months  |     |   |               |   |       |               | Nine Months |   |               |   |  |     
|                                   |  | Ended         |     |   |               |   | Ended |               |             |  
|                                   |  | September 30, |     |   | 2005 vs. 2004 |   |       | September 30, |             |   | 2005 vs. 2004 |  
|                                   |  |               |     |   |               |   |       |               |             |   |               |  
|($ in millions)                    |  | 2005          |     |   | 2004          |   |       | $             |             |   | %             |   |  | 2005 |     |   | 2004 |   |      | $ |  |   | %    |  
|                                   |  |               |     |   |               |   |       |               |             |   |               |   |  |      |     |   |      |   |      |   |  |   |      |  
|General and administrative expense |  | $             | 4.8 |   |               | $ | 5.1   |               |             | $ | (0.3          | ) |  |      | (7% | ) |      | $ | 14.8 |   |  | $ | 14.4 |   |  | $ | 0.4 |  |  |  | 3% | 
|Percent of total revenue           |  |               | 14  | % |               |   | 14    | %             |             |   |               |   |  |      |     |   |      |   | 16   | % |  |   | 13   | % |  |   |     |  |  |  |    | 



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Non-cash stock compensation expense:


|                                    |  |               |     |  |               |   |       |               |             |   |               |  |      |  |    |      |  |   |     |  |  |   |     |  |  |   |      |   |  |  |     |   
|----------------------------------- |  | ------------- | --- |  | ------------- | - | ----- | ------------- | ----------- | - | ------------- |  | ---- |  | -- | ---- |  | - | --- |  |  | - | --- |  |  | - | ---- | - |  |  | --- | --
|                                    |  | Three Months  |     |  |               |   |       |               | Nine Months |   |               |  |      | 
|                                    |  | Ended         |     |  |               |   | Ended |               |             |  
|                                    |  | September 30, |     |  | 2005 vs. 2004 |   |       | September 30, |             |   | 2005 vs. 2004 | 
|                                    |  |               |     |  |               |   |       |               |             |   |               | 
|($ in millions)                     |  | 2005          |     |  | 2004          |   |       | $             |             | % |               |  | 2005 |  |    | 2004 |  |   | $   |  |  | % |    
|                                    |  |               |     |  |               |   |       |               |             |   |               |  |      |  |    |      |  |   |     |  |  |   |    
|Non-cash stock compensation expense |  | $             | 0.2 |  |               | $ | 0.2   |               |             | $ |              |  |      |  | NM |      |  | $ | 0.6 |  |  | $ | 1.0 |  |  | $ | (0.4 | ) |  |  | (41 | %)









Depreciation and amortization of property and equipment:


|                                                               |  |               |      |  |               |   |       |               |             |   |               |  |  |      |    |   |      |   |      |   |  |   |      |  |  |   |      |  |  |  |    |  
|-------------------------------------------------------------- |  | ------------- | ---- |  | ------------- | - | ----- | ------------- | ----------- | - | ------------- |  |  | ---- | -- | - | ---- | - | ---- | - |  | - | ---- |  |  | - | ---- |  |  |  | -- | -
|                                                               |  | Three Months  |      |  |               |   |       |               | Nine Months |   |               |  |  |     
|                                                               |  | Ended         |      |  |               |   | Ended |               |             |  
|                                                               |  | September 30, |      |  | 2005 vs. 2004 |   |       | September 30, |             |   | 2005 vs. 2004 | 
|                                                               |  |               |      |  |               |   |       |               |             |   |               | 
|($ in millions)                                                |  | 2005          |      |  | 2004          |   |       | $             |             |   | %             |  |  | 2005 |    |   | 2004 |   |      | $ |  |   | %    | 
|                                                               |  |               |      |  |               |   |       |               |             |   |               |  |  |      |    |   |      |   |      |   |  |   |      | 
|Depreciation and amortization of property and equipment        |  | $             | 2.3  |  |               | $ | 2.0   |               |             | $ | 0.3           |  |  |      | 13 | % |      | $ | 6.6  |   |  | $ | 5.7  |  |  | $ | 0.9  |  |  |  | 17 | %
|Average gross cost of property and equipment during the period |  | $             | 49.4 |  |               | $ | 41.6  |               |             |   | 7.8           |  |  |      | 16 | % |      | $ | 48.1 |   |  | $ | 38.0 |  |  |   | 10.1 |  |  |  | 21 | %



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Amortization of acquired intangible assets:


|                                           |  |               |     |  |               |   |       |               |             |   |               |  |  |      |    |   |      |   |     |   |  |   |     |  |  |   |     |  |  |  |    |  
|------------------------------------------ |  | ------------- | --- |  | ------------- | - | ----- | ------------- | ----------- | - | ------------- |  |  | ---- | -- | - | ---- | - | --- | - |  | - | --- |  |  | - | --- |  |  |  | -- | -
|                                           |  | Three Months  |     |  |               |   |       |               | Nine Months |   |               |  |  |     
|                                           |  | Ended         |     |  |               |   | Ended |               |             |  
|                                           |  | September 30, |     |  | 2005 vs. 2004 |   |       | September 30, |             |   | 2005 vs. 2004 | 
|                                           |  |               |     |  |               |   |       |               |             |   |               | 
|($ in millions)                            |  | 2005          |     |  | 2004          |   |       | $             |             |   | %             |  |  | 2005 |    |   | 2004 |   |     | $ |  |   | %   | 
|                                           |  |               |     |  |               |   |       |               |             |   |               |  |  |      |    |   |      |   |     |   |  |   |     | 
|Amortization of acquired intangible assets |  | $             | 0.7 |  |               | $ | 0.5   |               |             | $ | 0.2           |  |  |      | 28 | % |      | $ | 2.2 |   |  | $ | 1.6 |  |  | $ | 0.6 |  |  |  | 36 | %





Interest expense:


|                                                                 |  |               |     |  |               |   |       |               |             |   |               |   |  |      |     |    |      |   |     |   |  |   |     |  |  |   |      |   |  |  |     |   
|---------------------------------------------------------------- |  | ------------- | --- |  | ------------- | - | ----- | ------------- | ----------- | - | ------------- | - |  | ---- | --- | -- | ---- | - | --- | - |  | - | --- |  |  | - | ---- | - |  |  | --- | --
|                                                                 |  | Three Months  |     |  |               |   |       |               | Nine Months |   |               |   |  |     
|                                                                 |  | Ended         |     |  |               |   | Ended |               |             |  
|                                                                 |  | September 30, |     |  | 2005 vs. 2004 |   |       | September 30, |             |   | 2005 vs. 2004 |  
|                                                                 |  |               |     |  |               |   |       |               |             |   |               |  
|($ in millions)                                                  |  | 2005          |     |  | 2004          |   |       | $             |             |   | %             |   |  | 2005 |     |    | 2004 |   |     | $ |  |   | %   | 
|                                                                 |  |               |     |  |               |   |       |               |             |   |               |   |  |      |     |    |      |   |     |   |  |   |     | 
|Interest expense incurred on notes payable and line of credit    |  | $             | 0.1 |  |               | $ | 0.2   |               |             | $ | (0.1          | ) |  |      | (54 | %) |      | $ | 0.3 |   |  | $ | 0.6 |  |  | $ | (0.3 | ) |  |  | (52 | %)
|Interest expense incurred on capital lease obligations           |  |               | 0.1 |  |               |   | 0.1   |               |             |   |              |   |  |      | NM  |    |      |   | 0.2 |   |  |   | 0.2 |  |  |   |     |   |  |  | NM  |   
|Interest expense incurred on convertible subordinated debentures |  |               |    |  |               |   | 0.1   |               |             |   | (0.1          | ) |  |      | NM  |    |      |   |    |   |  |   | 0.3 |  |  |   | (0.3 | ) |  |  | NM  |   
|Amortization of deferred financing fees                          |  |               |    |  |               |   | 0.1   |               |             |   | (0.1          | ) |  |      | NM  |    |      |   | 0.3 |   |  |   | 0.3 |  |  |   |     |   |  |  | NM  |   
|Amortization of debt discount                                    |  |               |    |  |               |   | 0.2   |               |             |   | (0.2          | ) |  |      | NM  |    |      |   |    |   |  |   | 0.9 |  |  |   | (0.9 | ) |  |  | NM  |   
|                                                                 |  |               |     |  |               |   |       |               |             |   |               |   |  |      |     |    |      |   |     |   |  |   |     | 
|Total interest expense                                           |  | $             | 0.2 |  |               | $ | 0.7   |               |             | $ | (0.5          | ) |  |      | (63 | %) |      | $ | 0.8 |   |  | $ | 2.3 |  |  | $ | (1.5 | ) |  |  | (67 | %)

.


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Other income/(expense), net:


|                                         |  |               |   |      |               |   |       |               |             |   |               |   |      |  |    |      |  |   |      |   |  |   |      |   |  |   |      |   |  |  |    | 
|---------------------------------------- |  | ------------- | - | ---- | ------------- | - | ----- | ------------- | ----------- | - | ------------- | - | ---- |  | -- | ---- |  | - | ---- | - |  | - | ---- | - |  | - | ---- | - |  |  | -- | 
|                                         |  | Three Months  |   |      |               |   |       |               | Nine Months |   |               |   |      | 
|                                         |  | Ended         |   |      |               |   | Ended |               |             |  
|                                         |  | September 30, |   |      | 2005 vs. 2004 |   |       | September 30, |             |   | 2005 vs. 2004 |  
|                                         |  |               |   |      |               |   |       |               |             |   |               |  
|($ in millions)                          |  | 2005          |   | 2004 |               |   | $     |               |             | % |               |   | 2005 |  |    | 2004 |  |   | $    |   |  | % |     
|                                         |  |               |   |      |               |   |       |               |             |   |               |   |      |  |    |      |  |   |      |   |  |   |     
|Foreign currency translation gain/(loss) |  | $             |  |      |               | $ | 0.1   |               |             | $ | (0.1          | ) |      |  | NM |      |  | $ | (0.3 | ) |  | $ | (0.1 | ) |  | $ | (0.2 | ) |  |  | NM | 
|Loan forgiveness gain                    |  |               |  |      |               |   |      |               |             |   |              |   |      |  | NM |      |  |   |     |   |  |   | 0.1  |   |  |   |     |   |  |  | NM | 
|Interest income                          |  |               |  |      |               |   |      |               |             |   |              |   |      |  | NM |      |  |   | 0.1  |   |  |   | 0.1  |   |  |   |     |   |  |  | NM | 
|Miscellaneous gain/(loss)                |  |               |  |      |               |   |      |               |             |   |              |   |      |  | NM |      |  |   |     |   |  |   | (0.2 | ) |  |   | 0.2  |   |  |  | NM | 
|                                         |  |               |   |      |               |   |       |               |             |   |               |   |      |  |    |      |  |   |      |   |  |   |      |  
|Total other income/(expense), net        |  | $             |  |      |               | $ | 0.1   |               |             | $ | (0.1          | ) |      |  | NM |      |  | $ | (0.2 | ) |  | $ | (0.1 | ) |  | $ | (0.1 | ) |  |  | NM | 



Income taxes:




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Net loss:


|                |  |               |      |   |               |   |       |               |             |   |               |  |  |      |     |  |      |   |      |   |  |   |      |   |  |   |      |   |  |  |     |   
|--------------- |  | ------------- | ---- | - | ------------- | - | ----- | ------------- | ----------- | - | ------------- |  |  | ---- | --- |  | ---- | - | ---- | - |  | - | ---- | - |  | - | ---- | - |  |  | --- | --
|                |  | Three Months  |      |   |               |   |       |               | Nine Months |   |               |  |  |     
|                |  | Ended         |      |   |               |   | Ended |               |             |  
|                |  | September 30, |      |   | 2005 vs. 2004 |   |       | September 30, |             |   | 2005 vs. 2004 | 
|                |  |               |      |   |               |   |       |               |             |   |               | 
|($ in millions) |  | 2005          |      |   | 2004          |   |       | $             |             |   | %             |  |  | 2005 |     |  | 2004 |   |      | $ |  |   | %    |  
|                |  |               |      |   |               |   |       |               |             |   |               |  |  |      |     |  |      |   |      |   |  |   |      |  
|Net loss        |  | $             | (2.2 | ) |               | $ | (3.2  | )             |             | $ | 1.0           |  |  |      | 32% |  |      | $ | (8.3 | ) |  | $ | (5.8 | ) |  | $ | (2.5 | ) |  |  | (43 | %)



Liquidity and Capital Resources


|                                                                                    |                                         |               |      |      |               |  |       |       |   |  |       |       |   |  |     |    |  
|----------------------------------------------------------------------------------- | --------------------------------------- | ------------- | ---- | ---- | ------------- |  | ----- | ----- | - |  | ----- | ----- | - |  | --- | -- | -
|                                                                                    |                                         | Nine Months   |      |      |               |  |      
|                                                                                    |                                         | Ended         |      |      |              
|                                                                                    |                                         | September 30, |      |      | 2005 vs. 2004 | 
|                                                                                    |                                         |               |      |      |               | 
|($ in millions)                                                                     |                                         | 2005          |      |      | 2004          |  |       | $     |   |  | %     |      
|                                                                                    |                                         |               |      |      |               |  |       |       |   |  |       |      
|Net cash and cash equivalents provided by (used in):                                |                                         |               |      |      |               |  |       |       |   |  |       |       |   |  |     |   
|                                                                                    | Operating activities                    |               | $    | 1.5  |               |  | $     | (6.5  | ) |  | $     | 8.0   |   |  |     | NM |  
|                                                                                    | Investing activities                    |               |      | (7.3 | )             |  |       | (28.0 | ) |  |       | 20.7  |   |  |     | 74 | %
|                                                                                    | Financing activities                    |               |      | (4.0 | )             |  |       | 30.7  |   |  |       | (34.7 | ) |  |     | NM |  
|                                                                                    | Net change in cash and cash equivalents |               |      | (9.9 | )             |  |       | (3.8  | ) |  |       | (6.1  | ) |  |     | NM |  
|Acquisitions, net of cash acquired                                                  |                                         |               | (0.1 | )    |               |  | (24.5 | )     |   |  | 24.4  |       |   |  | 99  | % 
|Purchases of property and equipment                                                 |                                         |               | (3.4 | )    |               |  | (5.3  | )     |   |  | 1.9   |       |   |  | 35  | % 
|Payments under long term debt and lease obligations                                 |                                         |               | (7.5 | )    |               |  | (6.4  | )     |   |  | (1.1  | )     |   |  | (18 | %)
|Proceeds from draws on short term line of credit, net                               |                                         |               | 3.0  |      |               |  | 5.0   |       |   |  | (2.0  | )     |   |  | (40 | %)
|Proceeds from issuance of stock and debentures, net                                 |                                         |               |     |      |               |  | 30.0  |       |   |  | (30.0 | )     |   |  | NM  |   
|Financing fees from issuance of stock and debentures                                |                                         |               | (0.1 | )    |               |  | (1.7  | )     |   |  | 1.6   |       |   |  | 95  | % 
|Proceeds from long-term debt                                                        |                                         |               |     |      |               |  | 2.5   |       |   |  | (2.5  | )     |   |  | NM  |   
|Cash and cash equivalents                                                           |                                         |               | 8.4  |      |               |  | 15.0  |       |   |  | (6.6  | )     |   |  | (44 | %)
|Changes in:                                                                         |                                         |               |      |      |               |  |       |       |   |  |       |       |   |  |     |   
|                                                                                    | Accounts receivable, net                |               |      | 0.4  |               |  |       | (1.5  | ) |  |       |       |   |  |     |    |  
|                                                                                    | Unbilled receivables                    |               |      | (0.8 | )             |  |       | (4.8  | ) |  |       |       |   |  |     |    |  
|                                                                                    | Inventory                               |               |      |     |               |  |       | (2.3  | ) |  |       |       |   |  |     |    |  
|                                                                                    | Other current assets                    |               |      | (2.1 | )             |  |       | (0.8  | ) |  |       |       |   |  |     |    |  
|                                                                                    | Accounts payable and accrued expenses   |               |      | 1.1  |               |  |       | (2.3  | ) |  |       |       |   |  |     |    |  
|                                                                                    | Accrued payroll and related liabilities |               |      | (2.3 | )             |  |       | (0.1  | ) |  |       |       |   |  |     |    |  
|                                                                                    | Deferred revenue                        |               |      | 3.3  |               |  |       | 1.2   |   |  |       |       |   |  |     |    |  
|Days revenues outstanding in accounts receivable including
    unbilled receivables |                                         |               | 89   |      |               |  | 101   |       |   |  |       |       |   |  |     |   





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Off-Balance Sheet Arrangements




Contractual Commitments




|                          |  |           |      |  |       |   |      |       |  |   |           |  |       |   |   |  |  |   |      | 
|------------------------- |  | --------- | ---- |  | ----- | - | ---- | ----- |  | - | --------- |  | ----- | - | - |  |  | - | ---- | 
|                          |  | Within 12 |      |  | 1-3   |   |      | 3-5   |  |   | More than |  |      
|($ in millions)           |  | Months    |      |  | Years |   |      | Years |  |   | 5 Years   |  | Total |  
|                          |  |           |      |  |       |   |      |       |  |   |           |  |       |  
|Notes payable             |  | $         | 2.1  |  |       | $ | 0.8  |       |  | $ |          |  |       | $ |  |  |  | $ | 2.9  | 
|Line of credit            |  |           | 8.0  |  |       |   |     |       |  |   |          |  |       |   |  |  |  |   | 8.0  | 
|Capital lease obligations |  |           | 2.8  |  |       |   | 2.7  |       |  |   |          |  |       |   |  |  |  |   | 5.5  | 
|Operating leases          |  |           | 4.2  |  |       |   | 7.1  |       |  |   | 3.5       |  |       |   |  |  |  |   | 14.8 | 
|                          |  |           |      |  |       |   |      |       |  |   |           |  |       |   |  
|                          |  | $         | 17.1 |  |       | $ | 10.6 |       |  | $ | 3.5       |  |       | $ |  |  |  | $ | 31.2 | 
|                          |  |           |      |  |       |   |      |       |  |   |           |  |       |   |  

Related Party Transactions









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

Interest Rate Risk






28



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##### Table of Contents





Foreign Currency Risk













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

Evaluation of Disclosure Controls and Procedures




Changes in Internal Control over Financial Reporting




29



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##### Table of Contents






PART II.  OTHER INFORMATION







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








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








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








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








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










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

|        |    |             |  |                                                                                                                               
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Numbers |    | Description
|        |    |            
|        | 10 | .46         |  | Second 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

30



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##### Table of Contents






SIGNATURES






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



| |     |                    
| | --- | -------------------
| | By: | /s/ Maurice B. Tosé

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



|                                                                            |  |                                                                                    
|--------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------
|/s/ Maurice B.
    ToséMaurice
    B. Tosé
    November 8, 2005             |  | Chairman, President and Chief Executive Officer
    (Principal Executive Officer)  
|                                                                           
|/s/ Thomas M. Brandt,
    Jr.Thomas
    M. Brandt, Jr.
    November 8, 2005 |  | Senior Vice President and Chief Financial Officer
    (Principal Financial Officer)

31