Telecommunication Systems (TSYS) 10-Q 2003 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2003
OR
[  ]	THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 0-30821

TELECOMMUNICATION SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

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

(410) 263-7616

(Registrant’s telephone number, including area code)

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

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

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

	Shares outstanding
	as of October 15,
Title of Each Class	2003
Class A Common Stock, par value $0.01 per share		21,470,549
Class B Common Stock, par value $0.01 per share		9,584,488
Total Common Stock Outstanding		31,055,037

TABLE OF CONTENTS

PART I. -- FINANCIAL INFORMATION
	Item 1. Financial Statements
		Consolidated Statements of Operations
		Consolidated Balance Sheets
		Consolidated Statements of Cash Flows
		Notes to Consolidated Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II. -- OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Change in 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 and Reports on Form 8-K
	SIGNATURES
RSAC-Brandt
RSAC-Brandt
RSAC-Heintzelman
RSAC-KOZAK
RSAC-LATHAM
RSAC-LORELLO
RSAC-LORELLO
RSAC-MARCHANT
RSAC-MORIN
RSAC-MORIN
RSAC-TOSE
RSAC-TOSE
RSAC-WEBB
RSAC-WEBB
RSAC-YOUNG
RSAC-YOUNG
Certification CEO
Certification- CFO
Certification-CEO
Certification-CFO

INDEX

TELECOMMUNICATION SYSTEMS, INC.

			Page
PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Consolidated Statements of Operations for the three and nine months ended September 30, 2003 and 2002		3
		Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002		4
		Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002		5
		Notes to Consolidated Financial Statements		6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		11
	Item 3.	Qualitative and Quantitative Disclosures about Market Risk		21
	Item 4.	Controls and Procedures		21
PART II. OTHER INFORMATION
	Item 1.	Legal Proceedings		22
	Item 2.	Changes in Securities and Use of Proceeds		22
	Item 3.	Defaults Upon Senior Securities		22
	Item 4.	Submission of Matters to a Vote of Security Holders		22
	Item 5.	Other Information		22
	Item 6.	Exhibits and Reports on Form 8-K		23
	SIGNATURES			24

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,
				2003			2002			2003			2002
Revenue:
	Network software:
		Network software licenses		$	2,177		$	5,920		$	5,432		$	11,043
		Network software services			1,563			3,941			4,196			8,746
	Network software total				3,740			9,861			9,628			19,789
	Service bureau				8,832			5,885			24,697			17,323
	Network solutions				15,675			7,499			33,294			26,915
			Total revenue		28,247			23,245			67,619			64,027
Operating costs and expenses:
	Direct cost of network software				1,786			4,450			4,823			10,493
	Direct cost of service bureau				4,138			3,518			12,105			9,385
	Direct cost of network solutions				10,501			5,110			22,353			19,788
	Research and development				4,109			4,234			12,688			12,719
	Sales and marketing				2,068			2,221			6,674			7,625
	General and administrative				2,725			2,853			8,335			9,243
	Non-cash stock compensation expense				412			429			1,174			1,296
	Depreciation and amortization of property and equipment				1,710			1,593			4,945			4,758
	Amortization of software development costs				123			1,233			8,927			3,620
	Amortization of Xypoint tradename				138			139			415			415
			Total operating costs and expenses		27,710			25,780			82,439			79,342
Income/(loss) from operations					537			(2,535	)		(14,820	)		(15,315	)
Interest expense					(282	)		(210	)		(774	)		(1,001	)
Other income, net					251			186			660			315
Net income/(loss)				$	506		$	(2,559	)	$	(14,934	)	$	(16,001	)
Earnings/(loss) per share — basic and diluted				$	0.02		$	(0.09	)	$	(0.50	)	$	(0.55	)
Weighted average shares outstanding — basic					29,802			29,161			29,661			29,033
Weighted average shares outstanding — diluted					33,706			29,161			29,661			29,033

See accompanying Notes to Consolidated Financial Statements

3

TeleCommunication Systems, Inc.

Consolidated Balance Sheets

(amounts in thousands, except share data)

				September 30,			December 31,
				2003			2002
				(unaudited)
Assets
Current assets:
	Cash and cash equivalents			$	16,126		$	27,402
	Accounts receivable				21,408			22,911
	Unbilled receivables, less allowance of $240 in 2003 and $360 in 2002				11,000			6,987
	Other current assets				2,963			1,675
			Total current assets		51,497			58,975
Property and equipment, net of accumulated depreciation and amortization of $19,070 in 2003 and $14,125 in 2002					10,189			11,814
Software development costs, net of accumulated amortization of $646 in 2003 and $1,347 in 2002					626			7,688
Tradename, net of accumulated amortization of $1,484 in 2003 and $1,070 in 2002					116			530
Other assets					1,875			1,457
			Total assets	$	64,303		$	80,464
Liabilities and stockholders’ equity
Current liabilities:
	Accounts payable and accrued expenses			$	12,437		$	16,274
	Accrued payroll and related liabilities				3,563			3,395
	Deferred revenue				2,266			2,846
	Current portion of capital lease obligations and notes payable				6,252			4,770
			Total current liabilities		24,518			27,285
Capital lease obligations and notes payable, less current portion					5,566			5,543
Stockholders’ equity:
	Class A Common Stock; $0.01 par value:
		Authorized shares — 225,000,000; issued and outstanding shares of 21,445,992 in 2003 and 19,632,123 in 2002			214			196
	Class B Common Stock; $0.01 par value:
		Authorized shares — 75,000,000; issued and outstanding shares of 9,606,588 in 2003 and 9,890,960 in 2002			96			99
	Additional paid-in capital				166,678			165,176
	Accumulated deficit				(132,769	)		(117,835	)
			Total stockholders’ equity		34,219			47,636
			Total liabilities and stockholders’ equity	$	64,303		$	80,464

See accompanying Notes to Consolidated Financial Statements

4

TeleCommunication Systems, Inc.

Consolidated Statements of Cash Flows

(amounts in thousands)

(unaudited)

			Nine months ended
			September 30,
			2003			2002
Operating activities:
Net loss			$	(14,934	)	$	(16,001	)
Adjustments to reconcile net loss to net cash used in operating activities:
	Depreciation and amortization of property and equipment			5,149			4,758
	Amortization of software development costs			8,927			3,620
	Non-cash compensation expense			1,144			1,296
	Amortization of Xypoint tradename			415			415
	State of Maryland loan forgiveness			(100	)		(100	)
	Changes in operating assets and liabilities:
		Accounts receivable, net		1,503			(1,066	)
		Unbilled receivables, net		(4,013	)		(5,945	)
		Other current assets		(1,288	)		31
		Accounts payable and accrued expenses		(3,837	)		(2,481	)
		Accrued payroll and related liabilities		168			(164	)
		Deferred revenue		(580	)		786
Net cash used in operating activities				(7,446	)		(14,851	)
Investing activities:
Purchases of property and equipment				(3,345	)		(3,467	)
Capitalized software development costs				(1,865	)		(3,630	)
Acquisitions, net of cash acquired				—			(927	)
Payments on notes receivable from employees				—			3,492
Change in other assets				(418	)		(158	)
Net cash used in investing activities				(5,628	)		(4,690	)
Financing activities:
Payments on capital lease obligations				(2,346	)		(2,824	)
Payments on long-term debt				(1,494	)		—
Proceeds from long-term debt				5,266			2,633
Proceeds from exercise of employee stock options and sale of stock to employees				372			517
Net cash provided by financing activities				1,798			326
Net decrease in cash				(11,276	)		(19,215	)
Cash and cash equivalents at the beginning of the period				27,402			42,928
Cash and cash equivalents at the end of the period			$	16,126		$	23,713

See accompanying Notes to Consolidated Financial Statements

5

TeleCommunication Systems, Inc.

Notes to Consolidated Financial Statements

September 30, 2003

(amounts in thousands)

(unaudited)

1.     Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three- and nine-month periods ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003. These consolidated financial statements should be read in conjunction with our audited financial statements and related notes included in our 2002 Annual Report on Form 10-K.

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

Reclassifications.Certain prior period balances have been reclassified to conform with current year presentation.

2.     Earnings and Loss Per Common Share

     Basic earnings or loss per common share is based upon the average number of shares of common stock outstanding during the period. Our potentially dilutive securities outstanding consist of stock options, restricted stock grants, and warrants. We calculate the potentially dilutive effect of such securities using the treasury stock method. For periods when we incurred a net loss, potentially dilutive securities were excluded from the computation because the result would be anti-dilutive. A reconciliation of the weighted average number of shares outstanding used for the computation of basic and diluted earnings per share is as follows (shares in thousands):

	Three months ended				Nine months ended
	September 30,				September 30,
	2003		2002		2003		2002
Weighted average shares outstanding-basic		29,802		29,161		29,661		29,033
Dilutive effect of potentially dilutive outstanding securities		2,867		N/A		N/A		N/A
Dilutive effect of unvested stock outstanding		1,037		N/A		N/A		N/A
Weighted average shares outstanding-diluted		33,706		29,161		29,661		29,033

3.     Supplemental Disclosure of Cash Flow Information

     We did not acquire any property and equipment under capital leases during the three months ended September 30, 2003 or 2002. Property and equipment acquired under capital leases totaled $179 and $174 during the nine months ended September 30, 2003 and 2002, respectively.

     Interest paid totaled $236 and $204 for the three months ended September 30, 2003 and 2002, respectively, and $728 and $705 for the nine months ended September 30, 2003 and 2002, respectively.

6

TeleCommunication Systems, Inc.

Notes to Consolidated Financial Statements — (Continued)

4.     Segment Information

     During the fourth quarter of 2002, management began evaluating our performance within three operating segments: network software, service bureau and network solutions. Management also began evaluating our performance based on gross profit. Gross profit is defined as revenue less direct cost of revenue, excluding the amortization of software development costs, which under accounting principles generally accepted in the United States, is considered in determining gross profit from software license revenues. We have restated prior period segment information for comparative purposes.

			Three months ended				Nine months ended
			September 30,				September 30,
			2003		2002		2003		2002
Revenue:
Network software
	Network software licenses		$	2,177	$	5,920	$	5,432	$	11,043
	Network software services			1,563		3,941		4,196		8,746
Network software total				3,740		9,861		9,628		19,789
Service bureau				8,832		5,885		24,697		17,323
Network solutions				15,675		7,499		33,294		26,915
		Total revenue	$	28,247	$	23,245	$	67,619	$	64,027
Segment gross profit:
	Network software		$	1,954	$	5,411	$	4,805	$	9,296
	Service bureau			4,694		2,367		12,592		7,938
	Network solutions			5,174		2,389		10,941		7,127
		Total segment gross profit	$	11,822	$	10,167	$	28,338	$	24,361

A reconciliation of gross profit to net loss is as follows:

		Three months ended						Nine months ended
		September 30,						September 30,
		2003			2002			2003			2002
Total segment gross profit		$	11,822		$	10,167		$	28,338		$	24,361
	Research and development expense		(4,109	)		(4,234	)		(12,688	)		(12,719	)
	Sales and marketing expense		(2,068	)		(2,221	)		(6,674	)		(7,625	)
	General and administrative expense		(2,725	)		(2,853	)		(8,335	)		(9,243	)
	Non-cash stock compensation expense		(412	)		(429	)		(1,174	)		(1,296	)
	Depreciation and amortization of property and equipment		(1,710	)		(1,593	)		(4,945	)		(4,758	)
	Amortization of software development costs		(123	)		(1,233	)		(8,927	)		(3,620	)
	Amortization of Xypoint tradename		(138	)		(139	)		(415	)		(415	)
	Interest expense		(282	)		(210	)		(774	)		(1,001	)
	Other income		251			186			660			315
Net income/(loss)		$	506		$	(2,559	)	$	(14,934	)	$	(16,001	)

7

TeleCommunication Systems, Inc.

Notes to Consolidated Financial Statements — (Continued)

5.     Intangible Assets

     Intangible assets consisted of the following as of:

			September 30, 2003						December 31, 2002
			Gross						Gross
			Carrying		Accumulated				Carrying		Accumulated
			Amount		Amortization		Net		Amount		Amortization		Net
Intangible assets:
	Tradename		$	1,600	$	1,484	$	116	$	1,600	$	1,070	$	530
	Software development costs			1,272		646		626		9,035		1,347		7,688
		Total	$	2,872	$	2,130	$	742	$	10,635	$	2,417	$	8,218
Estimated Future Amortization Expense:
For the three months ending December 31, 2003							$	336
Year ending December 31, 2004							$	204
Year ending December 31, 2005							$	202

We routinely update our estimates of the recoverability of the software products that have been capitalized. Amortization expense for the nine months ended September 30, 2003 includes $7.0 million of additional amortization that was recorded during the second quarter of 2003 when it was determined that the expected margins to be realized from the sales of certain software products over their remaining amortization periods was less than their remaining book values plus costs to complete.

6.     Concentrations of Credit Risk and Major Customers

Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of accounts receivable and unbilled receivables. Accounts receivable are generally due within thirty days and no collateral is required. We maintain allowances for potential credit losses and historically such losses have been insignificant and within our expectations.

The following table summarizes revenue concentrations from our significant customers:

		% of Total Revenue
		For the three		For the nine
		months ended		months ended
Customer	Segment	September 30, 2003		September 30, 2003
Federal Agencies	Network Solutions		38%		31%
Customer A	Network Software and Service Bureau		12%		15%
Customer B	Network Software and Service Bureau		9%		10%

As of September 30, 2003, total billed and unbilled receivables from agencies of the U.S. government aggregated approximately $10,500.

7.     Stock-Based Compensation

We have two stock-based employee compensation plans; our Third Amended and Restated 1997 Stock Incentive Plan (the “Stock Incentive Plan”) and our Employee Stock Purchase Plan. We record compensation expense for all stock-based compensation plans using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees(APB No. 25) and related Interpretations. Under APB 25, compensation expense is recorded over the vesting period to the extent that the fair value of the underlying stock on the date of grant exceeds the exercise or acquisition price of the stock or stock-based award. The following table illustrates the

8

TeleCommunication Systems, Inc.

Notes to Consolidated Financial Statements — (Continued)

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

		Three months ended						Nine months ended
		September 30,						September 30,
		2003			2002			2003			2002
Net income/(loss), as reported		$	506		$	(2,559	)	$	(14,934	)	$	(16,001	)
Add: Stock-based employee compensation expense included in reported net loss			412			429			1,174			1,296
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards			(1,321	)		(1,737	)		(3,904	)		(5,229	)
Pro forma net loss		$	(403	)	$	(3,867	)	$	(17,664	)	$	(19,934	)
Earnings/(loss) per common share:
	Basic and diluted — as reported	$	0.02		$	(0.09	)	$	(0.50	)	$	(0.55	)
	Basic and diluted — pro forma	$	(0.01	)	$	(0.13	)	$	(0.60	)	$	(0.69	)

In calculating the fair value of our stock options using Black-Scholes, we assumed that the expected life was five years for options granted to employees and three years for options granted to non-employees, that the risk free interest rate was 3%, and that there was no dividend yield. We also assumed that the expected volatility of our stock was 130%.

Prior to our initial public offering in 2000, we granted incentive stock options to employees and directors to purchase 885,983 shares of Class A Common Stock. The options were granted at an exercise price less than the estimated market value of Class A Common Stock at the date of grant. Net income/(loss), as reported, includes $249 and $429 of non-cash stock compensation expense related to these grants for the three months ended September 30, 2003 and 2002, respectively, and $844 and $1,296 of expense for the nine months ended September 30, 2003 and 2002, respectively. We expect to record future stock compensation expense of $1,209 as a result of option grants that will be recognized over the remaining vesting period of two years.

In the second quarter of 2003, we issued restricted stock to directors and certain key executives. The restrictions expire at the end of one year for directors and in annual increments over three years for executives and are based on continued employment. Net income/(loss) for the three and nine months ended September 30, 2003, as reported, includes $163 and $330, respectively, of non-cash stock compensation expense related to such stock grants. We expect to record future stock compensation expense of $1,551 as a result of these restricted stock grants that will be recognized over the remaining vesting period for directors and executives.

8.     Recent Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46,Consolidation of Variable Interest Entities(FIN 46). FIN 46 clarifies the requirements for consolidating certain entities in which equity investors do not have a controlling financial interest. We adopted FIN 46 during the second quarter of 2003. Since we are not affiliated with any variable interest entities, the adoption did not have an impact in the preparation of our consolidated financial statements.

In May 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 149, “Derivatives and Hedging-Amendment of FASB Statement 133”

9

TeleCommunication Systems, Inc.

Notes to Consolidated Financial Statements — (Continued)

(Statement No. 149). Statement No. 149 amends and clarifies accounting for derivative instruments, including derivatives embedded in other contracts, and hedging activities under the previously issued FASB Statement No. 133. We adopted Statement No. 149 during the third quarter of 2003. As we do not currently have any derivative contracts or hedging activities, the adoption did not have any impact on our consolidated financial statements.

Also in May 2003, the FASB issued Statement No. 150, “Accounting for Financial Instruments with Characteristics of Liabilities, Equity, or Both” (Statement No. 150). Statement No. 150 amends accounting for mandatory redeemable shares, put options and forward purchase contracts, and obligations to be settled in shares having a fixed value. We adopted Statement No. 150 during the third quarter of 2003. As we have not issued any of the affected financial instruments, the adoption did not have any impact on our consolidated financial statements.

9.     Long-Term Debt

     During the nine months ended September 30, 2003, we borrowed approximately $5.3 million, primarily to fund equipment purchases. The debt bears interest at 7.75% and is secured by the accounts receivable owed to us by certain customers.

10

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

Critical Accounting Policies and Estimates

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

     We identified our most critical accounting policies to be those related to revenue recognition for our software contracts with multiple elements, contracts accounted for using the percentage of completion method, and capitalized software. We describe these accounting policies in relevant sections of this discussion and analysis. This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included in our 2002 Annual Report on Form 10-K.

Overview

     We manage our business in three segments:network software, service bureau and network solutions. Our network software segment develops, licenses, and maintains software products for cellular wireless carriers. Our service bureau segment provides our wireless E9-1-1 service and hosts

11

software application offerings. Our network solutions segment designs, develops and deploys satellite-based and other data communication systems and provides related services. The following table sets forth information regarding each of our segments (in thousands):

			Three months ended				Nine months ended
			September 30,				September 30,
			2003		2002		2003		2002
Revenue:
Network software:
	Network software licenses		$	2,177	$	5,920	$	5,432	$	11,043
	Network software services			1,563		3,941		4,196		8,746
Network software total				3,740		9,861		9,628		19,789
Service bureau				8,832		5,885		24,697		17,323
Network solutions				15,675		7,499		33,294		26,915
		Total revenue	$	28,247	$	23,245	$	67,619	$	64,027
Segment gross profit:
	Network software		$	1,954	$	5,411	$	4,805	$	9,296
	Service bureau			4,694		2,367		12,592		7,938
	Network solutions			5,174		2,389		10,941		7,127
		Total segment gross profit	$	11,822	$	10,167	$	28,338	$	24,361

     Gross profit is defined as revenue less direct cost of revenue, excluding depreciation and the amortization of software development costs, which under accounting principles generally accepted in the United States, is considered in determining gross profit from software license revenues. A reconciliation of segment gross profit to net income/(loss) is as follows (in thousands):

		Three months ended						Nine months ended
		September 30,						September 30,
		2003			2002			2003			2002
Total segment gross profit		$	11,822		$	10,167		$	28,338		$	24,361
	Research and development expense		(4,109	)		(4,234	)		(12,688	)		(12,719	)
	Sales and marketing expense		(2,068	)		(2,221	)		(6,674	)		(7,625	)
	General and administrative expense		(2,725	)		(2,853	)		(8,335	)		(9,243	)
	Non-cash stock compensation expense		(412	)		(429	)		(1,174	)		(1,296	)
	Depreciation and amortization of property and equipment		(1,710	)		(1,593	)		(4,945	)		(4,758	)
	Amortization of software development costs		(123	)		(1,233	)		(8,927	)		(3,620	)
	Amortization of Xypoint tradename		(138	)		(139	)		(415	)		(415	)
	Interest expense		(282	)		(210	)		(774	)		(1,001	)
	Other income		251			186			660			315
Net income/(loss)		$	506		$	(2,559	)	$	(14,934	)	$	(16,001	)

     For both the nine months and three months ended September 30, 2003, customers that accounted for 10% or more of total revenue were Verizon Wireless, U.S. Cellular and U.S. Government agencies. In addition, as of September 30, 2003, our total billed receivables included 16% from U.S. Cellular, 12% from Verizon Wireless, and 22% from U.S. Government agencies. As of September 30, 2003, our total unbilled receivables included 22% from Hutchison 3G and 52% from U.S. Government agencies. The loss of any of these customers would have a material adverse impact on our business.

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     Total company backlog of signed contracts at September 30, 2003 was $87.4 million, of which $2.9 million related to our network software segment, $65.6 million related to our service bureau segment and $18.9 million related to our network solutions segment. We expect to realize approximately $51.7 million of this backlog in the next twelve months. Total company backlog at September 30, 2002 was $69.7 million, of which $8.5 million related to our network software segment, $40.4 million related to our service bureau segment and $20.8 million related to our network solutions segment. Our backlog at any given time may be affected by a number of factors, including contracts being renewed or new contracts being signed before existing contracts are completed. Some of our backlog could be canceled for causes such as late delivery, poor performance, and other factors. Accordingly, a comparison of backlog from period to period is not necessarily meaningful and may not be indicative of eventual actual revenue.

     Network Software Revenue and Related Direct Cost of Revenue.We market our network software products and services by responding to requests for proposals, and through our direct sales force and through channel partners. We generate network software revenue from licensing of our software products, and providing related maintenance, deployment, and customization services. Our Wireless Internet Gateway, TCS Xypoint® Location Platform products, Short Message Service Center (SMSC), and message notification applications are the principal generators of software license fees.

     We sell all of our software products to wireless carriers. Initial licensing fees are a function of the number of subscribers in the network where our software is deployed. As a carrier’s subscriber base increases, the carrier must purchase additional capacity under its license agreement and we receive additional revenue. Generally, we recognize license fee revenue when each of the following has occurred: (1) evidence of an arrangement is in place; (2) we have delivered software; (3) the fee is fixed or determinable; and (4) collection of the fee is probable. Software products that require significant customization are accounted for under the percentage-of-completion method. We measure progress to completion using costs incurred compared to estimated total costs. Software license fees billed and not recognized as revenue are included in deferred revenue.

     We have also historically sold some of our network software products through our channel relationship with Lucent. This sales process typically includes participation of our engineers along with Lucent in presenting our products to prospective customers. Lucent pays us initial license fees generally ranging between 50% and 80% of the revenue it generates from sales of the Short Message Service Center application that we developed under our 1996 development agreement. For sales of our Wireless Internet Gateway, Lucent pays us initial fees ranging between 75% and 90% of the sale value which we negotiate on a case-by-case basis.

     Our network software service revenue arises from annual maintenance fees for our packaged and custom software products and fees from custom development and implementation of software products. Maintenance fees on packaged software are collected in advance and recognized ratably over the maintenance period. Unrecognized maintenance fees are included in deferred revenue. Custom software development, implementation and maintenance services may be provided under time and materials or fixed-fee contracts. We also occasionally sell computer equipment as part of our packaged software sales. We recognize fixed-fee contract revenue using the percentage-of-completion method. We measure progress to completion using costs incurred compared to estimated total costs. We recognize estimated losses under long-term contracts in their entirety upon discovery. If we did not accurately estimate total costs to complete a contract or do not manage our contracts within the planned budget, then future margins may be negatively affected or losses on existing contracts may need to be recognized.

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

     Service Bureau Revenue and Related Direct Cost of Revenue.Our service bureau offerings include our E9-1-1 application, hosted Position Determining Entity (PDE) software and Message Distribution Center applications. Revenue from our service bureau offerings consists of monthly recurring service fees and is recognized in the month earned. E9-1-1 and PDE service fees are primarily dependent on

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the number of subscribers the carrier covers, Public Service Answering Points (PSAPs) served or cell sites that provide E9-1-1 services for the carrier. As the carrier’s number of subscribers, PSAPs, or cell sites increases, the monthly recurring service fees increase. Message Distribution Center revenue is priced based on message volume.

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

     Network Solutions Revenue and Related Direct Cost of Revenue.We generate network solutions revenue from the design, development and deployment of information processing and communication systems for corporate and government enterprises. Representative examples of recent network solutions projects include integration and delivery of our SwiftLink® lightweight, secure, deployable communications systems to the U.S. Departments of State and Defense. SwiftLink® systems provide secure voice, video and data communications, support a worldwide network during trips abroad and throughout the United States, and provide full network functionality and IP telephony capability using landlines and satellite-based technologies. We also operate a teleport facility in Baltimore, MD, which supports the integration of satellite communications and terrestrial wireless broadband with U.S. broadband networks. We generally provide network solutions under long-term contracts. We recognize revenue under long-term contracts as billable costs are incurred and for fixed-price contracts using the percentage-of-completion method, measured primarily by either costs or direct labor hours incurred, based on the type of contract, compared to estimated totals. We recognize estimated losses on contracts in their entirety upon discovery. If we did not accurately estimate total costs to complete a contract or do not manage our contracts within the planned budget, then future margins may be negatively affected or losses on existing contracts may need to be recognized. Under our contracts with the U.S. government, contract costs including allocated indirect expenses are subject to audit and adjustment by the Defense Contract Audit Agency. We record revenue under these contracts at estimated net realizable amounts.

     The direct cost of our network solutions revenue consists primarily of compensation, benefits, purchased equipment components and the costs of third-party contractors that we engage. Our direct costs of providing services under long-term contracts include an allocation of indirect costs at rates that comply with federal contractor cost accounting regulations.

     Research and Development Expense.Our research and development expense consists primarily of the costs of developing software products incurred prior to establishing technological feasibility. For new products, technological feasibility is established when an operative version of the computer software product is completed in the same software language as the product to be ultimately marketed, performs all the major functions planned for the product, and has successfully completed initial customer testing. Technological feasibility for enhancements to an existing product is established when a detail program design is completed. We incur research and development costs to enhance existing packaged software products as well as to create new software products. These costs primarily include compensation and benefits as well as costs associated with testing products before deployment. Cost incurred to enhance or complete products for which we have established technological feasibility and are not anticipated to be recovered are expensed as incurred. In addition, we expense research and development costs as they are incurred.

     Sales and Marketing Expense.Our sales and marketing expenses include compensation and benefits, trade show, travel, advertising and public relations costs which are expensed as incurred. Our marketing efforts also include speaking engagements and attending and sponsoring industry conferences. We sell our network software products and services through our direct sales force and through indirect channels. We have also historically leveraged our relationship with Lucent to market our network software products to wireless carrier customers. We sell our network solutions primarily through direct sales professionals.

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     General and Administrative Expense.General and administrative expense consists primarily of compensation costs and other costs associated with management, finance, human resources and internal information systems. These costs include compensation and benefits, rent, utilities and other facilities costs which are expensed as incurred.

     Non-Cash Stock-Based Compensation Expense.During the second and third quarters of 2000, we granted options to purchase 885,983 shares of Class A Common Stock to employees and directors at an exercise price less than the fair market value of our Class A Common Stock at the date of grant. We will record future additional stock compensation expense of approximately $1.2 million as a result of these option grants that will be recognized ratably over the remaining vesting period of approximately three years ending in 2005. During the three months ended September 30, 2003 and 2002, we recognized approximately $0.2 million and $0.4 million, respectively, of stock compensation expense related to these grants. During the first nine months of 2003 and 2002, we recognized approximately $0.8 million and $1.3 million, respectively, of stock compensation expense related to these grants. Additionally, in the second quarter of 2003, restricted stock was issued to directors and certain key executives. The restrictions expire at the end of one year for directors and in annual increments over three years for executives and are based on continued employment. The fair value of the stock is recorded as an expense over the period that the restrictions expire and is based on the value of the stock at the date of grant. For the three- and nine-month periods ended September 30, 2003, we recognized $0.2 million and $0.3 million, respectively, of stock compensation expense related to these restricted stock grants. We will record future stock compensation expense of approximately $1.6 million as a result of these grants that will be recognized ratably over the respective remaining vesting periods.

     Depreciation and Amortization Expense.Depreciation and amortization expense (other than amortization of software development costs) represents the period costs associated with our investment in computers, telephony equipment, software, furniture and fixtures, and leasehold improvements. We compute depreciation and amortization using the straight-line method over the estimated useful lives of the assets.

     Amortization of Software Development Costs.We capitalize software development costs after we establish technological feasibility, and amortize those costs over the estimated useful lives of the software beginning on the date when the software is first available for general release. We calculate amortization of software development costs on a product-by-product basis using the straight-line method over the remaining estimated economic life of the product, which is never greater than three years. We also compute amortization using the ratio that current revenue for the product bears to the total of current and anticipated future revenue for that product. If this revenue curve method results in amortization greater than the amount computed using the straight-line method, we record amortization at that greater amount. We also record amortization expense if the expected margin to be realized from product revenues is less than the remaining book value of the product plus the costs to complete. Our policies to determine when to capitalize software development costs and how much to amortize in a given period require us to make subjective estimates and judgments. If our software products do not achieve the level of market acceptance that we expect and our future revenue estimates for these products change, the amount of amortization that we record may increase compared to prior periods.

     Amortization of Xypoint Tradename.Tradename consists of the Xypoint® tradename. The cost of the tradename is being amortized over its estimated useful life of three years using the straight-line method.

     Other Income, Net.Other income, net consists primarily of income earned on cash equivalents, foreign currency transaction and translation gain or loss and other income or expense related to recording certain financial instruments at fair value.

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Results of Operations

Three Months Ended September 30, 2003 Compared to the Three Months Ended
September 30, 2002

     Revenue.Total revenue was $28.2 million in the third quarter of 2003, increasing $5.0 million, or 22%, from $23.2 million in the same period in 2002.

     Total network software revenue was $3.7 million in the three months ended September 30, 2003, which was a $6.2 million, or 63%, decrease from $9.9 million in the same period in 2002. Network software license revenue was $2.2 million in the third quarter of 2003, which was a $3.7 million, or 63%, decrease from $5.9 million in the same period in 2002. Network software service revenue was $1.6 million in the third quarter of 2003, which was a $2.3 million, or 60%, decrease from $3.9 million in the same period in 2002. These decreases were primarily due to reduced carrier software deployment project activity, reduced hardware components delivered with software licenses in 2003, and reduced custom software application projects for government agencies. In late 2002, we decided not to pursue new opportunities for developing custom software applications for government agencies.

     Service bureau revenue was $8.8 million in the three months ended September 30, 2003, which was a $2.9 million, or 50%, increase from $5.9 million in the same period in 2002. The increase in revenue is due to a significant increase in E9-1-1 deployments, an increase in customers served, and increased text message distribution volume. As of September 30, 2003, the number of our PSAP (public safety answering point) connections had increased to 4,010, up 15%, from the 3,480 PSAP connections served as June 30, 2003. Continued revenue growth is projected for the foreseeable future for our E9-1-1 business as additional locations are deployed under long-term contracts with existing customers.

     Network solutions revenue was $15.7 million in the three months ended September 30, 2003, which was an $8.2 million, or 109%, increase from $7.5 million in the same period in 2002. The increase is due to a significant increase in the number of satellite-based data communication systems deployed, which are being accounted for under the percentage-of-completion method, and completion of work during the quarter on a significant project during the third quarter of 2003.

     Direct Cost of Revenue.Total direct cost of revenue increased $3.3 million, or 25%, to $16.4 million in the third quarter of 2003 from $13.1 million in the same period in 2002. As a percentage of revenue, direct cost of revenue increased to 58% in third quarter of 2003 from 56% in the same period in 2002. The increase in direct costs as a percentage of revenues is primarily attributable to a change in our sales mix in 2003 to include a lower proportion of high margin license sales than in 2002. For the three months ended September 30, 2003, the network solutions segment generated a larger percentage of our total revenues than in the previous year. Margins from the network solutions segment tend to be lower than other segments due to conventional federal contracting market conditions.

     Direct cost of network software revenue decreased $2.7 million, or 60%, to $1.8 million in the third quarter of 2003 from $4.5 million in the same period in 2002, corresponding to the reduced volume of business. As a percentage of related revenue, direct cost of network software was 49% in the third quarter of 2003 compared to 45% in the same period in 2002. The increase in direct costs as a percentage of revenue is due to the mix of revenue in the quarter.

     Direct cost of service bureau revenue increased $0.6 million, or 17%, to $4.1 million in the third quarter of 2003 from $3.5 million in the same period in 2002. The increase in costs is related to a greater cumulative number of deployments completed in 2003 compared to the prior year. As a percentage of related revenue, direct costs of the service bureau decreased from 60% in the third quarter of 2002 to 47% in the third quarter of 2003. The decrease in direct cost of service bureau as a percentage of revenue is primarily due to the fixed and semi-variable costs in this segment.

     Direct cost of network solutions revenue increased $5.4 million, or 106%, to $10.5 million in the third quarter of 2003 from $5.1 million in the same period in 2002. As a percentage of related

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revenue, direct cost of network solutions decreased slightly to 67% in the third quarter of 2003 from 68% in the same period in 2002. Network solutions projects have variable margins that fluctuate based on the type and complexity of the systems and projects comprising period revenue. Variances in margins between periods are primarily due to changes in the mix of projects.

     Research and Development Expense.Research and development expense decreased $0.1 million, or 3%, to $4.1 million in the third quarter of 2003 from $4.2 million for the same period in 2002. The decrease is due to the timing and mix of projects in development. No development costs were capitalized in the third quarter of 2003.

     Sales and Marketing Expense.Sales and marketing expense decreased $0.1 million, or 7%, to $2.1 million in the third quarter of 2003 from $2.2 million in the same period in 2002. Our sales and marketing expenses have decreased largely due to the re-alignment of resources with products and services to more effectively target certain markets.

     General and Administrative Expense.General and administrative expense decreased $0.2 million, or 4%, to $2.7 million in the third quarter of 2003 from $2.9 million in the same period in 2002. The decrease in general and administrative expenses reflects savings realized through combining systems and processes of acquired companies into our central operations and reduced headcount.

     Depreciation and Amortization Expense.Depreciation and amortization of property and equipment increased $0.1 million, or 7%, to $1.7 million for the third quarter of 2003 from $1.6 million in the same period in 2002.

     Amortization of Software Development Costs.Amortization of software development costs was $0.1 million in the third quarter of 2003 compared to $1.2 million for the same period in 2002. This decrease was due to the significant reduction in capitalized software development costs following the additional $7.0 million of amortization expense that was recorded during the second quarter of 2003.

     Interest Expense.Interest expense was $0.3 million in the three months ended September 30, 2003 compared to $0.2 million in the same period in 2002.

     Other Income, Net.Other income, net was $0.3 million of income in the third quarter of 2003 compared to $0.2 million in the same period in 2002.

Nine Months Ended September 30, 2003 Compared to the Nine Months Ended
September 30, 2002

     Revenue.Total revenue was $67.6 million in the first nine months of 2003, increasing $3.6 million, or 6%, from $64.0 million in the same period in 2002.

     Total network software revenue was $9.6 million for the nine months ended September 30, 2003, which was a $10.2 million, or 51%, decrease from $19.8 million in the same period in 2002. Network software license revenue was $5.4 million in the first nine months of 2003, which was a $5.6 million, or 51%, decrease from $11.0 million in the same period in 2002. Network software service revenue was $4.2 million in the nine months ended September 30, 2003, which was a $4.5 million, or 52%, decrease from $8.7 million in the same period in 2002. These decreases were primarily due to reduced carrier software deployment project activity, reduced revenue associated with resale of hardware, as well as reduced custom software application projects for government agencies. In late 2002, we decided not to pursue new opportunities for developing custom software applications for government agencies.

     Service bureau revenue was $24.7 million for the nine months ended September 30, 2003, which was a $7.4 million, or 43% increase from $17.3 million in the same period in 2002. The increase in revenue is due to a significant increase in E9-1-1 deployments throughout 2003, an increase in customers served, and increased text message distribution volume. As of September 30, 2003, the number of our PSAP connections had increased to 4,010, up 59% from the 3,176 PSAP connections served as December 31, 2002. Continued revenue growth is projected for our E9-1-1 business as additional locations are deployed under long-term contracts with existing customers.

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     Network solutions revenue was $33.3 million for the nine months ended September 30, 2003, which was a $6.4 million, or 24%, increase from $26.9 million in the same period in 2002. The increase in year-to-date revenues for the network solutions segment was generated during the third quarter, and is attributable to a significant increase in satellite-based system sales volumes, which are being accounted for under the percentage-of-completion method, and completion of work during the quarter on a significant customer project in 2003.

     Direct Cost of Revenue.Total direct cost of revenue decreased $0.4 million, or 1%, to $39.3 million in the nine months ended September 30, 2003 from $39.7 million in the same period in 2002. As a percentage of revenue, direct cost of revenue decreased to 58% in 2003 from 62% in the same period in 2002.

     Direct cost of network software revenue decreased $5.7 million, or 54%, to $4.8 million for the nine months ended September 30, 2003 from $10.5 million in the same period in 2002, corresponding to the reduced volume of business. As a percentage of related revenue, direct cost of network software was 50% in 2003 compared to 53% in the same period in 2002. In 2003, a smaller portion of revenue and direct cost is related to custom software projects as well as reduced hardware costs associated with our license sales. As custom hardware projects generally achieve lower margins than those typically associated with off-the-shelf license revenue, margins in 2003 were higher than those in 2002.

     Direct cost of service bureau revenue increased $2.7 million, or 29%, to $12.1 million thru the third quarter of 2003 from $9.4 million in the same period in 2002. The increase in costs is related to a greater cumulative number of deployments completed in 2003 compared to the prior year. As a percentage of related revenue, direct cost of service bureau decreased from 54% in 2002 to 49% in 2003 primarily as a result of the fixed and semi-variable costs in this segment.

     Direct cost of network solutions revenue increased $2.6 million, or 13%, to $22.4 million for the nine months ended September 30, 2003 from $19.8 million in the same period in 2002. As a percentage of related revenue, direct cost of network solutions decreased to 67% in 2003 from 74% in the same period in 2002. Network solutions projects have variable margins that fluctuate based on the type and complexity of the projects. Variances in margins between periods are primarily due to changes in the mix of projects.

     Research and Development Expense.Research and development expense was $12.7 million for both the nine months ended September 30, 2003 and the same period in 2002.

     Sales and Marketing Expense.Sales and marketing expense decreased $0.9 million, or 12%, to $6.7 million in 2003 from $7.6 million in the same period in 2002. Our sales and marketing expenses have decreased largely due to the alignment of resources with products and services to more effectively target certain markets.

     General and Administrative Expense.General and administrative expense decreased $0.9 million, or 10%, to $8.3 million in 2003 from $9.2 million in the same period in 2002. The decrease in general and administrative expenses reflects savings realized through combining systems and processes of acquired companies into our central operations and reduced headcount, as well as a reduction related to the revision of an estimate for potential tax liabilities to state and local governments that was recorded during the first half of 2003.

     Depreciation and Amortization Expense.Depreciation and amortization of property and equipment increased $0.1 million, or 4%, to $4.9 million for the nine months ended September 30, 2003 from $4.8 million in the same period in 2002.

     Amortization of Software Development Costs.Amortization of software development costs increased $5.3 million to $8.9 million for the nine months ended September 30, 2003 compared to $3.6 million for the same period in 2002. The increase in year-to-date amortization of software development costs was attributable to the $7.0 million of additional amortization that was recorded during the second quarter of 2003 when it was determined that the expected margins from selling developed versions of key software products over their remaining useful life was less than the

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remaining book value plus costs to complete. This additional amortization expense recorded during the second quarter was partially offset by reduced amortization expense during the third quarter due to the significant reduction in capitalized software development costs.

     Interest Expense.Interest expense was $0.8 million for the nine months ended September 30, 2003 compared to $1.0 million in the same period in 2002.

     Other Income, Net.Other income, net was $0.7 million for the nine months ended September 30, 2003 compared to $0.3 million in the same period in 2002 due to fluctuations in foreign currency exchange rates applicable to receivables which will be paid with foreign currency.

Liquidity and Capital Resources

     We have funded our recent operations and capital expenditures primarily using net proceeds from our initial public offering in August 2000, which generated cash of approximately $83.2 million, as well as revenue from our operations and various borrowing arrangements. In 2001, our borrowing arrangements provided funding primarily through capital lease obligations. During the second half of 2002 and first three quarters of 2003, as an alternative to leasing, we borrowed $5.2 million and $5.3 million, respectively, under long-term debt arrangements to fund fixed asset purchases. As of September 30, 2003, we had $16.1 million in cash and cash equivalents and working capital of $27.5 million. We have an agreement with Silicon Valley Bank for a $15.0 million line of credit. We can borrow an amount equal to up to 80% of receivables less than 90 days old. The line of credit is secured by the assets of the company and bears interest at prime plus 1.0%, with the minimum prime rate at 4.25% (borrowing rate of 5.25% at September 30, 2003). The line of credit will expire in April 2006. As of September 30, 2003, we had $9.7 million available and unused under the line of credit and as of October 15, 2003, there were no borrowings outstanding under the line of credit.

		Nine months ended
		September 30,
		2003			2002
		(in thousands)
Net cash (used in)/provided by:
	Operating activities	$	(7,971	)	$	(14,851	)
	Investing activities		(5,103	)		(4,690	)
	Financing activities		1,798			326

     Our net cash used in operating activities was $8.0 million in the first nine months of 2003 and $14.9 million in the same period in 2002. The $8.0 million in net cash used in operating activities in 2003 reflects a net loss of $14.9 million, a net increase in operating assets and liabilities of $8.6 million, and non-cash expenses of $15.5 million. The changes in our operating assets and liabilities vary primarily based on the timing of billings and collections as well as vendor payment terms for long-term projects, license sales and service bureau operations.

     Net cash used in investing activities was $5.1 million in the first nine months of 2003 and $4.7 million in the same period in 2002. In 2003, cash used in investing activities includes $1.9 million for the development of our software products and $3.3 million for the purchase of fixed assets.

     Net cash provided by financing activities was $1.8 million in the first nine months of 2003 and $0.3 million in the same period in 2002. In 2003, we borrowed an additional $5.3 million under long-term borrowing arrangements primarily for the purpose of funding equipment purchases, and we repaid capital lease obligations of $2.3 million and notes payable of $1.5 million.

     During the first nine months of 2003 and the second half of 2002, we borrowed approximately $5.3 million and $5.2 million, respectively, primarily to fund equipment purchases. The debt bears interest at 7.75% and is secured by the accounts receivable owed to us by certain customers.

     As of September 30, 2003, our most significant commitments consisted of long-term debt, obligations under capital leases and non-cancelable operating leases. We lease certain furniture and

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computer equipment under capital leases. We lease office space and equipment under non-cancelable operating leases. As of September 30, 2003 our commitments consisted of the following (amounts in thousands):

	2003		2004–2005		2006–2007		Total
Notes payable	$	898	$	8,032	$	8	$	8,938
Capital lease obligations		709		2,133		38		2,880
Operating leases		756		5,118		3,369		9,243
	$	2,363	$	15,283	$	3,415	$	21,061

     We currently believe that our existing cash and cash equivalents and credit facility will be sufficient to meet our anticipated working capital and capital expenditure needs for at least the next twelve months, but unanticipated events and opportunities may make it necessary for us to return to the public markets or establish new credit facilities or raise capital in private transactions in order to meet our capital requirements. We cannot be certain that we will be able to obtain, if required, additional financing on acceptable terms, or at all.

Related Party Transactions

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

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

     We have limited exposure to financial market risks, including changes in interest rates. In July 2003, we extended our agreement with Silicon Valley Bank for a $15.0 million line of credit. The line bears an interest rate of prime plus 1.0%, with a minimum prime rate of 4.25% (interest rate of 5.25% at September 30, 2003). As of September 30, 2003, there were no borrowings outstanding under the line of credit.

     During the nine months ended 2003 and for the same period of 2002, we borrowed approximately $5.3 million and $5.2 million, respectively, primarily to fund equipment purchases. The debt bears interest at a fixed rate of 7.75%.

     At September 30, 2003, we had cash and cash equivalents of $16.1 million. Cash and cash equivalents consisted of demand deposits and money market accounts that are interest rate sensitive. However, these investments have short maturities mitigating their sensitivity to interest rates. A hypothetical 100 basis point adverse movement (decrease) in interest rates would have increased our net loss for the three and nine month periods ending September 30, 2003 by approximately $40,000 and $163,000, respectively, resulting in no significant impact on our consolidated financial position, results of operations or cash flows.

Foreign Currency Risk

     In January 2002, we entered into a contract for the sale of our products and services, which is denominated in British Pounds Sterling. Fluctuations in the value of the British Pound Sterling relative to the United States dollar could cause us to incur foreign currency exchange gains or losses. Under the terms of this contract, we will be paid in British Pounds Sterling which exposes us to foreign currency exchange risk.

     As of September 30, 2003 we had approximately $2.4 million in unbilled receivables and $0.7 million in accounts receivable that are exposed to foreign currency exchange risk. For the three and nine months ended September 30, 2003, we recorded transaction gains of $222,000 and $470,000, respectively, on foreign currency denominated receivables.

Item 4. Controls and Procedures

     As of the end of the period ending September 30, 2003, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company’s periodic SEC filings. There have been no significant changes in the Company’s internal controls or in other factors which could significantly affect internal controls subsequent to the date the Company carried out its evaluation.

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PART II. — OTHER INFORMATION

Item 1. Legal Proceedings

     In November 2001, a shareholder class action lawsuit was filed against us, certain of our current officers and a director, and several investment banks that were the underwriters of our initial public offering (the “Underwriters”): Highstein v. Telecommunication Systems, Inc., et al., United States District Court for the Southern District of New York, Civil Action No.01-CV-9500. The plaintiffs seek an unspecified amount of damages. The lawsuit purports to be a class action suit filed on behalf of purchasers of our common stock during the period August 8, 2000 through December 6, 2000. The plaintiffs allege that the Underwriters agreed to allocate common stock offered for sale in our initial public offering to certain purchasers in exchange for excessive and undisclosed commissions and agreements by those purchasers to make additional purchases of common stock in the aftermarket at pre-determined prices. The plaintiffs allege that all of the defendants violated Sections 11,12 and 15 of the Securities Act of 1933, as amended, and that the underwriters violated Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The claims against us of violation of Rule 10b-5 have been dismissed with the plaintiffs having the right to re-plead. We intend to vigorously defend the lawsuit. We believe that more than 300 other companies have been named in nearly identical lawsuits that have been filed by some of the same law firms that represent the plaintiffs in the lawsuit against us.

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

Item 2. Change in Securities and Use of Proceeds

     None.

Item 3. Defaults Upon Senior Securities

     None.

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

     None.

Item 5. Other Information

     None.

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Item 6. Exhibits and Reports on Form 8-K

     (a) Exhibits.

Exhibit
Numbers		Description
	10.48	Restricted stock award certificate to Mr. Thomas M. Brandt, Jr.
	10.49	Restricted stock award certificate to Mr. Thomas M. Brandt, Jr.
	10.50	Restricted stock award certificate to Mr. Clyde A. Heintzelman.
	10.51	Restricted stock award certificate to Mr. Richard A. Kozak.
	10.52	Restricted stock award certificate to Mr. Weldon H. Latham.
	10.53	Restricted stock award certificate to Mr. Timothy J. Lorello.
	10.54	Restricted stock award certificate to Mr. Timothy J. Lorello.
	10.55	Restricted stock award certificate to Mr. Byron F. Marchant.
	10.56	Restricted stock award certificate to Mr. Drew A. Morin.
	10.57	Restricted stock award certificate to Mr. Drew A. Morin.
	10.58	Restricted stock award certificate to Mr. Maurice B. Tosé.
	10.59	Restricted stock award certificate to Mr. Maurice B. Tosé.
	10.60	Restricted stock award certificate to Mr. Kevin M. Webb.
	10.61	Restricted stock award certificate to Mr. Kevin M. Webb.
	10.62	Restricted stock award certificate to Mr. Richard A. Young.
	10.63	Restricted stock award certificate to Mr. Richard A. Young.
	31.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

     (b) Reports on Form 8-K.

     On July 25, 2003, we filed a Form 8-K attaching a press release relating to the Registrant’s financial results for the quarter ended June 30, 2003.

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SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on the 24th day of October 2003.

TELECOMMUNICATION SYSTEMS, INC.

By:  /s/ MAURICE B. TOSÉ

Maurice B. Tosé

Chairman, President and Chief Executive Officer

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

/s/ MAURICE B. TOSÉ Maurice B. Tosé October 24, 2003	Chairman, President and Chief Executive Officer (Principal Executive Officer)
/s/ THOMAS M. BRANDT, JR. Thomas M. Brandt, Jr. October 24, 2003	Senior Vice President and Chief Financial Officer (Principal Financial Officer)

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