e10vq

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.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three- and nine-month periods ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. These unaudited consolidated financial statements should be read in conjunction with our audited financial statements and related notes included in our 2003 Annual Report on Form 10-K, as amended.

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

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

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

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

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

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

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

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

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

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

The intangible assets acquired in the Enterprise Acquisition were determined to have useful lives of 3 – 5 years, with a weighted-average useful life of 4.1 years, based on the ratio of the estimated cash flows generated in each period to the estimated total cash flows to be contributed from each asset.

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

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

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

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

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

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

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

Significant Accounting Policies Related to our Newly Acquired Enterprise Segment:

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

Effective January 1, 2004, we acquired the Enterprise segment from Aether Systems, Inc. in accordance with a Purchase Agreement dated as of December 18, 2003.

The Enterprise segment provides wireless data solutions, uniting messaging, synchronization and web technologies. These solutions include package and vehicle tracking, productivity tools, and the ability to capture digital signatures for proof of delivery to a growing installed base of logistics customers. The Enterprise segment is a leading reseller of Blackberry^TM devices and provides real-time financial market data to wireless device users under annual subscriber contracts in the U.S. and Europe. As a result of the acquisition of the Enterprise segment, we believe that we have expanded our product offerings to both new and existing customers, expanded international sales, and provided broader technology and expertise to our customers.

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

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

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

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

The pro forma results include the estimated amortization of intangibles, estimated depreciation of the fair value of the property, plant and equipment acquired, and the recognition of interest expense related to financing the acquisition. The pro forma results are not necessarily indicative of

the results that would have occurred if the acquisition had actually been completed on January 1, 2003 and do not reflect the reduction in recurring costs during the latter part of 2003, nor are they necessarily indicative of future consolidated results.

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

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

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

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

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

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

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

Management evaluates performance based on gross profit. Gross profit is defined as revenue less direct cost of revenue, excluding non-cash stock compensation expense, which under GAAP, is considered in determining gross profit. We have restated prior period segment information for comparative purposes.

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

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

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

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

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

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:

We have two stock-based employee compensation plans: our Fourth Amended and Restated 1997 Stock Incentive Plan (the “Stock Incentive Plan”) and our Employee Stock Purchase Plan. We record compensation expense for all stock-based compensation plans using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25) and related Interpretations. Under APB 25, compensation expense is recorded over the vesting period to the extent that the fair value of the underlying stock on the date of grant exceeds the exercise or acquisition price of the stock or stock-based award. The related compensation constitutes portions of our direct cost of revenue, research and development expense, sales and marketing expense, and general and administrative expense as detailed in the table presented with our Consolidated Statement of Operations. The following table illustrates the effect on net loss and loss per common share if we had applied the fair value recognition provisions of Financial Accounting Standards Board Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

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 116%.

Prior to our initial public offering in 2000, we granted incentive stock options to employees and directors to purchase 885,983 shares of Class A Common Stock. The options were granted at an exercise price less than the estimated market value of Class A Common Stock at the date of grant. Net (loss)/income, as reported, includes $102 and $249 of non-cash stock compensation expense related to these grants for the three-months ended September 30, 2004 and 2003, respectively, and $484 and $844 of expense for the nine-months then ended. We expect to record future stock compensation expense of $289 as a result of these option grants that will be recognized over the remaining vesting period of one year.

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

To fund the Enterprise Acquisition, on January 13, 2004 we raised $21,000 in cash from third-parties through the issuance of (i) a convertible subordinated debenture with a face value of $15,000 (the “Debenture”), bearing interest at a stated rate of 3% per annum and due in lump sum on January 13, 2009 in cash or shares of our Company Class A Common Stock at our option (ii) warrants to purchase 341,072 shares of Class A Common Stock at an exercise price of $6.50 per share and expiring in January 2007, and (iii) 1,364,288 shares of Class A Common Stock. We determined that the value of the Class A Common Stock issued was $7,640 based on the quoted closing price of our Class A Common Stock on the issue date of $5.60. The difference between the proceeds from the issuance of these shares and their fair value was recognized as a debt discount. The value of the warrants was estimated to be $1,395, determined using the Black-Scholes option-pricing model and was recorded as a debt discount and additional paid-in capital. The convertible subordinated debentures provided for a contractual conversion price of $5.38 per share, and were estimated to have an issuance date beneficial conversion value of $3,662, which was recorded as a debt discount and additional paid-in capital. The resulting carrying value of the debt at issuance was $8,303, net of $6,697 of original issue discount that was being amortized over its five-year term using the effective interest method, yielding an effective interest rate of 12.6%. As of September 30, 2004, the subordinated convertible debentures had a carrying value of $9,196. The terms of the Debenture described above in clause (i) were amended effective as of August 30, 2004. See Note 11 below.

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

Under our bank credit agreement, we can borrow an amount equal to up to 80% of receivables less than 90 days old. The line of credit is secured by accounts receivable and bears

interest at the prime rate plus 1.25% for equipment loans at date of borrowing and at the prime rate plus 1.0% for all other loans, with a minimum prime rate of 4.25% (borrowing rates of 5.5% and 5.75%, respectively, at October 31, 2004). Our bank line of credit with Silicon Valley Bank contains covenants requiring us to maintain at least $25 million of tangible net worth, as defined, and at least $10 million in cash and cash availability as well as restrictive covenants, including, among others, restrictions on our ability to merge, acquire assets above prescribed thresholds, undertake actions outside the ordinary course of our business (including the incurrence of indebtedness), guarantee debt, distribute dividends, and repurchase our stock. As of September 30, 2004, we were in compliance with all of these covenants. As part of this agreement, we have borrowed $2.5 million as an equipment loan, secured by purchased equipment, for a term of three years. As of September 30, 2004, there was approximately $1.9 million outstanding under the equipment loan. As of September 30, 2004, we have borrowed $5.0 million under the line of credit and had $5.2 million of unused availability. As of September 30, 2004 and October 31, 2004, there were no other borrowings outstanding under the bank agreement. We are also subject to minimal unused commitment and collateral monitoring fees related to our line of credit, which are waived if we maintain certain levels of deposits. The line of credit will expire in April 2006.

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

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

The following discussion and analysis of the financial condition and results of operations should be read in conjunction with the consolidated financial statements, related notes, and other detailed information included elsewhere in this Quarterly Report on Form 10-Q. This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are statements other than historical information or statements of current condition. Some forward-looking statements may be identified by the use of such terms as “believes”, “anticipates”, “intends”, or “expects”. For example, the statements (a) regarding our belief as to the sufficiency of our capital resources to meet our anticipated working capital and capital expenditures for at least the next twelve months, (b) regarding our belief that general and administrative expenses will remain higher than 2003 levels and (c) that we expect to realize approximately $20 million of backlog in the balance of this year and $58 million in the next 12 months are forward-looking statements. These forward-looking statements relate to our plans, objectives and expectations for future operations. In light of the risks and uncertainties inherent in all such projected operational matters, the inclusion of forward-looking statements in this report should not be regarded as a representation by us or any other person that our objectives or plans will be achieved or that any of our operating expectations will be realized. Our actual financial results realized could differ materially from the statements made herein, depending in particular upon the risks and uncertainties described in our filings with the Securities and Exchange Commission. These include without limitation risks and uncertainties relating to our financial results and our ability to (i) reach and maintain profitability as early as anticipated or at all, (ii) continue to rely on our customers and other third parties to provide additional products and services that create a demand for our products and services, (iii) conduct our business in foreign countries, (iv) adapt and integrate new technologies into our products, (v) develop software and deliver products and services without any errors or defects, (vi) protect our intellectual property rights, (vii) implement our business strategy (viii) realize backlog, and (ix) achieve continued revenue growth in the foreseeable future for our E9-1-1 business. These factors should not be considered exhaustive; we undertake no obligation to release publicly the results of any future revisions we may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. We caution you not to put undue reliance on these forward-looking statements.

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

We identified our most critical accounting policies to be those related to revenue recognition for our software contracts with multiple elements, contracts accounted for using the percentage of completion method, revenue recognition for our newly acquired Enterprise segment, the relevant accounting related to valuation allowances, capitalized software development costs, acquired intangible assets, stock compensation expense, and deferred compensation. We describe these

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

On January 13, 2004, we consummated the Enterprise Acquisition and acquired the assets which now comprise our Enterprise segment. This segment added a substantial base of 1,200 enterprise customers, more than 60,000 wireless data subscribers, applications for logistics, financial services and the mobile office, and 112 employees.

Prior to the Enterprise Acquisition, we managed our business in three operating segments: Network Software, Service Bureau and Network Solutions. Subsequent to the Enterprise Acquisition, we realigned our segments to better manage the business we operate. Our operating segments include (i) our Wireless Carrier segment, which consists principally of the previous Network Software and Service Bureau segments, and which principally includes our products and services marketed directly to wireless carriers consisting of monthly recurring E9-1-1 and hosted software application offerings as well as software license and service fees (ii) our Government segment, which consists principally of the previous Network Solutions segment, and which includes the design, development, and deployment of information processing and communication systems and related services, and (iii) our Enterprise segment, which offers subscriber-based services as well as software licenses and services for Enterprise customers. The information in this section is presented based on the operating segments through which we currently manage our business.

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

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


	•	Revenue. We derive revenue from products and services including service bureau and subscriber-based services, software license fees and related service fees relating to our developed software products, and network solutions revenue related to our communication systems delivered to governmental agencies.

	•	Cost of revenue. The major items impacting our cost of revenue are compensation and benefits as well as third-party hardware and software, airtime costs of subscriber-based revenue, amortization of software development costs, and overhead expenses. Hardware and third-party software costs are primarily associated with the delivery of product within our Government segment while also, to a lesser extent, may be attributed to the delivery of software licenses and services in both our Wireless Carrier and Enterprise segments. These costs tend to fluctuate as a result of the relative volume, mix of projects, level of service support required and the complexity of customized products and services delivered in a period. Airtime costs relate to the volume of monthly subscriber-based revenue experiences


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


	•	Operating expenses. Operating expenses are substantially driven by compensation and benefits, travel costs, professional fees, facility costs, specific marketing and sales-related expenses as well as certain non-cash expenses such as non-cash stock compensation expenses, depreciation and amortization of property and equipment, and amortization of acquired intangible assets. Operating expenses are incurred in connection with the development and marketing of new software applications as well as general corporate overhead expenses.

	•	Liquidity and cash flows. The primary driver of our cash flows is our results of operations. Important sources of our liquidity have been cash raised at the time of our initial public offering in 2000, our January 2004 financing in connection with our Enterprise Acquisition (as described below under “Liquidity and Capital Resources”), our September 2004 financing (as described below under “Liquidity and Capital Resources”) and borrowing and lease financings secured for the purchase of equipment.

	•	Balance sheet. We view cash, working capital, accounts receivable balances and days revenues outstanding as important indicators of our financial health.

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

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

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


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

We market our service bureau and software offerings to wireless carriers. Our service bureau offerings include our E9-1-1, hosted Position Determining Entity (PDE) and Text Message Distribution Center (MDC) applications. Revenue from our service bureau offerings primarily consists of monthly recurring service fees and is recognized in the month earned. E9-1-1 and PDE service fees are primarily dependent on the number of subscribers the carrier covers, Public Service Answering Points (PSAPs) served or carrier cell sites. As the carrier’s number of subscribers, PSAPs, or cell sites increases, the monthly recurring service fees increase. MDC revenue is priced based on message volume. In both the three- and nine-month periods ended September 30, 2004, our revenue reflected an increase in the number of wireless carriers served as well as the volume served from the customer client base that existed in the corresponding periods of 2003.

The direct cost of our service bureau revenue consists primarily of compensation, benefits, and consulting fees incurred when providing our services, as well as the equipment maintenance and circuit costs of our network operations centers circuits utilized for connectivity to carrier customers and local governments’ PSAPs. In both the three- and nine-month periods ended September 30, 2004, we incurred increased costs related to increased headcount as well as increased circuit costs required to support the increase in PSAPs served.

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

We sell our software products directly to wireless carriers. Initial licensing fees are a function of the number of subscribers or other measure of usage of our software in the network where our software is deployed. As a carrier’s subscriber base or usage increases, the carrier must purchase additional capacity under its license agreement and we receive additional revenue. Generally, we recognize license fee revenue when each of the following has occurred: (1) evidence of an arrangement is in place; (2) we have delivered software; (3) the fee is fixed or determinable; and (4) collection of the fee is probable. Software projects that require significant customization are accounted for under the percentage-of-completion method. We typically measure progress to completion using costs incurred compared to estimated total costs. We recognize estimated losses under long-term contracts in their entirety upon discovery.

If we did not accurately estimate total costs to complete a contract or do not manage our contracts within the planned budget, then future margins may be negatively affected or losses on existing contracts may need to be recognized. Software license fees billed and not recognized as revenue are included in deferred revenue.

We have also historically sold some of our network software products through channel relationships. This sales process typically involves our engineers along with original equipment manufacturers in presenting our products to prospective customers. We record sales under these arrangements net of any related commissions. In the three-month period ended September 30, 2004, software license revenue decreased to $1.2 million from $2.2 million in the comparable period last year. Software license revenue decreased in the three-month period ended September 30, 2004 due to the timing of orders closing in the second quarter as compared to prior years including revenue from a large customer software project in 2003 that was not replaced in 2004 and license revenue related to an upgrade in 2003. In the nine-month period ended September 30, 2004 software license revenue increased to $8.7 million from $5.4 million in the

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

In the three-month period ended September 30, 2004, 62% of software service revenues related to maintenance fees, while 38% related to custom development and implementation fees associated with the delivery of related software applications. In the comparable period in 2003, 61% of service revenue was related to maintenance fees, while 37% of service revenue was associated with custom development and implementation fees associated with the delivery of related software applications and the remaining 2% related to third-party hardware and software delivered as part of our packaged software sales. In the nine-month period ended September 30, 2004, 63% of software service revenues related to maintenance fees, while 35% related to custom development and implementation fees associated with the delivery of related software applications, and the remaining 2% related to third-party hardware and software delivered as part of our packaged software sales. In the comparable period in 2003, 61% of service revenue was related to maintenance fees, while 38% of service revenue was associated with custom development and implementation fees associated with the delivery of related software applications, and the remaining 1% related to third-party hardware and software delivered as part of our packaged software sales.

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

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

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


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

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

In the three- and nine- month periods ended September 30, 2004, approximately 26% and 44%, respectively, of network solutions revenue resulted from the sale of SwiftLink® and related deployable communications systems. In 2004, we also designed, tested and delivered products to government customers related to other satellite-based communication systems and information processing systems for local government agencies as well as for the country of Bahrain. In the three-and nine- month periods ended September 30, 2003, approximately 48% and 45%, respectively, of our revenue for this segment resulted from the sale of SwiftLink® and related deployable communication systems, while the remaining amount related to the design, development and operation of other communication systems, as well as the design, testing and delivery of products for several government agencies.

The direct cost of our network solutions revenue consists of compensation, benefits, travel, satellite “space segment” and airtime. In the three-and nine-month periods ended September 30, 2004, approximately 77% and 68%, respectively, of costs were related to purchased equipment components, which we purchase as needed for customer contracts or release from inventory, and the costs of third-party contractors that we engage. Such costs represented 76% and 66% of direct cost of network solutions revenue in the three-month and nine-month periods ended September 30, 2003, respectively.

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

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


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

No period-over-period comparison between 2003 and 2004 is presented for our Enterprise segment because the Enterprise Mobility Solutions division of Aether Systems, Inc, which makes up the Enterprise segment, was acquired in January 2004.

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

Subscriber-based revenue is billed to customers on a monthly basis and is generally cancelable with 30 days’ notice. Most corporate customers have retained their service for three years or more.

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

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

As of September 30, 2004, we had unfilled orders, or backlog, of approximately $87.2 million, of which $68.1 million related to our Wireless Carrier segment, $11.2 million related to our Government segment and $7.9 million related to our Enterprise segment. We expect to realize approximately $20.4 million of this backlog in the balance of this year and $57.9 million of this backlog in the next twelve months. The remaining backlog primarily represents the balance of multi-year contracts for our service bureau business. Total company backlog at September 30, 2003 was $87.4 million, of which $68.5 million related to our Wireless Carrier segment, and $18.9 million related to our Government segment.

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

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

We incur research and development costs to enhance existing packaged software products as well as to create new software products, including software hosted in our service bureau network

In 2004, we incurred research and development expenses related to Wireless Carrier and Enterprise software applications, which are being marketed to new and existing customers on a global basis, with an emphasis on expanded functionality of our location platform software and E9-1-1 application. In 2003, the research and development expenditures were primarily incurred for the same software applications, excluding the Enterprise applications which were acquired in 2004. Research and development expenditures decreased as a percentage of revenue in 2004. The decrease as a percentage of revenue is the result of increased revenues in 2004 primarily due to the Enterprise Acquisition and the significant increase of software license revenue in 2004. Management continually assesses our spending on research and development to ensure resources are focused on products that are expected to achieve the highest level of success.

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

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

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

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

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

Prior to our initial public offering in 2000, we granted incentive stock options to employees and directors to purchase 885,983 shares of Class A Common Stock. The options were granted at an exercise price less than the estimated market value of Class A Common Stock at the date of grant. Net (loss)/income, as reported, includes $102,000 and $249,000 of non-cash stock compensation expense related to these grants for the three month periods ended September 30, 2004 and 2003, respectively, and $484,000 and $844,000 of expense for the nine month periods then ended. We expect to record future stock compensation expense of $289,000 as a result of these option grants that will be recognized over the remaining vesting period of two years.

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

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

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

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

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

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

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

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

Because we have generated significant net operating losses since 1999, no provision for federal or state income taxes has been made for the three or nine month periods ended September 30, 2004 or any portion of 2003. We have recorded a full valuation allowance for deferred tax assets as a result of our inability to determine the realizability of our net operating loss carry-forwards.

The following table sets forth, for the nine-months ended September 30, 2004 and 2003, respectively, a period-over-period comparison of key components of our liquidity and capital resources:

We have funded our operations and capital expenditures primarily using revenue from our operations as well as the net proceeds from our initial public offering in August 2000, which generated cash of approximately $83.2 million, leasing activities, issuance of long-term debt, and the net proceeds of the financings in connection with the Enterprise Acquisition in January 2004 and the Kivera Acquisition in August 2004 (as described in Notes 10 and 11 to our Consolidated Financial Statements and below).

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

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

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

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

Net cash used in investing activities increased in 2004 from 2003 primarily related to the Enterprise Acquisition and the Kivera Acquisition. For the nine-month period ended September 30, 2004, the total cash used for the purchase of property and equipment and development of our software products was $5.3 million while they were $5.2 million in the comparable period of 2003. The increase in 2004 is primarily related to an increase in the purchase of property and equipment required for our network operations center including the cost of leasehold improvements related to the move into new office space, our software development efforts, and our corporate administrative support. This increase is offset by a reduction in capitalized software development costs due to completion of certain software development projects that were under development in prior years.

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

Under our bank credit agreement, we can borrow an amount equal to up to 80% of receivables less than 90 days old. The line of credit is secured by accounts receivable and bears interest at the prime rate plus 1.25% for equipment loans at date of borrowing and at the prime rate plus 1.0% for all other loans, with a minimum prime rate of 4.25% (borrowing rates of 5.5% and 5.75%, respectively, at October 31, 2004). Our bank line of credit with Silicon Valley Bank contains covenants requiring us to maintain at least $25 million of tangible net worth, as defined, and at least $10 million of cash and cash availability as well as restrictive covenants, including, among others, restrictions on our ability to merge, acquire assets above prescribed thresholds, undertake actions outside the ordinary course of our business (including the incurrence of indebtedness), guarantee debt, distribute dividends, and repurchase our stock. As of September 30, 2004, we were in compliance with all of these covenants. As part of this agreement, we have borrowed $2.5 million as an equipment loan, secured by purchased equipment, for a term of three years. As of September 30, 2004, there was approximately $1.9 million outstanding under the equipment loan. As of September 30, 2004, we have borrowed $5.0 million against the line of credit and had $5.2 million of unused availability. As of September 30, 2004 and October 31, 2004, there were no other borrowings outstanding under the bank agreement. We are also subject to minimal unused commitment and collateral monitoring fees associated with our line of credit, which are waived if we maintain certain levels of deposits. The line of credit will expire in April 2006.

Effective January 1, 2004, we acquired the Enterprise Mobility Solutions division of Aether Systems, Inc. Consideration for the acquisition was valued at approximately $20 million, consisting of $18.1 million in cash, $1.0 million in the form of a note payable and 204,020 newly issued shares of Class A Common Stock. Concurrent with the acquisition, we closed on $21.0 million of financing with two accredited institutional investors, which included a subordinated convertible debenture with stated principal of $15 million, bearing interest at a stated rate of 3% per annum and originally due in lump sum on January 13, 2009 in cash or shares of our Class A Common Stock at the option of the Company, approximately 1.4 million newly issued shares of our Class A Common Stock and warrants to purchase 341,072 shares of our Class A Common Stock at an exercise price of $6.50 per share, expiring in January 2007. The majority of the proceeds from this financing transaction were used to fund the purchase of the acquired assets. See Notes 2 and 10 to our Consolidated Financial Statements.

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

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

The leases for substantially all of our Annapolis, Maryland office facilities, including our principal executive office, are currently set to expire in early 2005. We are in the process of extending these leases until 2008, and expect to finalize the agreements during the fourth quarter of 2004. We have begun planning for facilities needs thereafter, including entering an agreement with Annapolis Partners LLC to explore the opportunity of relocating our Annapolis offices to a planned new real estate development. Our President and Chief Executive Officer owns a controlling voting and economic interest in Annapolis Partners LLC and he also serves as a member. The financial and many other terms of the lease have not yet been established. The lease is subject to several contingencies and rights of termination. For example, the lease can be terminated at the sole discretion of our Board of Directors if the terms and conditions of the development are unacceptable to us, including without limitation the circumstances that market conditions make the lease not favorable to us or the overall cost is not in the best interest of us or our shareholders, or any legal or regulatory restrictions apply. Our Board of Directors will evaluate this opportunity along with alternatives that are or may become available in the relevant time periods and there is no assurance that we will enter into a definitive lease at this new development site.

As of September 30, 2004, we had $5.2 million available and unused under the line of credit. As of October 31, 2004, $1.8 million was outstanding under the terms of an equipment loan that was secured by purchased equipment, bearing interest at 5.5% and payable monthly through December 2006. As of the same date, $5.0 million was outstanding against the line of credit and secured by accounts receivable, bearing interest at 5.75% and payable upon the collection of the receivables collateralizing the loan. A hypothetical 100 basis point adverse movement (increase) in the prime rate would have increased our interest expense for the three- and nine-month periods ended September 30, 2004 by approximately $17,000 and $52,000, respectively, resulting in no significant impact on our consolidated financial position, results of operations or cash flows.

At September 30, 2004, we had cash and cash equivalents of $15.0 million. Cash and cash equivalents consisted of demand deposits and money market accounts that are interest rate sensitive. However, these investments have short maturities mitigating their sensitivity to interest rates. A hypothetical 100 basis point adverse movement (decrease) in interest rates would have

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

As of September 30, 2004, we had approximately $1.0 million in accounts receivable and $1.2 million in unbilled receivables that are exposed to foreign currency exchange risk. We record transaction gains or losses as a component of other (expense)/income in our Consolidated Statements of Operations. There have not been any material changes to our foreign currency risk as described in Item 7A of our 2003 Annual Report on Form 10-K.

As of the end of the period ending September 30, 2004, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company’s periodic SEC filings. There have been no significant changes in the Company’s internal controls or in other factors which could significantly affect internal controls subsequent to the date the Company carried out its evaluation.

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

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

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


	•	Election of five Directors (being all of our Directors).

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

	•	To approve the Third Amended and Restated 1997 Stock Incentive Plan.

	•	To adopt a staggered board of directors.

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

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

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

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

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

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

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on the 3rd day of August 2004.


	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.

Silicon Valley Bank

Amended and Restated
Loan and Security Agreement


Borrower:		TELECOMMUNICATION SYSTEMS, INC.
		(the “Company” or the “Borrower”)

Address:		275 West Street, Suite 400
		Annapolis, Maryland 21401

Date:		July 24, 2003

THIS AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (this “Agreement”) is entered into on the above date (the “Closing Date”) between SILICON VALLEY BANK (“Silicon”), whose address is 3003 Tasman Drive, Santa Clara, California, 95054 and with a loan production office located at 3343 Peachtree Road, N.W., Suite 312, Atlanta, Georgia 30326 TeleCommunication Systems, Inc. (the “Borrower”), whose chief executive office is located at the above address (“Borrower’s Address”). The Schedule to this Agreement (the “Schedule”) shall for all purposes be deemed to be a part of this Agreement, and the same is an integral part of this Agreement. (Definitions of certain terms used in this Agreement are set forth in Section 8 below.)

RECITALS

Silicon and Borrower have entered into that certain Loan and Security Agreement dated as of May 1, 2002, which Loan and Security Agreement was amended by that certain Loan Modification Agreement dated as of September 25, 2002 by and between Borrower and Silicon (collectively, the “Original Loan Agreement”). Pursuant to the Original Loan Agreement, Silicon agreed to make certain loans including, the “Revolving Facility” and the “Equipment Loan Sublimit” described therein, and other financial accommodations to Borrower. Borrower has requested and Silicon has agreed pursuant to this Agreement to (i) decrease the maximum principal amount of the Revolving Facility from Fifteen Million Dollars ($15,000,000) to Twelve Million Five Hundred Thousand Dollars ($12,500,000) (ii) terminate the existing Equipment Loan Sublimit, (iii) to make a new Equipment Loan to Borrower in the principal amount of Two Million Five Hundred Thousand Dollars ($2,500,000), and (iv) amend and restate the Original Loan Agreement.

NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Silicon and Borrower agree that the Original Loan Agreement is amended and restated in its entirety as follows:

1. LOANS.

1.1 Loans. Silicon will make revolving loans to Borrower (the “Revolving Loan”), issue Letters of Credit, enter into FX Forward Contracts and provide Cash Management Services to Borrower (collectively the “Loans”), in amounts determined by Silicon in its good faith business judgment, up to the amounts (the “Credit Limit”) shown on the Schedule, provided no

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Silicon Valley Bank		Amended and Restated Loan and Security Agreement

Default or Event of Default has occurred and is continuing, and subject to deduction of Reserves for accrued interest and such other Reserves as Silicon deems proper from time to time in its good faith business judgment. The Borrower may from time to time, by giving Silicon prior written notice (a “Non-Borrowing Notice”), elect to cease requesting Loans under this Agreement and during such period, Silicon shall have no further obligation to make any such Loans (such periods each being called a “Non-Borrowing Period”). Each Non-Borrowing Notice shall be given to Silicon in accordance with Section 9.5 of this Agreement and shall set forth the date on which the Non-Borrowing Period shall commence, which date must be not earlier than one (1) Business Days after the date on which Silicon receives such notice and shall be signed by an officer of the Borrower. The Borrower may terminate a Non-Borrowing Period by giving Silicon not less than thirty (30) days prior written notice of its desire to terminate such Non-Borrowing Period, which notice once received, is not revocable.

1.2 Interest. All Loans and all other monetary Obligations shall bear interest at the rate shown on the Schedule, except where expressly set forth to the contrary in this Agreement. Interest shall be payable monthly, on the last day of the month. Interest may, in Silicon’s discretion, be charged to Borrower’s loan account, and the same shall thereafter bear interest at the same rate as the other Loans. Silicon may, in its discretion, charge interest to Borrower’s Deposit Accounts maintained with Silicon. Silicon will provide Borrower with notice prior to any debit of Borrower’s loan account for any regularly scheduled payment.

1.3 Overadvances. If at any time or for any reason the total of all outstanding Loans and all other monetary Obligations, including, without limitation, Exim Loans, Cash Management Services and the face amount of all outstanding Letters of Credit, exceeds the Credit Limit (an “Overadvance”), Borrower shall immediately pay the amount of the excess to Silicon, without notice or demand. Without limiting Borrower’s obligation to repay to Silicon the amount of any Overadvance, Borrower agrees to pay Silicon interest on the outstanding amount of any Overadvance, on demand, at the Default Rate.

1.4 Fees. Borrower shall pay Silicon the fees shown on the Schedule, which are in addition to all interest and other sums payable to Silicon and are not refundable.

1.5 Loan Requests. To obtain a Loan, Borrower shall make a request to Silicon by facsimile or telephone. Loan requests received after 12:00 Noon (Pacific standard time) will not be considered by Silicon until the next Business Day. Silicon may rely on any telephone request for a Loan given by a person whom Silicon believes is an authorized representative of Borrower, and Borrower will indemnify Silicon for any loss Silicon suffers as a result of that reliance.

1.6 Letters of Credit Exposure.

(a) At the request of Borrower, and as part of the Loans, Silicon may, in its good faith business judgment, issue or arrange for the issuance of letters of credit for the account of Borrower, in each case in form and substance satisfactory to Silicon in its sole discretion (collectively, “Letters of Credit”). The aggregate face amount of all Letters of Credit from time to time outstanding shall not exceed the amount shown on the Schedule (the “Letter of Credit Sublimit”), and shall be reserved against Loans which would otherwise be available hereunder, and in the event at any time there are insufficient Loans available to Borrower for such reserve, Borrower shall deposit and maintain with Silicon cash collateral in an amount at all times equal to such deficiency, which shall be held as Collateral for all purposes of this Agreement. Borrower shall pay all bank charges (including charges of Silicon) for the issuance of Letters of Credit, together with such additional fee as Silicon’s letter of credit department shall charge in connection with the issuance of the Letters of Credit. Any payment by Silicon under or in connection with a Letter of Credit shall constitute a Loan hereunder on the date such payment is made. Each Letter of Credit shall have an expiry date no later than thirty days prior to the Maturity Date. Borrower hereby agrees to indemnify and hold Silicon harmless from any loss, cost, expense, or liability, including payments made by Silicon, expenses, and reasonable attorneys’ fees incurred by Silicon arising out of or in connection with any Letters of Credit. Borrower agrees to be bound by the regulations and interpretations of the issuer of any Letters of Credit guaranteed by Silicon and opened for Borrower’s account or by Silicon’s interpretations of any Letter of Credit issued by Silicon for Borrower’s account, and Borrower understands and agrees that Silicon shall not be liable for any error, negligence, or mistake, whether of omission or commission, in following Borrower’s instructions or those contained in the Letters of Credit or any modifications, amendments, or supplements thereto. Borrower understands that Letters of Credit may require Silicon to indemnify the issuing bank for certain costs or liabilities arising out of claims by Borrower against such issuing bank. Borrower hereby agrees to indemnify and hold Silicon harmless with respect to any loss, cost, expense, or liability incurred by Silicon under any Letter of Credit as a result of Silicon’s indemnification of any such issuing bank. The provisions of this Loan Agreement, as it pertains to Letters of Credit, and any other Loan Documents relating to Letters of Credit are cumulative.

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1.7 Foreign Exchange As part of the Loans, Borrower may enter in foreign exchange forward contracts with Silicon under which Borrower commits to purchase from or sell to Silicon a set amount of foreign currency more than one (1) Business Day after the contract date (the “FX Forward Contract”). The aggregate face amount of all FX Forward Contracts and FX Reserve from time to time outstanding shall not exceed the amount shown on the Schedule (the “Foreign Exchange Sublimit”), and shall be reserved against Loans which would otherwise be available hereunder, and in the event at any time there are insufficient Loans available to Borrower for such reserve, Borrower shall deposit and maintain with Silicon cash collateral in an amount at all times equal to such deficiency, which shall be held as Collateral for all purposes of this Agreement. Silicon will subtract ten percent (10%) of each outstanding FX Forward Contract (the “FX Reserve”) from the Foreign Exchange Sublimit. “). The total FX Forward Contracts at any one time may not exceed ten (10) times the amount of the FX Reserve. Silicon may terminate the FX Forward Contracts if a Default or an Event of Default occurs and is continuing.

1.8 Cash Management/ACH Services.

Borrower may use up to One Million Five Hundred Thousand Dollars ($1,500,000) of the Loans for Lender’s cash management services, which may include merchant services, direct deposit of payroll, business credit card, and check cashing services identified in various cash management services agreements related to such services (the “Cash Management Services”). Such aggregate amounts utilized under the Cash Management Services Sublimit will at all times reduce the amount otherwise available to be borrowed under the Loans. Any amounts Silicon pays on behalf of Borrower or any amounts that are not paid by Borrower for any Cash Management Services will be treated as Loans and will accrue interest at the Prime Rate in effect from time to time, plus one percent (1.00%) per annum.

1.9 EximBank Loans. At the request of Borrower, as part of the Loans, Silicon may, subject to the satisfaction of certain conditions set forth herein, make certain Loans against Eligible Foreign Accounts (collectively, “Exim Loans” and each an “Exim Loan”). The aggregate face amount of all Exim Loans from time to time outstanding shall not exceed the amount shown on the Schedule (the “Exim Loan Sublimit”), and shall be reserved against Loans which would otherwise be available hereunder. Prior to making any Exim Loan, Silicon shall have received (a) a fully executed Borrower Agreement in form and substance satisfactory to Silicon, (b) a fully executed Loan Authorization Notice in form and substance satisfactory to Silicon, (c) payment of the Exim Bank Loan Fee, (d) a fully executed Exim Bank Loan and Security Agreement, and (e) such other documents as Silicon may deem necessary in connection with the Exim Loans (collectively, the “Exim Loan Documents”).

1.10 Equipment Loans. In addition to the Loans, at the request of Borrower, Silicon will make equipment term loans to Borrower (the “Equipment Loans”), in amounts determined by Silicon in its good faith business judgment, up to the Equipment Loan Amount shown on the Schedule, provided no Default or Event of Default has occurred and is continuing. Equipment Loans shall be repaid in accordance with the Schedule.

2. SECURITY INTEREST. To secure the payment and performance of all of the obligations when due, Borrower hereby grants to Silicon a security interest in all of the following (collectively, the “Collateral”): all right, title and interest of Borrower in and to all of the following, whether now owned or hereafter arising or acquired and wherever located: all Accounts; all Inventory; all Equipment; all Deposit Accounts; all General Intangibles; all Investment Property; all other property; and any and all claims, rights and interests in any of the above, and all guaranties and security for any of the above, and all substitutions and replacements for, additions, accessions, attachments, accessories, and improvements to, and proceeds (including proceeds of any insurance policies, proceeds of proceeds and claims against third parties) of, any and all of the above, and all Borrower’s books relating to any and all of the above. Notwithstanding the foregoing, the Collateral shall not be deemed to include any Intellectual Property, except that the Collateral shall include the proceeds of all the Intellectual Property that are Accounts of Borrower, or General Intangibles consisting of rights to payment, if a judicial authority (including a U.S. Bankruptcy Court) holds that a security interest in the underlying Intellectual Property is necessary to have a security interest in such Accounts and General Intangibles of Borrower that are proceeds of the Intellectual Property, then the Collateral shall automatically, and effective as of the date hereof, include the Intellectual Property to the extent necessary to permit perfection of Silicon’s security interest in such Accounts and General Intangibles of Borrower that are proceeds of the Intellectual Property.

3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF BORROWER.

In order to induce Silicon to enter into this Agreement and to make Loans and other Obligations under the Loan Documents, Borrower represents and warrants to Silicon as follows, and Borrower covenants that the following

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representations will continue to be true, and that Borrower will at all times comply with all of the following covenants, throughout the term of this Agreement and until all Obligations have been paid and performed in full:

3.1 Corporate Existence and Authority. Borrower is and will continue to be, duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation. Borrower is and will continue to be qualified and licensed to do business in all jurisdictions in which any failure to do so would result in a Material Adverse Change. The execution, delivery and performance by Borrower of this Agreement, and all other documents contemplated hereby (i) have been duly and validly authorized, (ii) are enforceable against Borrower in accordance with their terms (except as enforcement may be limited by equitable principles and by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to creditors’ rights generally), and (iii) do not violate Borrower’s articles or certificate of incorporation, or Borrower’s by-laws, or any law or any material agreement or instrument which is binding upon Borrower or its property, and (iv) do not constitute grounds for acceleration of any material indebtedness or obligation under any agreement or instrument which is binding upon Borrower or its property.

3.2 Name; Trade Names and Styles. The name of Borrower set forth in the heading to this Agreement is its correct name. Listed in the Representations are all prior names of Borrower and all of Borrower’s present and prior trade names. Borrower shall give Silicon ten (10) days’ prior written notice before changing its name or doing business under any other name. Borrower has complied, and will in the future comply, in all material respects, with all laws relating to the conduct of business under a fictitious business name, except where the failure to so comply would not reasonably be expected to result in a Material Adverse Change.

3.3 Place of Business; Location of Collateral. The address set forth in the heading to this Agreement is Borrower’s chief executive office. In addition, Borrower has places of business and Collateral is located only at the locations set forth in the Representations. Borrower will notify Silicon within thirty (30) days of opening any additional place of business, changing its chief executive office, or moving any of the Collateral to a location other than Borrower’s Address or one of the locations set forth in the Representations, except that Borrower may maintain sales offices in the ordinary course of business at which not more than a total of $10,000 fair market value of Equipment is located.

3.4 Title to Collateral; Perfection; Permitted Liens.

(a) Borrower is now, and will at all times in the future be, the sole owner of all the Collateral, except for items of Equipment which are leased to Borrower. The Collateral now is and will remain free and clear of any and all liens, charges, security interests, encumbrances and adverse claims, except for Permitted Liens. Silicon now has, and will continue to have, a first-priority perfected and enforceable security interest in all of the Collateral, subject only to the Permitted Liens, and Borrower will at all times defend Silicon and the Collateral against all claims of others.

(b) Borrower has set forth in the Representations all of Borrower’s Deposit Accounts, and Borrower will give Silicon three (3) Business Days advance written notice before establishing any new Deposit Accounts and will cause the institution where any such new Deposit Account is maintained to execute and deliver to Silicon a control agreement in form sufficient to perfect Silicon’s security interest in the Deposit Account and otherwise satisfactory to Silicon in its good faith business judgment. Nothing herein limits any requirements which may be set forth in the Schedule as to where Deposit Accounts will be maintained.

(c) In the event that Borrower shall at any time after the date hereof have any commercial tort claims against others, which it is asserting or intends to assert, and in which the potential recovery exceeds $500,000, Borrower shall promptly notify Silicon thereof in writing and provide Silicon with such information regarding the same as Silicon shall request (unless providing such information would waive the Borrower’s attorney-client privilege). Such notification to Silicon shall constitute a grant of a security interest in the commercial tort claim and all proceeds thereof to Silicon, and Borrower shall execute and deliver all such documents and take all such actions as Silicon shall request in connection therewith.

(d) None of the Collateral now is or will be affixed to any real property in such a manner, or with such intent, as to become a fixture. Borrower is not and will not become a lessee under any real property lease pursuant to which the lessor may obtain any rights in any of the Collateral and no such lease now prohibits, restrains, impairs or will prohibit, restrain or impair Borrower’s right to remove any Collateral from the leased premises. Whenever any Collateral is located upon premises in which any third party has an interest, Borrower shall, whenever requested by Silicon, use its best efforts to cause such third party to execute and deliver to Silicon, in form acceptable to Silicon, such waivers and subordinations as Silicon

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shall specify in its good faith business judgment. Borrower will keep in full force and effect, and will comply with all material terms of, any lease of real property where any of the Collateral now or in the future may be located.

3.5 Maintenance of Collateral. Borrower will maintain the Collateral in good working condition (ordinary wear and tear excepted), and Borrower will not use the Collateral for any unlawful purpose. Borrower will promptly advise Silicon in writing of any material loss or damage to the Collateral.

3.6 Books and Records. Borrower has maintained and will maintain at Borrower’s Address complete and accurate books and records, comprising an accounting system in accordance with GAAP.

3.7 Financial Condition, Statements and Reports. All financial statements now or in the future delivered to Silicon have been, and will be, prepared in conformity with GAAP and now and in the future will fairly present the results of operations and financial condition of Borrower, in accordance with GAAP, at the times and for the periods therein stated. Between the last date covered by any such statement provided to Silicon and the date hereof, there has been no Material Adverse Change.

3.8 Tax Returns and Payments; Pension Contributions. Borrower has timely filed, and will timely file, all required tax returns and reports, and Borrower has timely paid, and will timely pay, all foreign, federal, state and local taxes, assessments, deposits and contributions now or in the future owed by Borrower. Borrower may, however, defer payment of any contested taxes, provided that Borrower (i) in good faith contests Borrower’s obligation to pay the taxes by appropriate proceedings promptly and diligently instituted and conducted, (ii) notifies Silicon in writing of the commencement of, and any material development in, the proceedings, and (iii) posts bonds or takes any other steps required to keep the contested taxes from becoming a lien upon any of the Collateral. Borrower is unaware of any claims or adjustments proposed for any of Borrower’s prior tax years which could result in additional taxes becoming due and payable by Borrower. Borrower has paid, and shall continue to pay all amounts necessary to fund all present and future pension, profit sharing and deferred compensation plans in accordance with their terms, and Borrower has not and will not withdraw from participation in, permit partial or complete termination of, or permit the occurrence of any other event with respect to, any such plan which could reasonably be expected to result in any liability of Borrower, including any liability to the Pension Benefit Guaranty Corporation or its successors or any other governmental agency.

3.9 Compliance with Law. Borrower has, to the best of its knowledge, complied, and will comply, in all material respects, with all provisions of all foreign, federal, state and local laws and regulations applicable to Borrower, including, but not limited to, those relating to Borrower’s ownership of real or personal property, the conduct and licensing of Borrower’s business, and all environmental matters.

3.10 Litigation. Except as set forth in the Schedule, there is no claim, suit, litigation, proceeding or investigation pending or (to best of Borrower’s knowledge) threatened against or affecting Borrower in any court or before any governmental agency (or any basis therefor known to Borrower) which could reasonably be expected to result, either separately or in the aggregate, in any Material Adverse Change. Borrower will promptly inform Silicon in writing of any claim, proceeding, litigation or investigation in the future threatened or instituted against Borrower involving any single claim of $50,000 or more, or involving $100,000 or more in the aggregate.

3.11 Use of Proceeds. All proceeds of all Loans shall be used solely for lawful business purposes. Borrower is not purchasing or carrying any “margin stock” (as defined in Regulation U of the Board of Governors of the Federal Reserve System) and no part of the proceeds of any Loan will be used to purchase or carry any “margin stock” or to extend credit to others for the purpose of purchasing or carrying any “margin stock.”

3.12 Operating Subsidiaries. All of Borrower’s operating Subsidiaries are parties to this Agreement.

4. Accounts.

4.1 Representations Relating to Accounts. Borrower represents and warrants to Silicon as follows: Each Account with respect to which Loans are requested by Borrower shall, on the date each Loan is requested and made, (i) represent an undisputed bona fide existing unconditional obligation of the Account Debtor created by the sale, delivery, and acceptance of goods or the rendition of services, or the non-exclusive licensing of Intellectual Property, in the ordinary course of Borrower’s business, and (ii) meet the Minimum Eligibility Requirements set forth in Section 8 below.

4.2 Representations Relating to Documents and Legal Compliance. Borrower represents and warrants to Silicon as follows: All statements made and all unpaid balances appearing in all invoices, instruments and other documents evidencing the Accounts are and shall be true and correct and all such invoices, instruments and other documents and all of Borrower’s

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books and records are and shall be genuine and in all respects what they purport to be. All sales and other transactions underlying or giving rise to each Account shall comply in all material respects with all applicable laws and governmental rules and regulations. To the best of Borrower’s knowledge, all signatures and endorsements on all documents, instruments, and agreements relating to all Accounts are and shall be genuine, and all such documents, instruments and agreements are and shall be legally enforceable in accordance with their terms.

4.3 Schedules and Documents Relating to Accounts. Borrower shall deliver to Silicon transaction reports and schedules of collections, as provided in the Schedule, on Silicon’s standard forms; provided, however, that Borrower’s failure to execute and deliver the same shall not affect or limit Silicon’s security interest and other rights in all of Borrower’s Accounts, nor shall Silicon’s failure to advance or lend against a specific Account affect or limit Silicon’s security interest and other rights therein. If requested by Silicon in its reasonable judgment, Borrower shall furnish Silicon with copies (or, at Silicon’s request, originals) of all contracts, orders, invoices, and other similar documents, and all shipping instructions, delivery receipts, bills of lading, and other evidence of delivery, for any goods the sale or disposition of which gave rise to such Accounts, and Borrower warrants the genuineness of all of the foregoing. Borrower shall also furnish to Silicon an aged accounts receivable trial balance as provided in the Schedule. In addition, Borrower shall deliver to Silicon, on its request, the originals of all instruments, chattel paper, security agreements, guarantees and other documents and property evidencing or securing any Accounts, in the same form as received, with all necessary endorsements, and copies of all credit memos.

4.4 Collection of Accounts. Borrower shall have the right to collect all Accounts, unless and until a Default or an Event of Default has occurred and is continuing. Whether or not an Event of Default has occurred and is continuing, Borrower shall hold all payments on, and proceeds of, Accounts in trust for Silicon, and Borrower shall immediately deliver all such payments and proceeds to Silicon in their original form, duly endorsed, to be applied to the Obligations in such order as Silicon shall determine. Silicon may, in its good faith business judgment, require that all proceeds of Collateral be deposited by Borrower into a lockbox account, or such other “blocked account” as Silicon may specify, pursuant to a blocked account agreement in such form as Silicon may specify in its good faith business judgment.

4.5. Remittance of Proceeds. All proceeds arising from the disposition of any Collateral shall be delivered, in kind, by Borrower to Silicon in the original form in which received by Borrower not later than the following Business Day after receipt by Borrower, to be applied to the Obligations in such order as Silicon shall determine; provided that, if no Default or Event of Default has occurred and is continuing, Borrower shall not be obligated to remit to Silicon the proceeds of the sale of worn out or obsolete Equipment disposed of by Borrower in good faith in an arm’s length transaction for a purchase price of $25,000 or less (for all such transactions in any fiscal year). Borrower agrees that it will not commingle proceeds of Collateral with any of Borrower’s other funds or property, but will hold such proceeds separate and apart from such other funds and property and in an express trust for Silicon. Nothing in this Section limits the restrictions on disposition of Collateral set forth elsewhere in this Agreement.

4.6 Disputes. Borrower shall notify Silicon promptly of all disputes or claims relating to Accounts. Borrower shall not forgive (completely or partially), compromise or settle any Account for less than payment in full, or agree to do any of the foregoing, except that Borrower may do so, provided that: (i) Borrower does so in good faith, in a commercially reasonable manner, in the ordinary course of business, and in arm’s length transactions, which are reported to Silicon on the regular reports provided to Silicon; (ii) no Default or Event of Default has occurred and is continuing; and (iii) taking into account all such discounts, settlements and forgiveness, the total outstanding Loans will not exceed the Credit Limit.

4.7 Returns. Provided no Event of Default has occurred and is continuing, if any Account Debtor returns any Inventory to Borrower, Borrower shall promptly determine the reason for such return and promptly issue a credit memorandum to the Account Debtor in the appropriate amount. In the event any attempted return occurs after the occurrence and during the continuance of any Event of Default, Borrower shall hold the returned Inventory in trust for Silicon, and immediately notify Silicon of the return of the Inventory.

4.8 Verification. Silicon may, from time to time, verify directly with the respective Account Debtors the validity, amount and other matters relating to the Accounts, by means of mail, telephone or otherwise, either in the name of Borrower or Silicon or such other name as Silicon may choose. Silicon will provide Borrower with notice of any such action.

4.9 No Liability. Silicon shall not be responsible or liable for any shortage or discrepancy in, damage to, or loss or destruction of, any goods, the sale or other disposition of which gives rise to an Account, or for any error, act, omission, or delay of any kind occurring in the settlement, failure to settle, collection or failure to collect any Account, or for settling any Account in good faith for less than the full amount thereof, nor shall Silicon be deemed to be responsible for any of

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Borrower’s obligations under any contract or agreement giving rise to an Account. Nothing herein shall, however, relieve Silicon from liability for its own gross negligence or willful misconduct.

4.10 Exim Insurance. If required by Silicon, at all times that any Exim Loans are outstanding, Borrower will obtain, and pay when due all premiums with respect to, and maintain uninterrupted foreign credit insurance. In addition, Borrower will execute in favor of Silicon an assignment of proceeds of any insurance policy obtained by Borrower and issued by Exim Bank insuring against comprehensive commercial and political risk (the “EXIM Bank Policy”). The insurance proceeds from the EXIM Bank Policy assigned or paid to Silicon will be applied to the balance outstanding of Exim Loans made under this Agreement. Borrower will immediately notify Bank and Exim Bank in writing upon submission of any claim under the Exim Bank Policy. Then Silicon will not be obligated to make any further Loans to Borrower without prior approval from Exim Bank.

4.11 Subsidiaries. Borrower will cause any operating Subsidiaries in existence after the date hereof, to promptly become parties to this Agreement.

5. ADDITIONAL DUTIES OF BORROWER.

5.1 Financial and Other Covenants. Borrower shall at all times comply with the financial and other covenants set forth in the Schedule.

5.2 Insurance. Borrower shall, at all times insure all of the tangible personal property Collateral and carry such other business insurance, with insurers reasonably acceptable to Silicon, in such form and amounts as Silicon may reasonably require and that are customary and in accordance with standard practices for Borrower’s industry and locations, and Borrower shall provide evidence of such insurance to Silicon. All such insurance policies shall name Silicon as an additional loss payee, and shall contain a lenders loss payee endorsement in form reasonably acceptable to Silicon. Upon receipt of the proceeds of any such insurance, Silicon shall apply such proceeds in reduction of the Obligations as Silicon shall determine in its good faith business judgment, except that, provided no Default or Event of Default has occurred and is continuing, Silicon shall release to Borrower insurance proceeds with respect to Equipment totaling less than $100,000, which shall be utilized by Borrower for the replacement of the Equipment with respect to which the insurance proceeds were paid. Silicon may require reasonable assurance that the insurance proceeds so released will be so used. If Borrower fails to provide or pay for any insurance, Silicon may, but is not obligated to, obtain the same at Borrower’s expense. Borrower shall promptly deliver to Silicon copies of all material reports made to insurance companies.

5.3 Reports. Borrower, at its expense, shall provide Silicon with the written reports set forth in the Schedule, and such other written reports with respect to Borrower (including budgets and forecasts), as Silicon shall from time to time specify in its good faith business judgment.

5.4 Access to Collateral, Books and Records. At reasonable times, and on one Business Day’s notice, Silicon, or its agents, shall have the right to inspect the Collateral, and the right to audit and copy Borrower’s books and records. Silicon shall take reasonable steps to keep confidential all information obtained in any such inspection or audit, but Silicon shall have the right to disclose any such information to its auditors, regulatory agencies, and attorneys, and pursuant to any subpoena or other legal process. The foregoing inspections and audits shall be at Borrower’s expense and the charge therefor shall be $750 per person per day (or such higher amount as shall represent Silicon’s then current standard charge for the same), plus reasonable out of pocket expenses, provided however that it is agreed that the cost of the first inspection and audit will not exceed $7,500, and further provided, that if at the time of such inspection and audit no Event of Default has occurred and is continuing, the cost of such inspections and audits will not exceed $15,000 in any twelve (12) month period and such inspections and audits will not be conducted more frequently than once in any calendar quarter.

5.5 Negative Covenants. Except as may be permitted in the Schedule, Borrower shall not, without Silicon’s prior written consent (which shall be a matter of its good faith business judgment), do any of the following: (i) merge or consolidate with another corporation or entity (each an “Acquisition” and collectively, the “Acquisitions”) during the existence of this Agreement unless each of the following conditions precedent are in Silicon’s discretion satisfied: (a) Bank shall have received and reviewed the pro forma projections of the Borrower (in form and detail satisfactory to Silicon in its reasonable discretion) taking into effect the Acquisition, which pro forma projections demonstrate the Borrower’s continued compliance with all of the material terms of this Agreement throughout the term hereof; (b) Silicon shall have received and reviewed a copy of the current financial statement of the acquired Person (the “Target”); (c) the aggregate amount of all Acquisitions does not exceed Two Million Dollars ($2,000,000) (the “Acquisition Cap”); and (d) Silicon shall have received a written certification,

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Silicon Valley Bank		Amended and Restated Loan and Security Agreement

in form and substance satisfactory to Silicon, from the chief financial officer of Borrower that: (aa) the Target is a going concern; (bb) the Target is in the same line of business as the Borrower;(cc) after completion of the Acquisition, the Borrower will own at all times not less than fifty-one percent (51%) of the Target; (dd) after giving affect to the Acquisition, the Borrower shall not be in default under this Agreement or any of the Loan Documents; (ee) the Borrower does not directly or indirectly assume any indebtedness of the Target, other than current accounts payable arising in the ordinary course of the Target’s business; (ff) the Target is not subject to any litigation, which, if adversely determined, could when taken as a whole, have a material adverse effect on the financial condition of the Target; and (gg) the Target is not subject to contingent liabilities, in an amount which could, when taken as a whole, have a material adverse effect on the financial condition of the Target. Borrower further understands and agrees that in the event any Acquisition satisfies the foregoing conditions, Silicon shall not include any Accounts of such Target in the Eligible Accounts unless and until Silicon has performed an audit of such Accounts, the results of which are satisfactory to Silicon; (ii) acquire any assets in excess of $1,000,000 in the aggregate except in the ordinary course of business; (iii) enter into any other transaction outside the ordinary course of business; (iv) sell or transfer any Collateral, except for the sale of finished Inventory in the ordinary course of Borrower’s business, and except for the sale of obsolete or unneeded Equipment in the ordinary course of business; (v) store any Inventory or other Collateral with any warehouseman or other third party; (vi) sell any Inventory on a sale-or-return, guaranteed sale, consignment, or other contingent basis; (vii) make any loans of any money or other assets; (viii) incur any debts, outside the ordinary course of business, which would result in a Material Adverse Change; (ix) guarantee or otherwise become liable with respect to the obligations of another party or entity; (x) pay or declare any dividends on Borrower’s stock (except for dividends payable solely in stock of Borrower); (xi) redeem, retire, purchase or otherwise acquire, directly or indirectly, any of Borrower’s stock in an aggregate amount to exceed $1,000,000, provided that at the time of any such redemption, retirement, purchase or other acquisition, and after giving effect thereto, no Event of Default has occurred and is continuing; (xii) make any change in Borrower’s capital structure which would result in a Material Adverse Change; or (xiii) engage, directly or indirectly, in any business other than the businesses currently engaged in by Borrower or reasonably related thereto; (xiv) dissolve or elect to dissolve; (xv) at such times as any Exim Loans are outstanding, violate or fail to comply with any provision of the Borrower Agreement; (xvi) at such times as any Exim Loans are outstanding, take an action, or permit any action to be taken, that causes, or could be expected to cause, the Exim Guarantee to not be in full force and effect; or (xvii) make any loans, advances or transfer any assets to any Affiliate or subsidiary of any Borrower which has not become a party to this Agreement and the Loan Documents. Transactions permitted by the foregoing provisions of this Section are only permitted if no Default or Event of Default would occur as a result of such transaction.

5.6 Litigation Cooperation. Should any third-party suit or proceeding be instituted by or against Silicon with respect to any Collateral or relating to Borrower, Borrower shall, without expense to Silicon, make available Borrower and its officers, employees and agents and Borrower’s books and records, to the extent that Silicon may deem them reasonably necessary in order to prosecute or defend any such suit or proceeding.

5.7 Further Assurances. Borrower agrees, at its expense, on request by Silicon, to execute all documents and take all actions, as Silicon, may, in its good faith business judgment, deem necessary or useful in order to perfect and maintain Silicon’s perfected first-priority security interest in the Collateral (subject to Permitted Liens), and in order to fully consummate the transactions contemplated by this Agreement.

6. TERM.

6.1 Maturity Date. This Agreement shall continue in effect until the maturity date set forth on the Schedule (the “Maturity Date”), subject to Section 6.3 below.

6.2 Early Termination. This Agreement may be terminated prior to the Maturity Date as follows: (i) by Borrower, effective three Business Days after written notice of termination is given to Silicon; or (ii) by Silicon at any time after the occurrence and during the continuance of an Event of Default, without notice, effective immediately. If this Agreement is terminated by Borrower or by Silicon under this Section 6.2, Borrower shall pay to Silicon a termination fee in an amount equal to one half percent (.50%) of the Maximum Credit Limit, provided that no termination fee shall be charged if the credit facility hereunder is replaced with a new facility from another division of Silicon Valley Bank. The termination fee shall be due and payable on the effective date of termination and thereafter shall bear interest at a rate equal to the highest rate applicable to any of the Obligations.

6.3 Payment of Obligations. On the Maturity Date or on any earlier effective date of termination, Borrower shall pay and perform in full all Obligations, including, without limitation all Exim Loans and all Equipment Loans, whether evidenced by

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Silicon Valley Bank		Amended and Restated Loan and Security Agreement

installment notes or otherwise, and whether or not all or any part of such Obligations are otherwise then due and payable. Without limiting the generality of the foregoing, if on the Maturity Date, or on any earlier effective date of termination, there are any outstanding Letters of Credit issued by Silicon or issued by another institution based upon an application, guarantee, indemnity or similar agreement on the part of Silicon, then on such date Borrower shall provide to Silicon cash collateral in an amount equal to 105% of the face amount of all such Letters of Credit plus all interest, fees and cost due or to become due in connection therewith (as estimated by Silicon in its good faith business judgment), to secure all of the Obligations relating to said Letters of Credit, pursuant to Silicon’s then standard form cash pledge agreement. Notwithstanding any termination of this Agreement, all of Silicon’s security interests in all of the Collateral and all of the terms and provisions of this Agreement shall continue in full force and effect until all Obligations have been paid and performed in full; provided that Silicon may, in its sole discretion, refuse to make any further Loans after termination. No termination shall in any way affect or impair any right or remedy of Silicon, nor shall any such termination relieve Borrower of any Obligation to Silicon, until all of the Obligations have been paid and performed in full. Upon payment and performance in full of all the Obligations and termination of this Agreement, Silicon shall promptly terminate its financing statements with respect to the Borrower and deliver to Borrower such other documents as may be required to fully terminate Silicon’s security interests.

7. EVENTS OF DEFAULT AND REMEDIES.

7.1 Events of Default. The occurrence of any of the following events shall constitute an “Event of Default” under this Agreement, and Borrower shall give Silicon immediate written notice thereof: (a) Any warranty, representation, statement, report or certificate made or delivered to Silicon by Borrower or any of Borrower’s officers, employees or agents, now or in the future, shall be untrue or misleading in a material respect when made or deemed to be made; or (b) Borrower shall fail to pay when due any Loan or any interest thereon or any other monetary Obligation; or (c) the total Loans and other Obligations outstanding at any time shall exceed the Credit Limit; or (d) Borrower shall fail to comply with any of the financial covenants set forth in the Schedule, or shall fail to perform any other non-monetary Obligation which by its nature cannot be cured, or shall fail to permit Silicon to conduct an inspection or audit as specified in Section 5.4 hereof; or (e) Borrower shall fail to perform any other non-monetary Obligation, which failure is not cured within five Business Days after the date due; or (f) any levy, assessment, attachment, seizure, lien or encumbrance (other than a Permitted Lien) is made on all or any part of the Collateral which is not cured within 10 days after the occurrence of the same; or (g) any default or event of default occurs under any obligation secured by a Permitted Lien, which is not cured within any applicable cure period or waived in writing by the holder of the Permitted Lien; or (h) Borrower breaches any material contract or obligation, which has resulted or may reasonably be expected to result in a Material Adverse Change; or (i) Dissolution, termination of existence, insolvency or business failure of Borrower; or appointment of a receiver, trustee or custodian, for all or any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding by Borrower under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect; or (j) the commencement of any proceeding against Borrower or any guarantor of any of the Obligations under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect, which is not cured by the dismissal thereof within 30 days after the date commenced; or (k) revocation or termination of, or limitation or denial of liability upon, any guaranty of the Obligations or any attempt to do any of the foregoing, or commencement of proceedings by any guarantor of any of the Obligations under any bankruptcy or insolvency law; or (l) revocation or termination of, or limitation or denial of liability upon, any pledge of any certificate of deposit, securities or other property or asset of any kind pledged by any third party to secure any or all of the Obligations, or any attempt to do any of the foregoing, or commencement of proceedings by or against any such third party under any bankruptcy or insolvency law; or (m) Borrower makes any payment on account of any indebtedness or obligation which has been subordinated to the Obligations other than as permitted in the applicable subordination agreement, or if any Person who has subordinated such indebtedness or obligations terminates or in any way limits his subordination agreement; or (n) Borrower shall generally not pay its debts as they become due, or Borrower shall conceal, remove or transfer any part of its property, with intent to hinder, delay or defraud its creditors, or make or suffer any transfer of any of its property which may be fraudulent under any bankruptcy, fraudulent conveyance or similar law; or (o) a Material Adverse Change shall occur; or (p) Silicon, acting in good faith and in a commercially reasonable manner, deems itself insecure because of the occurrence of an event prior to the effective date hereof of which Silicon had no knowledge on the effective date or because of the occurrence of an event on or subsequent to the effective date, or (q) if the Exim Guarantee ceases for any reason to be in full force and effect, or (r) if the Exim Bank declares the Exim Guarantee void or revokes any obligations under the Exim Guarantee. Silicon may cease making any Loans hereunder during any of the above cure periods, and thereafter if an Event of Default has occurred and is continuing.

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Silicon Valley Bank		Amended and Restated Loan and Security Agreement

7.2 Remedies. Upon the occurrence and during the continuance of any Event of Default, and at any time thereafter, Silicon, at its option, and without notice or demand of any kind (all of which are hereby expressly waived by Borrower), may do any one or more of the following: (a) Cease making Loans or otherwise extending credit to Borrower under this Agreement or any other Loan Document; (b) Accelerate and declare all or any part of the Obligations to be immediately due, payable, and performable, notwithstanding any deferred or installment payments allowed by any instrument evidencing or relating to any Obligation; (c) Take possession of any or all of the Collateral wherever it may be found, and for that purpose Borrower hereby authorizes Silicon without judicial process to enter onto any of Borrower’s premises without interference to search for, take possession of, keep, store, or remove any of the Collateral, and remain on the premises or cause a custodian to remain on the premises in exclusive control thereof, without charge for so long as Silicon deems it necessary, in its good faith business judgment, in order to complete the enforcement of its rights under this Agreement or any other agreement; provided, however, that should Silicon seek to take possession of any of the Collateral by court process, Borrower hereby irrevocably waives: (i) any bond and any surety or security relating thereto required by any statute, court rule or otherwise as an incident to such possession; (ii) any demand for possession prior to the commencement of any suit or action to recover possession thereof; and (iii) any requirement that Silicon retain possession of, and not dispose of, any such Collateral until after trial or final judgment; (d) Require Borrower to assemble any or all of the Collateral and make it available to Silicon at places designated by Silicon which are reasonably convenient to Silicon and Borrower, and to remove the Collateral to such locations as Silicon may deem advisable; (e) Complete the processing, manufacturing or repair of any Collateral prior to a disposition thereof and, for such purpose and for the purpose of removal, Silicon shall have the right to use Borrower’s premises, vehicles, hoists, lifts, cranes, and other Equipment and all other property without charge; (f) Sell, lease or otherwise dispose of any of the Collateral, in its condition at the time Silicon obtains possession of it or after further manufacturing, processing or repair, at one or more public and/or private sales, in lots or in bulk, for cash, exchange or other property, or on credit, and to adjourn any such sale from time to time without notice other than oral announcement at the time scheduled for sale. Silicon shall have the right to conduct such disposition on Borrower’s premises without charge, for such time or times as Silicon deems reasonable, or on Silicon’s premises, or elsewhere and the Collateral need not be located at the place of disposition. Silicon may directly or through any affiliated company purchase or lease any Collateral at any such public disposition, and if permissible under applicable law, at any private disposition. Any sale or other disposition of Collateral shall not relieve Borrower of any liability Borrower may have if any Collateral is defective as to title or physical condition or otherwise at the time of sale; (g) Demand payment of, and collect any Accounts and General Intangibles comprising Collateral and, in connection therewith, Borrower irrevocably authorizes Silicon to endorse or sign Borrower’s name on all collections, receipts, instruments and other documents, to take possession of and open mail addressed to Borrower and remove therefrom payments made with respect to any item of the Collateral or proceeds thereof, and, in Silicon’s good faith business judgment, to grant extensions of time to pay, compromise claims and settle Accounts and the like for less than face value; (h) Offset against any sums in any of Borrower’s general, special or other Deposit Accounts with Silicon against any or all of the Obligations; and (i) Demand and receive possession of any of Borrower’s federal and state income tax returns and the books and records utilized in the preparation thereof or referring thereto. All reasonable attorneys’ fees, expenses, costs, liabilities and obligations incurred by Silicon with respect to the foregoing shall be added to and become part of the Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. Without limiting any of Silicon’s rights and remedies, from and after the occurrence and during the continuance of any Event of Default, the interest rate applicable to the Obligations shall be increased by an additional four percent per annum (the “Default Rate”).

7.3 Standards for Determining Commercial Reasonableness. Borrower and Silicon agree that a sale or other disposition (collectively, “sale”) of any Collateral which complies with the following standards will conclusively be deemed to be commercially reasonable: (i) Notice of the sale is given to Borrower at least ten days prior to the sale, and, in the case of a public sale, notice of the sale is published at least five days before the sale in a newspaper of general circulation in the county where the sale is to be conducted; (ii) Notice of the sale describes the collateral in general, non-specific terms; (iii) The sale is conducted at a place designated by Silicon, with or without the Collateral being present; (iv) The sale commences at any time between 8:00 a.m. and 6:00 p.m.; (v) Payment of the purchase price in cash or by cashier’s check or wire transfer is required; (vi) With respect to any sale of any of the Collateral, Silicon may (but is not obligated to) direct any prospective purchaser to ascertain directly from Borrower any and all information concerning the same. Silicon shall be free to employ other methods of noticing and selling the Collateral, in its discretion, if they are commercially reasonable.

7.4 Power of Attorney. Upon the occurrence and during the continuance of any Event of Default, without limiting Silicon’s other rights and remedies, Borrower grants to Silicon an irrevocable power of attorney coupled with an interest,

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Silicon Valley Bank		Amended and Restated Loan and Security Agreement

authorizing and permitting Silicon (acting through any of its employees, attorneys or agents) at any time, at its option, but without obligation, with or without notice to Borrower, and at Borrower’s expense, to do any or all of the following, in Borrower’s name or otherwise, but Silicon agrees that if it exercises any right hereunder, it will do so in good faith and in a commercially reasonable manner: (a) Execute on behalf of Borrower any documents that Silicon may, in its good faith business judgment, deem advisable in order to perfect and maintain Silicon’s security interest in the Collateral, or in order to exercise a right of Borrower or Silicon, or in order to fully consummate all the transactions contemplated under this Agreement, and all other Loan Documents; (b) Execute on behalf of Borrower, any invoices relating to any Account, any draft against any Account Debtor and any notice to any Account Debtor, any proof of claim in bankruptcy, any Notice of Lien, claim of mechanic’s, materialman’s or other lien, or assignment or satisfaction of mechanic’s, materialman’s or other lien; (c) Take control in any manner of any cash or non-cash items of payment or proceeds of Collateral; endorse the name of Borrower upon any instruments, or documents, evidence of payment or Collateral that may come into Silicon’s possession; (d) Endorse all checks and other forms of remittances received by Silicon; (e) Pay, contest or settle any lien, charge, encumbrance, security interest and adverse claim in or to any of the Collateral, or any judgment based thereon, or otherwise take any action to terminate or discharge the same; (f) Grant extensions of time to pay, compromise claims and settle Accounts and General Intangibles for less than face value and execute all releases and other documents in connection therewith; (g) Pay any sums required on account of Borrower’s taxes or to secure the release of any liens therefor, or both; (h) Settle and adjust, and give releases of, any insurance claim that relates to any of the Collateral and obtain payment therefor; (i) Instruct any third party having custody or control of any books or records belonging to, or relating to, Borrower to give Silicon the same rights of access and other rights with respect thereto as Silicon has under this Agreement; and (j) Take any action or pay any sum required of Borrower pursuant to this Agreement and any other Loan Documents. Any and all reasonable sums paid and any and all reasonable costs, expenses, liabilities, obligations and attorneys’ fees incurred by Silicon with respect to the foregoing shall be added to and become part of the Obligations, shall be payable on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. In no event shall Silicon’s rights under the foregoing power of attorney or any of Silicon’s other rights under this Agreement be deemed to indicate that Silicon is in control of the business, management or properties of Borrower.

7.5 Application of Proceeds. All proceeds realized as the result of any sale of the Collateral shall be applied by Silicon first to the reasonable costs, expenses, liabilities, obligations and attorneys’ fees incurred by Silicon in the exercise of its rights under this Agreement, second to the interest due upon any of the Obligations, and third to the principal of the Obligations, in such order as Silicon shall determine in its sole discretion. Any surplus shall be paid to Borrower or other persons legally entitled thereto; Borrower shall remain liable to Silicon for any deficiency. If, Silicon, in its good faith business judgment, directly or indirectly enters into a deferred payment or other credit transaction with any purchaser at any sale of Collateral, Silicon shall have the option, exercisable at any time, in its good faith business judgment, of either reducing the Obligations by the principal amount of purchase price or deferring the reduction of the Obligations until the actual receipt by Silicon of the cash therefor.

7.6 Remedies Cumulative. In addition to the rights and remedies set forth in this Agreement, Silicon shall have all the other rights and remedies accorded a secured party under the Maryland Uniform Commercial Code and under all other applicable laws, and under any other instrument or agreement now or in the future entered into between Silicon and Borrower, and all of such rights and remedies are cumulative and none is exclusive. Exercise or partial exercise by Silicon of one or more of its rights or remedies shall not be deemed an election, nor bar Silicon from subsequent exercise or partial exercise of any other rights or remedies. The failure or delay of Silicon to exercise any rights or remedies shall not operate as a waiver thereof, but all rights and remedies shall continue in full force and effect until all of the Obligations have been fully paid and performed.

8. Definitions. As used in this agreement, the following terms have the following meanings:

“Account Debtor” means the obligor on an Account.

“Accounts” means all present and future “accounts” as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation all accounts receivable and other sums owing to Borrower.

“Affiliate” means, with respect to any Person, a relative, partner, shareholder, director, officer, or employee of such Person, or any parent or subsidiary of such Person, or any Person controlling, controlled by or under common control with such Person.

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Silicon Valley Bank		Amended and Restated Loan and Security Agreement

“Borrower Agreement” means an Export-Import Bank of the United States Working Capital Guarantee Program Borrower Agreement between Borrower and Silicon, as amended, modified, supplemented or restated from time to time.

“Business Day” means a day on which Silicon is open for business.

“Buyer” shall mean a Person that has entered into one or more Export Orders with Borrower.

“Code” means the Uniform Commercial Code as adopted and in effect in the State of Maryland from time to time.

“Collateral” has the meaning set forth in Section 2 above.

“continuing” and “during the continuance of” when used with reference to a Default or Event of Default means that the Default or Event of Default has occurred and has not been either waived in writing by Silicon or cured within any applicable cure period.

“Default” means any event which with notice or passage of time or both, would constitute an Event of Default.

“Default Rate” has the meaning set forth in Section 7.2 above.

“Deposit Accounts” means all present and future “deposit accounts” as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation all general and special bank accounts, demand accounts, checking accounts, savings accounts and certificates of deposit.

“Eligible Accounts” means Accounts and General Intangibles arising in the ordinary course of Borrower’s business from the sale of goods or the rendition of services, or the non-exclusive licensing of Intellectual Property, which Silicon, in its good faith business judgment, shall deem eligible for borrowing. Without limiting the fact that the determination of which Accounts are eligible for borrowing is a matter of Silicon’s good faith business judgment, the following (the “Minimum Eligibility Requirements”) are the minimum requirements for an Account to be an Eligible Account: (i) the Account must not be outstanding for more than 90 days from its invoice date (the “Eligibility Period”), (ii) the Account must not represent progress billings, or be due under a fulfillment or requirements contract with the Account Debtor, unless the Account Debtor on any progress billing has agreed that payment of such invoice is due and payable without offset or defense, (iii) the Account must not be subject to any contingencies (including Accounts arising from sales on consignment, guaranteed sale or other terms pursuant to which payment by the Account Debtor may be conditional), (iv) the Account must not be owing from an Account Debtor with whom Borrower has any dispute (whether or not relating to the particular Account), (v) the Account must not be owing from an Affiliate of Borrower, (vi) the Account must not be owing from an Account Debtor which is subject to any insolvency or bankruptcy proceeding, or whose financial condition is not acceptable to Silicon, or which, fails or goes out of a material portion of its business, (vii) the Account must not be owing from the United States or any department, agency or instrumentality thereof (unless there has been compliance, to Silicon’s satisfaction, with the United States Assignment of Claims Act), (viii) the Account must not be owing from an Account Debtor located outside the United States or Canada (unless pre-approved by Silicon in its discretion in writing, or backed by a letter of credit satisfactory to Silicon, or FCIA insured satisfactory to Silicon), (ix) the Account must not be owing from an Account Debtor to whom Borrower is or may be liable for goods purchased from such Account Debtor or otherwise (but, in such case, the Account will be deemed not eligible only to the extent of any amounts owed by Borrower to such Account Debtor), (x) the Account must not be subject to any lien in favor of any other Person, including without limitation, Tatonka Capital Corporation (“Tatonka”). Unless otherwise agreed to by Silicon, Accounts owing from one Account Debtor will not be deemed Eligible Accounts to the extent they exceed twenty five percent (25%) of the total Accounts outstanding. In addition, if more than 50% of the Accounts owing from an Account Debtor are outstanding for a period longer than their Eligibility Period (without regard to unapplied credits) or are otherwise not eligible Accounts, then all Accounts owing from that Account Debtor will be deemed ineligible for borrowing. Silicon may, from time to time, in its good faith business judgment, revise the Minimum Eligibility Requirements, upon written notice to Borrower.

“Equipment” means all present and future “equipment” as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation all machinery, fixtures, goods, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing.

“Exim Bank” is the Export-Import Bank of the United States.

“Exim Borrowing Base” shall have the meaning set forth in the Exim Loan Documents.

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Silicon Valley Bank		Amended and Restated Loan and Security Agreement

“Exim Eligible Foreign Accounts” shall have the meaning set forth in the Exim Loan Documents.

“Exim Eligible Foreign Inventory” shall have the meaning set forth in the Exim Loan Documents.

“Exim Guarantee” is that certain Master Guarantee Agreement between Exim Bank and Silicon dated August 11, 1999 or other agreement, as amended, modified, supplemented or restated from time to time, the terms of which are incorporated into this Exim Agreement.

“Export Order” is a written export order or contract for the purchase by the Buyer from the Borrower of any finished goods or services which are intended for export.

“Event of Default” means any of the events set forth in Section 7.1 of this Agreement.

“GAAP” means generally accepted accounting principles consistently applied.

“General Intangibles” means all present and future “general intangibles” as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes, without limitation payment intangibles, royalties, contract rights, goodwill, franchise agreements, purchase orders, customer lists, route lists, telephone numbers, domain names, claims, income tax refunds, security and other deposits, options to purchase or sell real or personal property, rights in all litigation presently or hereafter pending (whether in contract, tort or otherwise), insurance policies (including without limitation key man, property damage, and business interruption insurance), payments of insurance and rights to payment of any kind.

“good faith business judgment” means honesty in fact and good faith (as defined in Section 1201 of the Code) in the exercise of Silicon’s business judgment.

“including” means including (but not limited to).

“Intellectual Property” means all present and future (a) copyrights, copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work thereof, whether published or unpublished, (b) trade secret rights, including all rights to unpatented inventions and know-how, and confidential information; (c) mask work or similar rights available for the protection of semiconductor chips; (d) patents, patent applications and like protections including without limitation improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same; (e) trademarks, servicemarks, trade styles, and trade names, whether or not any of the foregoing are registered, and all applications to register and registrations of the same and like protections, and the entire goodwill of the business of Borrower connected with and symbolized by any such trademarks; (f) computer software and computer software products; (g) designs and design rights; (h) technology; (i) all claims for damages by way of past, present and future infringement of any of the rights included above; (j) all licenses or other rights to use any property or rights of a type described above.

“Inventory” means all present and future “inventory” as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products, including without limitation such inventory as is temporarily out of Borrower’s custody or possession or in transit and including any returned goods and any documents of title representing any of the above.

“Investment Property” means all present and future investment property, securities, stocks, bonds, debentures, debt securities, partnership interests, limited liability company interests, options, security entitlements, securities accounts, commodity contracts, commodity accounts, and all financial assets held in any securities account or otherwise, and all options and warrants to purchase any of the foregoing, wherever located, and all other securities of every kind, whether certificated or uncertificated.

“Loan Authorization Notice” is that certain Loan Authorization Notice between Bank and Export-Import Bank of the United States; as amended, modified, supplemented or restated from time to time

“Loan Documents” means, collectively, this Agreement, the Representations, and all other present and future documents, instruments and agreements between Silicon and Borrower, including, but not limited to those relating to this Agreement, and all amendments and modifications thereto and replacements therefor.

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Silicon Valley Bank		Amended and Restated Loan and Security Agreement

“Material Adverse Change” means any of the following: (i) a material adverse change in the business, operations, or financial or other condition of the Borrower, or (ii) a material impairment of the prospect of repayment of any portion of the Obligations; or (iii) a material impairment of the value or priority of Silicon’s security interests in the Collateral.

“Obligations” means all present and future Loans, advances, debts, liabilities, obligations, guaranties, covenants, duties and indebtedness at any time owing by Borrower to Silicon, whether evidenced by this Agreement or any note or other instrument or document, or otherwise, whether arising from an extension of credit, opening of a letter of credit, banker’s acceptance, loan, guaranty, indemnification or otherwise, whether direct or indirect (including, without limitation, those acquired by assignment and any participation by Silicon in Borrower’s debts owing to others), absolute or contingent, due or to become due, including, without limitation, all interest, charges, expenses, fees, attorney’s fees, expert witness fees, audit fees, letter of credit fees, collateral monitoring fees, closing fees, facility fees, termination fees, minimum interest charges and any other sums chargeable to Borrower under this Agreement or under any other Loan Documents.

“Other Property” means the following as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and all rights relating thereto: all present and future “commercial tort claims” (including without limitation any commercial tort claims identified in the Representations), “documents”, “instruments”, “promissory notes”, “chattel paper”, “letters of credit”, “letter-of-credit rights”, “fixtures”, “farm products” and “money”; and all other goods and personal property of every kind, tangible and intangible, whether or not governed by the Code.

“Permitted Liens” means the following: (i) purchase money security interests in specific items of Equipment; (ii) leases of specific items of Equipment; (iii) liens for taxes not yet payable; (iv) additional security interests and liens consented to in writing by Silicon, including, without limitation, liens on Equipment in favor of Tatonka, which consent may be withheld in its good faith business judgment; (v) security interests being terminated substantially concurrently with this Agreement; (vi) liens of materialmen, mechanics, warehousemen, carriers, or other similar liens arising in the ordinary course of business and securing obligations which are not delinquent; (vii) liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by liens of the type described above in clauses (i) or (ii) above, provided that any extension, renewal or replacement lien is limited to the property encumbered by the existing lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase; (viii) Liens in favor of customs and revenue authorities which secure payment of customs duties in connection with the importation of goods. Silicon will have the right to require, as a condition to its consent under subparagraph (iv) above, that the holder of the additional security interest or lien sign an intercreditor agreement on Silicon’s then standard form, acknowledge that the security interest is subordinate to the security interest in favor of Silicon, and agree not to take any action to enforce its subordinate security interest so long as any Obligations remain outstanding, and that Borrower agree that any uncured default in any obligation secured by the subordinate security interest shall also constitute an Event of Default under this Agreement.

“Person” means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, government, or any agency or political division thereof, or any other entity.

“Representations” means the written Representations and Warranties provided by Borrower to Silicon referred to in the Schedule.

“Reserves” means, as of any date of determination, such amounts as Silicon may from time to time establish and revise in its good faith business judgment, reducing the amount of Loans, Letters of Credit and other financial accommodations which would otherwise be available to Borrower under the lending formula(s) provided in the Schedule: (a) to reflect events, conditions, contingencies or risks which, as determined by Silicon in its good faith business judgment, do or may adversely affect (i) the Collateral or any other property which is security for the Obligations or its value (including without limitation any increase in delinquencies of Accounts), (ii) the assets, business or prospects of Borrower or any Guarantor, or (iii) the security interests and other rights of Silicon in the Collateral (including the enforceability, perfection and priority thereof); or (b) to reflect Silicon’s good faith belief that any collateral report or financial information furnished by or on behalf of Borrower or any Guarantor to Silicon is or may have been incomplete, inaccurate or misleading in any material respect; or (c) in respect of any state of facts which Silicon determines in good faith constitutes an Event of Default or may, with notice or passage of time or both, constitute an Event of Default.

Other Terms. All accounting terms used in this Agreement, unless otherwise indicated, shall have the meanings given to such terms in accordance with GAAP, consistently applied. All other terms contained in this Agreement, unless otherwise indicated, shall have the meanings provided by the Code, to the extent such terms are defined therein.

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Silicon Valley Bank		Amended and Restated Loan and Security Agreement

9. GENERAL PROVISIONS.

9.1 Interest Computation. In computing interest on the Obligations, all wire transfers shall be deemed applied on account of the Obligations on the day of receipt by Silicon thereof and all checks and other items of payment received by Silicon (including proceeds of Accounts and payment of the Obligations in full) shall be deemed applied by Silicon on account of the Obligations two (2) Business Days after receipt by Silicon. For purposes of the foregoing, any such funds received after 12:00 Noon (Pacific standard time) on any day shall be deemed received on the next Business Day. Silicon shall not, however, be required to credit Borrower’s account for the amount of any item of payment which is unsatisfactory to Silicon in its good faith business judgment, and Silicon may charge Borrower’s loan account for the amount of any item of payment which is returned to Silicon unpaid.

9.2 Application of Payments. All payments with respect to the Obligations may be applied, and in Silicon’s good faith business judgment reversed and re-applied, to the Obligations, in such order and manner as Silicon shall determine in its good faith business judgment.

9.3 Charges to Accounts. Silicon may, in its discretion, require that Borrower pay monetary Obligations in cash to Silicon, or charge them to Borrower’s Loan account with notice, prior to the occurrence and continuance of an Event of Default, but without notice thereafter, in which event they will bear interest at the same rate applicable to the Loans. Silicon may also, in its discretion, charge any monetary Obligations to Borrower’s Deposit Accounts maintained with Silicon.

9.4 Monthly Accountings. Silicon shall provide Borrower monthly with an account of advances, charges, expenses and payments made pursuant to this Agreement. Such account shall be deemed correct, accurate and binding on Borrower and an account stated (except for reverses and reapplications of payments made and corrections of errors discovered by Silicon), unless Borrower notifies Silicon in writing to the contrary within 60 days after such account is rendered, describing the nature of any alleged errors or omissions.

9.5 Notices. All notices to be given under this Agreement shall be in writing and shall be given either personally or by reputable private delivery service or by fax or email or by regular first-class mail, or certified mail return receipt requested, addressed to Silicon or Borrower at each of the addresses shown in the heading to this Agreement, or at any other address designated in writing by one party to the other party. Any notices given by fax or email must be followed by notice by another of the means set forth above to be effective. Notices to Silicon shall be directed to the Commercial Finance Division, to the attention of the Division Manager or the Division Credit Manager. All notices shall be deemed to have been given upon delivery in the case of notices personally delivered, or at the expiration of one Business Day following delivery to the private delivery service, or two Business Days following the deposit thereof in the United States mail, with postage prepaid.

9.6 Severability. Should any provision of this Agreement be held by any court of competent jurisdiction to be void or unenforceable, such defect shall not affect the remainder of this Agreement, which shall continue in full force and effect.

9.7 Integration. This Agreement and such other written agreements, documents and instruments as may be executed in connection herewith are the final, entire and complete agreement between Borrower and Silicon and supersede all prior and contemporaneous negotiations and oral representations and agreements, all of which are merged and integrated in this Agreement. There are no oral understandings, representations or agreements between the parties which are not set forth in this Agreement or in other written agreements signed by the parties in connection herewith.

9.8 Waivers; Indemnity. The failure of Silicon at any time or times to require Borrower to strictly comply with any of the provisions of this Agreement or any other Loan Document shall not waive or diminish any right of Silicon later to demand and receive strict compliance therewith. Any waiver of any default shall not waive or affect any other default, whether prior or subsequent, and whether or not similar. None of the provisions of this Agreement or any other Loan Document shall be deemed to have been waived by any act or knowledge of Silicon or its agents or employees, but only by a specific written waiver signed by an authorized officer of Silicon and delivered to Borrower. Borrower waives the benefit of all statutes of limitations relating to any of the Obligations or this Agreement or any other Loan Document, and Borrower waives demand, protest, notice of protest and notice of default or dishonor, notice of payment and nonpayment, release, compromise, settlement, extension or renewal of any commercial paper, instrument, account, General Intangible, document or guaranty at any time held by Silicon on which Borrower is or may in any way be liable, and notice of any action taken by Silicon, unless expressly required by this Agreement. Borrower hereby agrees to indemnify Silicon and its affiliates, subsidiaries, parent, directors, officers, employees, agents, and attorneys, and to hold them harmless from and against any and all claims, debts, liabilities, demands, obligations, actions, causes of action, penalties, costs and expenses (including reasonable attorneys’

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Silicon Valley Bank		Amended and Restated Loan and Security Agreement

fees), of every kind, which they may sustain or incur based upon or arising out of any of the Obligations, or any relationship or agreement between Silicon and Borrower, or any other matter, relating to Borrower or the Obligations; provided that this indemnity shall not extend to damages proximately caused by the indemnitee’s own gross negligence or willful misconduct and further provided that in any action or proceeding between Borrower and Silicon arising out of this Agreement or any Loan Documents, the prevailing party will be entitled to recover its reasonable attorneys’ fees and other reasonable costs and expenses incurred, in addition to any other relief to which it may be entitled. Notwithstanding any provision in this Agreement to the contrary, the indemnity agreement set forth in this Section shall survive any termination of this Agreement and shall for all purposes continue in full force and effect.

9.9 No Liability for Ordinary Negligence. Neither Silicon, nor any of its directors, officers, employees, agents, attorneys or any other Person affiliated with or representing Silicon shall be liable for any claims, demands, losses or damages, of any kind whatsoever, made, claimed, incurred or suffered by Borrower or any other party through the ordinary negligence of Silicon, or any of its directors, officers, employees, agents, attorneys or any other Person affiliated with or representing Silicon, but nothing herein shall relieve Silicon from liability for its own gross negligence or willful misconduct.

9.10 Amendment. The terms and provisions of this Agreement may not be waived or amended, except in a writing executed by Borrower and a duly authorized officer of Silicon.

9.11 Time of Essence. Time is of the essence in the performance by Borrower of each and every obligation under this Agreement.

9.12 Attorneys Fees and Costs. Borrower shall reimburse Silicon for all reasonable attorneys’ fees and all filing, recording, search, title insurance, appraisal, audit, and other reasonable costs incurred by Silicon, pursuant to, or in connection with, or relating to this Agreement (whether or not a lawsuit is filed), including, but not limited to, any reasonable attorneys’ fees and costs Silicon incurs in order to do the following: prepare and negotiate this Agreement and all present and future documents relating to this Agreement; obtain legal advice in connection with this Agreement or Borrower; enforce, or seek to enforce, any of its rights; prosecute actions against, or defend actions by, Account Debtors; commence, intervene in, or defend any action or proceeding; initiate any complaint to be relieved of the automatic stay in bankruptcy; file or prosecute any probate claim, bankruptcy claim, third-party claim, or other claim; examine, audit, copy, and inspect any of the Collateral or any of Borrower’s books and records; protect, obtain possession of, lease, dispose of, or otherwise enforce Silicon’s security interest in, the Collateral; and otherwise represent Silicon in any litigation relating to Borrower. In satisfying Borrower’s obligation hereunder to reimburse Silicon for attorneys fees, Borrower may, for convenience, issue checks directly to Silicon’s attorneys, Troutman Sanders LLP, but Borrower acknowledges and agrees that Troutman Sanders LLP is representing only Silicon and not Borrower in connection with this Agreement. If either Silicon or Borrower files any lawsuit against the other predicated on a breach of this Agreement, the prevailing party in such action shall be entitled to recover its reasonable costs and attorneys’ fees, including (but not limited to) reasonable attorneys’ fees and costs incurred in the enforcement of, execution upon or defense of any order, decree, award or judgment. All attorneys’ fees and costs to which Silicon may be entitled pursuant to this Paragraph shall immediately become part of Borrower’s Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations.

9.13 Benefit of Agreement. The provisions of this Agreement shall be binding upon and inure to the benefit of the respective successors, assigns, heirs, beneficiaries and representatives of Borrower and Silicon; provided, however, that Borrower may not assign or transfer any of its rights under this Agreement without the prior written consent of Silicon, and any prohibited assignment shall be void. No consent by Silicon to any assignment shall release Borrower from its liability for the Obligations.

9.14 Joint and Several Liability. If Borrower consists of more than one Person, their liability shall be joint and several, and the compromise of any claim with, or the release of, any Borrower shall not constitute a compromise with, or a release of, any other Borrower.

9.15 Limitation of Actions. Any claim or cause of action by Borrower against Silicon, its directors, officers, employees, agents, accountants or attorneys, based upon, arising from, or relating to this Loan Agreement, or any other Loan Document, or any other transaction contemplated hereby or thereby or relating hereto or thereto, or any other matter, cause or thing whatsoever, occurred, done, omitted or suffered to be done by Silicon, its directors, officers, employees, agents, accountants or attorneys, shall be barred unless asserted by Borrower by the commencement of an action or proceeding in a court of competent jurisdiction by the filing of a complaint within one year after the first act, occurrence or omission upon which such claim or cause of action, or any part thereof, is based, and the service of a summons and complaint on an officer of Silicon, or

-16-


Silicon Valley Bank		Amended and Restated Loan and Security Agreement

on any other person authorized to accept service on behalf of Silicon, within thirty (30) days thereafter. Borrower agrees that such one-year period is a reasonable and sufficient time for Borrower to investigate and act upon any such claim or cause of action. The one-year period provided herein shall not be waived, tolled, or extended except by the written consent of Silicon in its sole discretion. This provision shall survive any termination of this Loan Agreement or any other Loan Document.

9.16 Paragraph Headings; Construction. Paragraph headings are only used in this Agreement for convenience. Borrower and Silicon acknowledge that the headings may not describe completely the subject matter of the applicable paragraph, and the headings shall not be used in any manner to construe, limit, define or interpret any term or provision of this Agreement. This Agreement has been fully reviewed and negotiated between the parties and no uncertainty or ambiguity in any term or provision of this Agreement shall be construed strictly against Silicon or Borrower under any rule of construction or otherwise.

9.17 Governing Law; Jurisdiction; Venue. This Agreement and all acts and transactions hereunder and all rights and obligations of Silicon and Borrower shall be governed by the laws of the State of Maryland. As a material part of the consideration to Silicon to enter into this Agreement, Borrower (i) agrees that all actions and proceedings relating directly or indirectly to this Agreement shall, at Silicon’s option, be litigated in courts located within Maryland, and that the exclusive venue therefor shall be Santa Clara County; (ii) consents to the jurisdiction and venue of any such court and consents to service of process in any such action or proceeding by personal delivery or any other method permitted by law; and (iii) waives any and all rights Borrower may have to object to the jurisdiction of any such court, or to transfer or change the venue of any such action or proceeding.

9.18 Mutual Waiver of Jury Trial. Borrower and Silicon each hereby waives the right to trial by jury in any action or proceeding based upon, arising out of, or in any way relating to, this Agreement or any other present or future instrument or agreement between Silicon and Borrower, or any conduct, acts or omissions of Silicon or Borrower or any of their directors, officers, employees, agents, attorneys or any other persons affiliated with Silicon or Borrower, in all of the foregoing cases, whether sounding in contract or tort or otherwise.

9.19 Exim Notification. Silicon has the right to immediately notify Exim Bank in writing if it has knowledge of any of the following events: (1) any failure to pay any amount due under this Agreement; (2) the Exim Borrowing Base is less than the sum of the outstanding Exim Loans; (3) any failure to pay when due any amount payable to Silicon under any Loan owing by Borrower to Silicon; (4) the filing of an action for debtor’s relief by, against or on behalf of Borrower; (5) any threatened or pending material litigation against Borrower, or any dispute involving Borrower. If Silicon sends a notice to Exim Bank, Silicon has the right to send Exim Bank a written report on the status of events covered by the notice every thirty (30) days after the date of the original notification, until Silicon files a claim with Exim Bank or the defaults have been cured (but no Loans may be required during the cure period unless Exim Bank gives its written approval). If directed by Exim Bank, Silicon will have the right to exercise any rights it may have against Borrower to demand the immediate repayment of all amount outstanding under the Loans.

[SIGNATURES APPEAR ON THE FOLLOWING PAGE]

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Silicon Valley Bank		Amended and Restated Loan and Security Agreement

Silicon Valley Bank

Schedule to

Amended and Restated Loan and Security Agreement


Borrower:		TELECOMMUNICATION SYSTEMS, INC.

Address:		275 West Street, Suite 400
		Annapolis, Maryland 21401

Date:		July 24, 2003

This Schedule forms an integral part of the Amended and Restated Loan and Security Agreement between Silicon Valley Bank and the above-borrower of even date.

1. CREDIT LIMIT
(Section 1.1):


Revolving Loans:		An amount not to exceed the lesser of: (i) Twelve Million Five Hundred Thousand Dollars ($12,500,000) at any one time outstanding (the “Maximum Credit Limit”), less the amount of any outstanding Letters of Credit, FX Forward Contracts, FX Reserves, Exim Loans and the Cash Management Sublimit; or (ii) eighty percent (80%) (the “Advance Rate”) of the amount of Borrower’s Eligible Receivables (as defined in Section 8 above), less the amount of any outstanding Letters of Credit, FX Forward Contracts, FX Reserves, Equipment Loans, Exim Loans and the Cash Management Sublimit (such amount being called the “Borrowing Base”).

		Notwithstanding anything set forth herein to the contrary, during any Default or after the occurrence and during the continuance of any Event of Default, the outstanding amount of all Equipment Loans shall be incorporated in the calculation of the Borrowing Base in the immediately preceding paragraph.

		Silicon may, from time to time, modify the Advance Rate, in its good faith business judgment, upon notice to the Borrower, based on changes in collection experience with respect to Accounts or other issues or factors relating to the Accounts or other Collateral.

Letters of Credit Sublimit (Section 1.6):		Four Million Dollars ($4,000,000).


Silicon Valley Bank		Amended and Restated Loan and Security Agreement


Foreign Exchange Sublimit (Section 1.7)		Seven Hundred Fifty Thousand Dollars ($750,000)

Cash Management Sublimit (Section 1.8)		One Million Five Hundred Thousand Dollars ($1,500,000)

Exim Loan Sublimit (Section 1.9):		Three Million Dollars ($3,000,000).

Equipment Loan Amount (Section 1.10):		Two Million Five Hundred Thousand Dollars ($2,500,000).

2. INTEREST.

Interest Rate (Section 1.2):


		Except as set forth below with respect to Equipment Loans, all Loans shall bear interest at a rate equal to the “Prime Rate” in effect from time to time per annum plus one percent (1.0%) per annum.

		Interest on all Equipment Loans shall bear interest at a fixed rate equal to the Prime Rate in effect on the date of such Equipment Loan, plus one and one quarter of one percent (1.25%) per annum.

		“Prime Rate” means the rate announced from time to time by Silicon as its “prime rate;” it is a base rate upon which other rates charged by Silicon are based, and it is not necessarily the best rate available at Silicon, but for purposes of this Agreement the Prime Rate shall at all times be not less than four and one quarter of one percent (4.25%) per annum. The interest rate applicable to the Obligations shall change on each date there is a change in the Prime Rate.

		Interest shall be calculated on the basis of a 360-day year for the actual number of days elapsed.

3. FEES (Section 1.4):


Loan Fee:		One Hundred Eighty Seven Thousand Five Hundred Dollars ($187,500), payable concurrently herewith, less $93,750 already paid in connection with the Original Loan Agreement.


Silicon Valley Bank		Amended and Restated Loan and Security Agreement


Equipment Loan Fee:		Twenty Five Thousand Dollars ($25,000), payable concurrently herewith.

Collateral Monitoring Fee:		One Thousand Dollars ($1,000), per month, payable in arrears (prorated for any partial month at the beginning and at termination of this Agreement). Silicon agrees to waive the Collateral Monitoring Fee for any month in which the Borrower maintains monthly average balances in deposit and investment accounts with Silicon in excess of Ten Million Dollars ($10,000,000).

Unused Portion Fee:		The Borrower shall pay to Silicon a fee (collectively, the “Unused Line Fees” and individually, a “Unused Line Fee”) in an amount equal to one quarter of one percent (0.25%) per annum of the average daily unused and undisbursed portion of the Maximum Credit Limit accruing during each month. The accrued and unpaid portion of the Unused Line Fee shall be paid by the Borrower to Silicon on the first day of each month, commencing on the first such date following the date hereof, and on the Maturity Date. Silicon agrees to waive the Unused Line Fee for any month in which the Borrower maintains monthly average balances in deposit and investment accounts with Silicon in excess of Ten Million Dollars ($10,000,000).

Exim Bank Loan Fee		One and one half percent (1.50%) of the Exim Bank Loan Sublimit is due and payable in accordance with Section 1.8 of the Agreement, and annually thereafter.

4. REPAYMENT OF EQUIPMENT LOANS (Section 1.10):


		Borrower may request Equipment Loans from the Closing Date through December 31, 2003 (the “Equipment Availability End Date”), and Silicon will make Equipment Loans not exceeding the Equipment Loan Amount. To obtain an Equipment Loan, Borrower will deliver to Silicon copies of invoices for the Equipment being financed, and such additional information as Bank may request at least five (5) Business Days before the proposed funding date. The Equipment Loans may only be used to finance or refinance Equipment purchased three hundred sixty five (365) days before the date of each Equipment Loan (the “Funding Date”) and may not exceed one hundred percent (100%) of the equipment invoice, including taxes, shipping, warranty charges, freight discounts and installation expense. Each Equipment Loan must be for a minimum of Two Hundred Thousand Dollars ($200,000).


Silicon Valley Bank		Amended and Restated Loan and Security Agreement


		Interest accrues from the Funding Date of each Equipment Loan at the rate in Section 1.2 and is payable monthly. Equipment Loans are payable in thirty six (36) equal monthly installments of principal and accrued interest, beginning on the first day of each month (each date being called a “Payment Date”), after the Funding Payment Date. On the Funding Date (unless such Funding Date is the first Business Day of the month) Borrower shall pay to Silicon an amount (the “Interim Payment”) equal the number of days from the Funding Date until the first Payment Date with respect to such Equipment Advance.

5. MATURITY DATE
(Section 6.1):


Loans		April 30, 2006

Exim Bank Loans		April 30, 2004

Equipment Loans		Thirty six (36) months from the date of each Equipment Loan.

6. FINANCIAL COVENANTS

(Section 5.1):		Borrower shall comply with each of the following covenants. Compliance shall be determined as of the end of each month, except as otherwise specifically provided below:

Minimum Tangible Net Worth:		Borrower shall maintain a Tangible Net Worth of not less than the following amounts at the following times:


		Minimum Tangible
Period		Net Worth:
May 1, 2003-April 30, 2004		$23,000,000;
May 1, 2004-April 30, 2005		$25,000,000;
May 1, 2005-April 30, 2006		$25,000,000, plus seventy five percent (75%) of Borrower’s net income (without regard to any loss) commencing with the quarter ending June 30, 2005.


Definitions.		For purposes of the foregoing financial covenants, the following term shall have the following meaning:

		“Tangible Net Worth” shall mean the excess of total assets over total liabilities, determined in accordance with GAAP, with the following adjustments:


Silicon Valley Bank		Amended and Restated Loan and Security Agreement

(A) there shall be excluded from assets: (i) notes, accounts receivable and other obligations owing to Borrower from its officers or other Affiliates, and (ii) all assets which would be classified as “intangible assets” under GAAP, including without limitation goodwill, licenses, patents, trademarks, trade names, copyrights and organizational costs, licenses and franchises, capitalized software costs (net of related accumulated amortization), provided however, that only capitalized software costs in excess of the following amounts at the following times will be considered intangible assets:


May 1, 2003-April 30, 2004	$	7,000,000;
May 1, 2004-April 30, 2005	$	4,000,000;
May 1, 2005-June 30, 2005	$	2,000,000;
May 1, 2005 and thereafter	$	0;

(B) there shall be excluded from liabilities: all indebtedness which is subordinated to the Obligations under a subordination agreement in form specified by Silicon or by language in the instrument evidencing the indebtedness which Silicon agrees in writing is acceptable to Silicon in its good faith business judgment.

7. REPORTING.
(Section 5.3):

Borrower shall provide Silicon with the following:

1. Weekly transaction reports and schedules of collections, on Silicon’s standard form shall be provided weekly (and upon each Loan request), provided, however, that during any Non-Borrowing Period, the transaction shall be provided monthly, within fifteen (15) days after the end of each month.

2. Monthly accounts receivable agings, aged by invoice date, within fifteen days after the end of each month.

3. Monthly accounts payable agings, aged by invoice date, and outstanding or held check registers, if any, within fifteen days after the end of each month.

4. Monthly reconciliations of accounts receivable agings (aged by invoice date), transaction reports, and general ledger, within fifteen days after the end of each month.

5. Monthly perpetual inventory reports for the Inventory valued on a first-in, first-out basis at the lower of cost or market (in accordance with GAAP) or such other inventory


Silicon Valley Bank		Amended and Restated Loan and Security Agreement

reports as are requested by Silicon in its good faith business judgment, all within fifteen days after the end of each month.

6. Monthly unaudited financial statements, as soon as available, and in any event within thirty days after the end of each month.

7. Monthly Compliance Certificates, within thirty days after the end of each month, in such form as Silicon shall reasonably specify, signed by the Chief Financial Officer, Vice President, Finance, Treasurer or Corporate Controller of Borrower, certifying that as of the end of such month Borrower was in full compliance with all of the terms and conditions of this Agreement, and setting forth calculations showing compliance with the financial covenants set forth in this Agreement and such other information as Silicon shall reasonably request, including, without limitation, a statement that at the end of such month there were no held checks.

8. Quarterly unaudited financial statements, as soon as available, and in any event within forty-five days after the end of each fiscal quarter of Borrower.

9. Annual forecasts prior to each fiscal year end of Borrower and operating budgets (including income statements, balance sheets and cash flow statements, by month) for the current fiscal year of Borrower within sixty (60) days after the end of each fiscal year of Borrower.

10. Annual financial statements, as soon as available, and in any event within 120 days following the end of Borrower’s fiscal year, certified by, and with an unqualified opinion of, independent certified public accountants acceptable to Silicon.

8. BORROWER INFORMATION:

Borrower represents and warrants that the information set forth in the Representations and Warranties of the Company dated April 5, 2002, previously submitted to Silicon (the “Representations”) is true and correct as of the date hereof.

9. ADDITIONAL PROVISIONS

1. Depository and Operating Accounts. Borrower shall maintain its primary depository and operating accounts with Silicon. As to any Deposit Accounts and investment


Silicon Valley Bank		Amended and Restated Loan and Security Agreement

accounts maintained with another institution, Borrower shall cause such institution, within 30 days after the date of this Agreement, to enter into a control agreement in form acceptable to Silicon in its good faith business judgment in order to perfect Silicon’s first-priority security interest in said Deposit Accounts and investment accounts.

2. Subordination of Inside Debt. All present and future indebtedness of Borrower to its officers, directors and shareholders (“Inside Debt”) shall, at all times, be subordinated to the Obligations pursuant to a subordination agreement on Silicon’s standard form. Borrower represents and warrants that there is no Inside Debt presently outstanding. Prior to incurring any Inside Debt in the future, Borrower shall cause the person to whom such Inside Debt will be owed to execute and deliver to Silicon a subordination agreement on Silicon’s standard form.

3. Intellectual Property Negative Pledge Agreement. As a condition precedent to the effectiveness of this Agreement, the Borrower shall have executed and delivered an Intellectual Property Negative Pledge Agreement (the “IP Negative Pledge Agreement”), substantially in the form attached hereto as Exhibit B.

4. Minimum Cash and Excess Availability. The Borrower shall at all times maintain a sum of (i) unencumbered cash on deposit with Silicon and (ii) availability under the Loans of not less than Ten Million Dollars ($10,000,000).


Borrower:		Silicon:

TELECOMMUNICATION SYSTEMS, INC.		SILICON VALLEY BANK

By	/s/Thomas M. Brandt, Jr.

	President or Vice President	By	Larry Singer
		Title	VP

By	/s/Bruce A. White

	Secretary or Ass’t Secretary


[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2004
OR
[ ]		THE SECURITIES EXCHANGE ACT OF 1934


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)


	Shares outstanding
	as of October 31,
Title of Each Class	2004

Class A Common Stock, par value $0.01 per share		27,412,945
Class B Common Stock, par value $0.01 per share		8,529,101

Total Common Stock Outstanding		35,942,046


			Page

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



				Three months ended						Nine months ended
				September 30,						September 30,

				2004			2003			2004			2003

Revenue:
	Service bureau and subscriber			$	19,368		$	8,832		$	60,207		$	24,697
	Software systems:
		Software licenses			1,358			2,177			8,862			5,432
		Software systems and services			3,723			1,563			9,821			4,196

	Software systems total				5,081			3,740			18,683			9,628
	Network solutions				13,588			15,675			32,351			33,294

			Total revenue		38,037			28,247			111,241			67,619
Direct costs of revenue:
	Direct cost of service bureau and subscriber revenue				11,959			4,138			37,944			12,105
	Direct cost of software systems revenue, including amortization of software development costs of $77, $123, $403, and $8,927, respectively				3,652			1,909			9,585			13,750
	Direct cost of network solutions revenue				9,292			10,501			20,537			22,353

			Total direct costs of revenue		24,903			16,548			68,066			48,208
	Service bureau and subscriber gross profit				7,409			4,694			22,263			12,592
	Software systems gross profit/(loss)				1,429			1,831			9,098			(4,122	)
	Network solutions gross profit				4,296			5,174			11,814			10,941

			Total gross profit		13,134			11,699			43,175			19,411
Operating costs and expenses:
	Research and development expense				4,798			4,109			14,399			12,688
	Sales and marketing expense				3,080			2,068			9,593			6,674
	General and administrative expense				5,121			2,725			14,374			8,335
	Non-cash stock compensation expense (see detail below)				247			412			950			1,174
	Depreciation and amortization of property and equipment				2,015			1,710			5,659			4,945
	Amortization of acquired intangible assets				532			138			1,596			415

			Total operating costs and expenses		15,793			11,162			46,571			34,231

(Loss)/income from operations					(2,659	)		537			(3,396	)		(14,820	)
Interest expense					(665	)		(282	)		(2,329	)		(774	)
Other income/(expense), net					79			251			(103	)		660

Net (loss)/income				$	(3,245	)	$	506		$	(5,828	)	$	(14,934	)

(Loss)/earnings per share — basic				$	(0.10	)	$	0.02		$	(0.18	)	$	(0.50	)

(Loss)/earnings per share — diluted				$	(0.10	)	$	0.02		$	(0.18	)	$	(0.50	)

Weighted average shares outstanding — basic					33,587			29,802			32,683			29,661
Weighted average shares outstanding — diluted					33,587			32,668			32,683			29,661

Composition of non-cash stock compensation expense:
	Direct costs of revenue			$	9		$	23		$	44		$	76
	Research and development expense				28			62			114			212
	Sales and marketing expense				10			49			46			168
	General and administrative expense				200			278			746			718

	Total non-cash stock compensation expense			$	247		$	412		$	950		$	1,174


				September 30,			December 31,
				2004			2003

				(unaudited)
Assets
Current assets:
	Cash and cash equivalents			$	14,985		$	18,785
	Accounts receivable, net of allowance of $1,632 in 2004 and $393 in 2003				28,930			20,208
	Unbilled receivables				13,621			8,862
	Inventory				3,386			451
	Other current assets				4,678			1,915

			Total current assets		65,600			50,221
Property and equipment, net of accumulated depreciation and amortization of $26,584 in 2004 and $20,925 in 2003					16,917			11,449
Software development costs, net of accumulated amortization of $1,157 in 2004 and $754 in 2003					2,985			518
Acquired intangible assets, net of accumulated amortization of $1,596 in 2004					6,411			—
Goodwill					15,563			—
Other assets					2,531			3,092

			Total assets	$	110,007		$	65,280


Liabilities and stockholders’ equity
Current liabilities:
	Accounts payable and accrued expenses			$	15,466		$	8,817
	Accrued payroll and related liabilities				4,228			3,331
	Deferred revenue				5,649			1,683
	Current portion of notes payable				11,662			5,698
	Current portion of capital lease obligations				2,498			2,154

			Total current liabilities		39,503			21,683
Capital lease obligations and notes payable, less current portion					5,409			6,746
Convertible subordinated debentures, net of discount of $5,804 in 2004					9,196			—
Stockholders’ equity:
	Class A Common Stock; $0.01 par value:
		Authorized shares — 225,000,000; issued and outstanding shares of 27,252,986 in 2004 and 22,062,974 in 2003			273			221
	Class B Common Stock; $0.01 par value:
		Authorized shares — 75,000,000; issued and outstanding shares of 8,686,801 in 2004 and 9,363,688 in 2003			87			94
	Deferred compensation				(932	)		(1,399	)
	Additional paid-in capital				193,655			169,256
	Accumulated other comprehensive loss:
		Cumulative foreign currency translation adjustment			(35	)		—
	Accumulated deficit				(137,149	)		(131,321	)

			Total stockholders’ equity		55,899			36,851

			Total liabilities and stockholders’ equity	$	110,007		$	65,280


													Accumulated
	Class A			Class B						Additional			Other
	Common			Common			Deferred			Paid-In			Comprehensive			Accumulated
	Stock			Stock			Compensation			Capital			Loss			Deficit			Total

Balance at January 1, 2004	$	221		$	94		$	(1,399	)	$	169,256		$	—		$	(131,321	)	$	36,851
Options exercised for the purchase of 460,656 shares of Class A Common Stock		5			—			—			963			—			—			968
Issuance of 57,454 shares of Class A Common Stock under Employee Stock Purchase Plan		1			—			—			269			—			—			270
Issuance of 1,568,308 shares of Class A Common Stock in connection with the Enterprise acquisition and related financing, net of issuance costs		16			—			—			8,366			—			—			8,382
Issuance of 2,500,000 shares of Class A Common Stock in connection with a private equity offering, net of issuance costs		25			—			—			9,395			—			—			9,420
Issuance of 45,376 shares of Class A Common Stock for interest incurred on convertible subordinated debentures		—			—			—			210			—			—			210
Surrender of 79,563 restricted shares of Class A Common Stock as payment for payroll tax withholdings		(1	)		—			—			(449	)		—			—			(450	)
Fair value of beneficial conversion feature of convertible subordinated debentures		—			—			—			3,662			—			—			3,662
Issuance of warrants to purchase 341,072 shares of Class A Common Stock		—			—			—			1,395			—			—			1,395
Conversion of 676,887 shares of Class B Common Stock to Class A Common Stock		6			(6	)		—			—			—			—			—
Stock compensation expense for issuance of Class A Common Stock options at below fair market value		—			—			—			483			—			—			483
Amortization of deferred compensation expense		—			—			467			—			—			—			467
Change in value of options issued to non-employees for service		—			—			—			105			—			—			105
Foreign currency translation adjustment		—			—			—			—			(35	)		—			(35	)
Net loss for the nine months ended September 30, 2004		—			—			—			—			—			(5,828	)		(5,828	)

Balance at September 30, 2004	$	273		$	87		$	(932	)	$	193,655		$	(35	)	$	(137,149	)	$	55,899


1.	*Basis of Presentation and Summary of Significant Accounting Policies*


Assets:
Cash		$	1,882
Accounts receivable, net			7,047
Inventory			606
Other current assets			718
Property and equipment			750
Acquired software development costs			287
Acquired intangible assets			6,819
Goodwill			13,802
Other assets			30

	Total assets		31,941
Liabilities:
Accounts payable and accrued expenses			6,188
Accrued payroll and related liabilities			1,032
Deferred revenue			2,315

	Total liabilities		9,535

Net assets acquired		$	22,406


		Three months			Nine months
		Ended			Ended
		September 30, 2003			September 30, 2003

Revenue		$	41,746		$	108,792
Loss from operations			(985	)		(17,841	)
Net loss			(1,507	)		(19,446	)

Loss per common share:
	Basic and diluted	$	(0.05	)	$	(0.62	)



			Three months ended September 30, 2004								Nine months ended September 30, 2004

			Wireless								Wireless
			Carrier		Government		Enterprise		Total		Carrier		Government		Enterprise		Total

Revenue:
Service bureau and subscriber			$	9,383	$	—	$	9,985	$	19,368	$	28,078	$	—	$	32,129	$	60,207
Software systems:
	Software licenses			1,238		—		120		1,358		8,681		—		181		8,862
	Software systems and services			2,381		—		1,342		3,723		6,706		—		3,115		9,821

Software systems total				3,619		—		1,462		5,081		15,387		—		3,296		18,683
Network solutions				—		13,588		—		13,588		—		32,351		—		32,351

		Total revenue	$	13,002	$	13,588	$	11,447	$	38,037	$	43,465	$	32,351	$	35,425	$	111,241

Segment gross profit:
Service bureau and subscriber			$	5,250	$	—	$	2,159	$	7,409	$	14,791	$	—	$	7,472	$	22,263
Software systems				1,105		—		324		1,429		8,408		—		690		9,098
Network solutions				—		4,296		—		4,296		—		11,814		—		11,814

		Total segment gross profit	$	6,355	$	4,296	$	2,483	$	13,134	$	23,199	$	11,814	$	8,162	$	43,175



			Three months ended September 30, 2003								Nine months ended September 30, 2003

			Wireless								Wireless
			Carrier		Government		Enterprise		Total		Carrier			Government		Enterprise		Total

Revenue:
Service bureau and subscriber			$	8,832	$	—	$	—	$	8,832	$	24,697		$	—	$	—	$	24,697
Software systems:
	Software licenses			2,177		—		—		2,177		5,432			—		—		5,432
	Software systems and services			1,563		—		—		1,563		4,196			—		—		4,196

Software systems total				3,740		—		—		3,740		9,628			—		—		9,628
Network solutions				—		15,675		—		15,675		—			33,294		—		33,294

		Total revenue	$	12,572	$	15,675	$	—	$	28,247	$	34,325		$	33,294	$	—	$	67,619

Segment gross profit:
Service bureau and subscriber			$	4,694	$	—	$	—	$	4,694	$	12,592		$	—	$	—	$	12,592
Software systems				1,831		—		—		1,831		(4,122	)		—		—		(4,122	)
Network solutions				—		5,174		—		5,174		—			10,941		—		10,941

		Total segment gross profit	$	6,525	$	5,174	$	—	$	11,699	$	8,470		$	10,941	$	—	$	19,411


		September 30, 2004		December 31, 2003

Component parts		$	1,575	$	346
Finished goods			1,811		105

	Total	$	3,386	$	451


7.	*Acquired Intangible Assets and Capitalized Software Development Costs*



			September 30, 2004						December 31, 2003

			Gross						Gross
			Carrying		Accumulated				Carrying		Accumulated
			Amount		Amortization		Net		Amount		Amortization		Net

Acquired intangible assets:
	Customer Contracts		$	4,208	$	1,036	$	3,172	$	—	$	—	$	—
	Customer Lists			2,518		478		2,040		—		—		—
	Trademarks & Patents			1,281		82		1,199		—		—		—
Software development costs,
	including acquired
	technology			4,142		1,157		2,985		1,272		754		518

		Total	$	12,149	$	2,753	$	9,396	$	1,272	$	754	$	518

Estimated future amortization expense:
Three months ending December 31, 2004							$	798
Year ending December 31, 2005							$	3,130
Year ending December 31, 2006							$	2,467
Year ending December 31, 2007							$	1,230
Year ending December 31, 2008							$	823
Year ending December 31, 2009							$	506
Thereafter							$	442


3.	*Kivera Acquisition*


4.	*Supplemental Disclosure of Cash Flow Information*


5.	*Segment Information*


6.	*Inventory*



		As of September 30, 2004

		Accounts		Unbilled
Customer	Segment	Receivable		Receivables

Federal Agencies	Government		24%		43%
Customer C	Wireless Carrier		13%		Less than 10%


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



		Three Months Ended September 30										Nine Months Ended September 30


						2004 vs. 2003										2004 vs. 2003

($ in millions)		2004		2003		$			%			2004		2003		$			%

Service bureau and subscriber revenue		$	9.4	$	8.8	$	0.6			6	%	$	28.1	$	24.7	$	3.4			14	%
Software systems revenue:
	Software licenses		1.2		2.2		(0.9	)		(43	%)		8.7		5.4		3.2			60	%
	Software systems and services		2.4		1.6		0.8			52	%		6.7		4.2		2.5			60	%

Software systems total			3.6		3.7		(0.1	)		(3	%)		15.4		9.6		5.8			60	%
Segment revenue			13.0		12.6		0.4			3	%		43.5		34.3		9.1			27	%
Direct cost of service bureau and subscriber			4.1		4.1		—			N/M			13.3		12.1		1.2			10	%
Direct cost of software systems			2.5		1.9		0.7			32	%		7.0		13.8		(6.8	)		(49	%)

Segment gross profit*		$	6.4	$	6.5	$	(0.2	)		(3	%)	$	23.2	$	8.5	$	14.7			N/M



	Three Months Ended September 30										Nine Months Ended September 30


					2004 vs.										2004 vs.
					2003										2003

($ in millions)	2004		2003		$			%			2004		2003		$			%

Network solutions revenue	$	13.6	$	15.7	$	(2.1	)		(13	%)	$	32.4	$	33.3	$	(0.9	)		(3	%)
Direct cost of network solutions		9.3		10.5		(1.2	)		(12	%)		20.5		22.4		(1.8	)		(8	%)

Segment gross profit*	$	4.3	$	5.2	$	(0.9	)		(17	%)	$	11.8	$	10.9	$	0.9			8	%


	Three months ended			Nine months ended
Subscriber Type	September 30, 2004			September 30, 2004

Mobile office subscribers		67	%		68	%
Mobile finance subscribers		27	%		26	%
Mobile asset subscribers		6	%		6	%



	Three Months Ended											Nine Months Ended
	September 30											September 30


							2004 vs.											2004 vs.
							2003											2003

($ in millions)	2004			2003			$		%			2004			2003			$		%

Research and development expense	$	4.8		$	4.1		$	0.7		17	%	$	14.4		$	12.7		$	1.7		14	%
Percent of revenue		13	%		15	%							13	%		19	%


	Within 12		1-3		3-5		More than
($ in millions)	Months		Years		Years		5 Years		Total

Notes payable	$	11,662	$	2,861	$	1	$	—	$	14,524
Capital lease obligations		2,498		2,547		—		—		5,045
Operating leases		2,743		3,038		2,789		1,317		9,887

	$	16,903	$	8,446	$	2,790	$	1,317	$	29,456


Item 3.	*Quantitative and Qualitative Disclosures About Market Risk*


Item 2.	*Unregistered Sales of Equity Securities and Use of Proceeds*


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


	For		%			Withhold		%

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


Exhibit
Numbers			Description

	10	.46	Amended and Restated Loan and Security Agreement by and between the Company and Silicon Valley Bank.
	31	.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31	.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32	.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32	.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


/s/ MAURICE B. TOSÉ Maurice B. Tosé November 15, 2004		Chairman, President and Chief Executive Officer (Principal Executive Officer)

/s/ THOMAS M. BRANDT, JR. Thomas M. Brandt, Jr. November 15, 2004		Senior Vice President and Chief Financial Officer (Principal Financial Officer)

	1.		Weekly transaction reports and schedules of collections, on Silicon’s standard form shall be provided weekly (and upon each Loan request), provided, however, that during any Non-Borrowing Period, the transaction shall be provided monthly, within fifteen (15) days after the end of each month.

	2.		Monthly accounts receivable agings, aged by invoice date, within fifteen days after the end of each month.

	3.		Monthly accounts payable agings, aged by invoice date, and outstanding or held check registers, if any, within fifteen days after the end of each month.

	4.		Monthly reconciliations of accounts receivable agings (aged by invoice date), transaction reports, and general ledger, within fifteen days after the end of each month.

	5.		Monthly perpetual inventory reports for the Inventory valued on a first-in, first-out basis at the lower of cost or market (in accordance with GAAP) or such other inventory

			reports as are requested by Silicon in its good faith business judgment, all within fifteen days after the end of each month.

	6.		Monthly unaudited financial statements, as soon as available, and in any event within thirty days after the end of each month.

	7.		Monthly Compliance Certificates, within thirty days after the end of each month, in such form as Silicon shall reasonably specify, signed by the Chief Financial Officer, Vice President, Finance, Treasurer or Corporate Controller of Borrower, certifying that as of the end of such month Borrower was in full compliance with all of the terms and conditions of this Agreement, and setting forth calculations showing compliance with the financial covenants set forth in this Agreement and such other information as Silicon shall reasonably request, including, without limitation, a statement that at the end of such month there were no held checks.

	8.		Quarterly unaudited financial statements, as soon as available, and in any event within forty-five days after the end of each fiscal quarter of Borrower.

	9.		Annual forecasts prior to each fiscal year end of Borrower and operating budgets (including income statements, balance sheets and cash flow statements, by month) for the current fiscal year of Borrower within sixty (60) days after the end of each fiscal year of Borrower.

	10.		Annual financial statements, as soon as available, and in any event within 120 days following the end of Borrower’s fiscal year, certified by, and with an unqualified opinion of, independent certified public accountants acceptable to Silicon.

			accounts maintained with another institution, Borrower shall cause such institution, within 30 days after the date of this Agreement, to enter into a control agreement in form acceptable to Silicon in its good faith business judgment in order to perfect Silicon’s first-priority security interest in said Deposit Accounts and investment accounts.

	2.		Subordination of Inside Debt. All present and future indebtedness of Borrower to its officers, directors and shareholders (“Inside Debt”) shall, at all times, be subordinated to the Obligations pursuant to a subordination agreement on Silicon’s standard form. Borrower represents and warrants that there is no Inside Debt presently outstanding. Prior to incurring any Inside Debt in the future, Borrower shall cause the person to whom such Inside Debt will be owed to execute and deliver to Silicon a subordination agreement on Silicon’s standard form.

	3.		Intellectual Property Negative Pledge Agreement. As a condition precedent to the effectiveness of this Agreement, the Borrower shall have executed and delivered an Intellectual Property Negative Pledge Agreement (the “IP Negative Pledge Agreement”), substantially in the form attached hereto as Exhibit B.

	4.		Minimum Cash and Excess Availability. The Borrower shall at all times maintain a sum of (i) unencumbered cash on deposit with Silicon and (ii) availability under the Loans of not less than Ten Million Dollars ($10,000,000).

a)		I have reviewed this quarterly report on Form 10-Q of TeleCommunication Systems, Inc.;

b)		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

c)		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

d)		The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have:

	a)		designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)		evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	c)		disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and

	a)		all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b)		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.



November 15, 2004	/s/ Maurice B. Tosé
	Maurice B. Tosé
	Chairman, CEO and President