10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

Commission File No. 0-30821

TELECOMMUNICATION SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

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

(410) 263-7616

(Registrant’s telephone number, including area code)

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

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

      Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):  Yes o      No þ

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

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

INDEX

TELECOMMUNICATION SYSTEMS, INC.

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

TeleCommunication Systems, Inc.

Consolidated Statements of Operations

(amounts in thousands, except per share data)

(unaudited)

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

See accompanying Notes to Consolidated Financial Statements

3

TeleCommunication Systems, Inc.

Consolidated Balance Sheets

(amounts in thousands, except share data)

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

See accompanying Notes to Consolidated Financial Statements

4

TeleCommunication Systems, Inc.

Consolidated Statement of Stockholders’ Equity

(amounts in thousands, except share data)

(unaudited)

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

See accompanying Notes to Consolidated Financial Statements

5

TeleCommunication Systems, Inc.

Consolidated Statements of Cash Flows

(amounts in thousands)

(unaudited)

			Nine months ended
			September 30,
			2005			2004
Operating activities:
Net loss			$	(8,337	)	$	(5,828	)
Adjustments to reconcile net loss to net cash provided by/(used in) operating activities:
	Depreciation and amortization of property and equipment			6,633			5,659
	Amortization of acquired intangible assets			2,166			1,596
	Non-cash stock compensation expense			565			950
	Amortization of software development costs			613			403
	Amortization of debt discount			—			893
	Amortization of deferred financing fees included in interest expense			259			328
	Other non-cash (income)/expenses			(102	)		179
	State of Maryland loan forgiveness			—			(100	)
	Changes in operating assets and liabilities:
		Accounts receivable, net		396			(1,512	)
		Unbilled receivables		(768	)		(4,759	)
		Inventory		34			(2,329	)
		Other current assets		(2,107	)		(784	)
		Accounts payable and accrued expenses		1,126			(2,255	)
		Accrued payroll and related liabilities		(2,275	)		(138	)
		Deferred revenue		3,264			1,162
Net cash provided by/(used in) operating activities				1,467			(6,535	)
Investing activities:
Acquisitions, net of cash acquired				(124	)		(24,476	)
Purchases of property and equipment				(3,442	)		(5,320	)
Capitalized software development costs				(2,327	)		—
Change in other assets				(1,336	)		1,837
Net cash used in investing activities				(7,229	)		(27,959	)
Financing activities:
Payments on long-term debt and capital lease obligations				(7,517	)		(6,375	)
Proceeds from draws under short-term line of credit, net				3,000			5,000
Proceeds from issuance of Class A Common Stock and Convertible subordinated debentures				—			29,970
Financing fees related to issuance of Class A Common Stock and Convertible subordinated debentures				(81	)		(1,650	)
Proceeds from issuance of long-term debt				—			2,500
Proceeds from exercise of employee stock options and sale of stock				582			1,238
Net cash (used in)/provided by financing activities				(4,016	)		30,683
Net decrease in cash				(9,778	)		(3,811	)
Effect of exchange rates on cash and cash equivalents				(88	)		11
Cash and cash equivalents at the beginning of the period				18,251			18,785
Cash and cash equivalents at the end of the period			$	8,385		$	14,985

See accompanying Notes to Consolidated Financial Statements

6

TeleCommunication Systems, Inc.

Notes to Consolidated Financial Statements

September 30, 2005

(amounts in thousands, except per share amounts)

(unaudited)

1.      Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-and nine-months ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ended December 31, 2005. These consolidated financial statements should be read in conjunction with our audited financial statements and related notes included in our 2004 Annual Report on Form 10-K.

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

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

Software Development Costs. We capitalize software development costs after we establish technological feasibility, and amortize those costs over the estimated lives of the software, beginning on the date when the products are available for general release.

For the three- and nine-months ended September 30, 2005, we capitalized $1,090 and $2,327, respectively, of software development costs for certain software projects after the point of technological feasibility had been reached but before the products were available for general release. Accordingly, these costs have been capitalized and will be amortized over their estimated useful lives beginning when the products are available for general release. The capitalized costs relate to our location-based software, our mobile asset management software, our Voice over IP E9-1-1 service, and our international financial market data application.

We believe that these capitalized costs will be recoverable from future gross profits generated by these products. Prior to 2005, our estimates did not sufficiently demonstrate future realizability of our software development costs expended on such products; and accordingly, all such costs were expensed as incurred.

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

7

TeleCommunication Systems, Inc.

Notes to Consolidated Financial Statements — (Continued)

per common share if we had applied the fair value recognition provisions of Financial Accounting Standards Board Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

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

Other Comprehensive Income/loss. 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 accounting principles generally accepted in the United States are included in comprehensive income, but excluded from net income. Total comprehensive loss for the three-and nine-months ended September 30, 2005 and 2004, respectively, was not materially different than consolidated net loss.

Recent Accounting Pronouncements. In December 2004, the Financial Accounting Standards Board (FASB) revised the previously issued Statement No. 123, Share Based Payment (Statement No. 123(R)). The objective of Statement No. 123(R) is to improve financial reporting by requiring all share based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair value. As permitted by Statement No. 123, we currently account for share-based payments to employees using APB No. 25’s intrinsic value method and, as such, generally recognize no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)’s fair value method will have a significant impact on our results of operations, although it will have no impact on our overall financial position.

Statement No. 123(R) allows for two adoption methods:

•  The modified prospective method which requires companies to recognize compensation cost beginning with the effective date of adoption based on (a) the requirements of Statement No. 123(R) for all share-based payments granted after the effective date of adoption and (b) the requirements of Statement No. 123(R) for all awards granted to employees prior to the effective date of adoption that remain unvested on the date of adoption; or

•  The modified retrospective method which includes the requirements of the modified prospective method described above, but also requires restatement of prior period financial statements using amounts previously disclosed under the pro forma provisions of Statement No. 123.

We expect to adopt effective January 1, 2006 using the modified prospective method. The impact of adoption of Statement No. 123(R) will depend on levels of share-based payments granted in the future. However, had we adopted Statement No. 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement No. 123 as described in the disclosure of pro forma net loss and loss per share in Note 7.

In May 2005, the FASB issued Statement No. 154, Accounting Changes and Error Corrections — A Replacement of APB Opinion No. 20 and FASB Statement No. 3 (Statement No. 154.) Statement No. 154 changes the requirements for the accounting for and reporting of a change in accounting principle. Statement No. 154 requires retrospective application of any change in accounting principle to prior periods’ financial statements. Statement No. 154 is effective for the first fiscal period beginning after December 15, 2005. We do not expect the implementation of Statement No. 154 to have a significant impact on our consolidated financial statements.

8

TeleCommunication Systems, Inc.

Notes to Consolidated Financial Statements — (Continued)

2. Supplemental Disclosure of Cash Flow Information

      Property and equipment acquired under capital leases totaled $2,315 and $4,841 during the nine-months ended September 30, 2005 and 2004, respectively.

      Interest paid totaled $522 and $898 during the nine-months ended September 30, 2005 and 2004, respectively.

3. Segment Information

      In the fourth quarter of 2004, we realigned our segments to better manage the business subsequent to the Enterprise and Kivera acquisitions during 2004. Our two operating segments are (i) Commercial Applications, which consists of the previous Network Software and Service Bureau segments, along with the assets acquired in the 2004 acquisitions and (ii) Government, which consists of the previous Network Solutions segment.

      Management evaluates performance based on gross profit. We do not maintain information regarding segment assets. Accordingly, asset information by reportable segment is not presented.

      The following table sets forth results for our reportable segments for the three- and nine-months ended September 30, 2005 and 2004. All revenues reported below are from external customers. We have restated all prior period segment information for comparative purposes. A reconciliation of segment gross profit to net loss for the respective periods is also included below:

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

9

TeleCommunication Systems, Inc.

Notes to Consolidated Financial Statements — (Continued)

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

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

4. Inventory

      We maintain inventory of component parts and finished product for deployable communication systems and finished goods inventory of third party software, handheld computers, pagers, and wireless modems. Our inventory consists of:

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

10

TeleCommunication Systems, Inc.

Notes to Consolidated Financial Statements — (Continued)

5. Acquired Intangible Assets and Capitalized Software Development Costs

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

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

      The valuation of the intangible assets from the Enterprise Acquisition was finalized during the first quarter of 2005. As a result, we reclassified a gross amount of $495 to acquired intangible assets and $11 to software development costs from goodwill as of January 1, 2005. The cumulative impact on amortization expense relating to prior periods from the revision of these valuations was $218. This amount was recorded as additional amortization expense for the three-months ended March 31, 2005. We believe the final purchase price allocation accurately reflects the value of the intangible assets acquired.

      We evaluate our estimates of the recoverability and the fair value of all of our intangible assets whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be fully recoverable. We review these assets annually if no impairment indicators are present which would otherwise initiate a review. Management uses these estimates as the basis for evaluating the carrying values of the respective assets.

6. Concentrations of Credit Risk and Major Customers

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

      The following tables summarize revenue and accounts receivable concentrations from our significant customers:

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

11

TeleCommunication Systems, Inc.

Notes to Consolidated Financial Statements — (Continued)

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

7. Stock-Based Compensation and Deferred Compensation

      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 Statements of Operations. The following table illustrates the effect on net loss and loss per common share if we had applied the fair value recognition provisions of Financial Accounting Standards Board Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

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

      In calculating the fair value of our stock options granted during 2005 using the Black-Scholes model, we assumed an expected life of 5.5 years for options granted to employees and three years for options granted to non-employees, that the risk free interest rate was 4%, an expected volatility of 107%, and that there was no dividend yield. The assumptions used to value options granted in 2004 were the same as the 2005 assumptions with the exception of an expected volatility of 114%. Options issued prior to 2004 were valued using comparable assumptions as of the options’ grant date, with volatilities of 124% in 2003, 139% in 2002, and 164% in 2001. The risk free interest rate used in the computation ranged from 3% to 5.5% in 2004 through 2001.

8. Line of Credit

      On October 14, 2005, we entered into an agreement with our bank to amend our line of credit. Under the amended agreement, the availability of the line is extended to October 2008, and our borrowing availability is increased from $15,000 to $22,000. Borrowings at any time are limited based principally on accounts receivable levels and a

12

TeleCommunication Systems, Inc.

Notes to Consolidated Financial Statements — (Continued)

working capital ratio, each as defined in the amended line of credit agreement. Borrowings are also limited by the amount of letters of credit outstanding ($900 at September 30, 2005.) The amended line of credit is secured by substantially all the assets of the company and bears interest at prime plus 1.25% per annum, with a minimum prime rate of 4.25% per annum and a borrowing rate of 8.0% per annum at September 30, 2005. Our amended line of credit contains covenants requiring us to maintain at least $29.5 million of tangible net worth, as defined, and at least $5 million in cash 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, 2005, we had an outstanding balance of $8,000 under our existing line of credit and there was approximately $1,000 outstanding under the equipment loan, Taking into account the pro forma impact of the October 14, 2005 amendment discussed above, we had approximately $4,600 of unused availability under our amended line of credit and our tangible net worth, as defined, was $33,300 as of September 30, 2005. We are in compliance with all covenants to the amended agreement.

9. Subsequent Event

      On October 28, 2005 our Board of Directors adopted resolutions to accelerate the vesting of certain outstanding, unvested “out-of-the-money” stock options. The accelerated vesting provisions apply to all qualifying options with an exercise price of $6.00 or greater. As a result, options to purchase 1,455,000 shares of our stock became fully exercisable as of October 28, 2005.

      The primary purpose of the accelerated vesting was to eliminate future compensation expense the Company would otherwise recognize in its statement of operations with respect to these options upon the adoption of Statement No. 123(R), which we are required to adopt on January 1, 2006 as discussed in Note 1. Statement No. 123(R) will require that compensation expense associated with stock options be recognized in the statement of operations rather than as a pro forma footnote disclosure in our consolidated financial statements. The acceleration of the vesting of these options will eliminate the future non-cash stock compensation expense associated with these outstanding options. We estimate that the related future compensation expense to be recorded Statement No. 123(R) that is eliminated as a result of the acceleration of vesting these options is approximately $1.2 million.

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

      The following discussion and analysis of the financial condition and results of operations should be read in conjunction with the consolidated financial statements, related notes, and other detailed information included elsewhere in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 (this “Form 10-Q”). This Form 10-Q 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) that we expect to realize approximately $24 million of backlog in the balance of this year and $66 million of backlog in the next twelve months, (c) we believe our location-based software is positioned for early adoption by carriers, (d) we believe that capitalized software development costs will be recoverable from future gross profits, and (e) the information under “Item 3. Quantitative and Qualitative Disclosures About Market Risk” 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 sustain profitability, (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) expand our sales and business offerings in the wireless communications industry, (vi) develop software without any errors or defects, (vii) have sufficient capital resources to fund the company’s operations, (viii) protect our intellectual property rights, (ix) implement our sales and marketing strategy, and (x) successfully integrate the assets and personnel obtained in our acquisitions. These factors should not be considered exhaustive; we undertake no obligation to release publicly the results of any future revisions we may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. We caution you not to put undue reliance on these forward-looking statements.

Critical Accounting Policies and Estimates

      The information in this “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” discusses our unaudited consolidated financial statements, which have been prepared in accordance with GAAP for interim financial information. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to intangible assets, realizability of goodwill, capitalized software development, realization of accounts receivable, 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 have identified our most critical accounting policies to be those related to revenue recognition for our software contracts with multiple elements, revenue recognition for our contracts accounted for using the percentage-of-completion and proportional performance methods, revenue recognition for the operations of our 2004 acquisitions, accounts receivable reserves, software development costs, acquired intangible assets, goodwill impairment, stock compensation expense, and income taxes. We describe these accounting policies in relevant sections of this discussion and analysis. This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2004, as amended (the “2004 Form 10-K”.)

14

Overview

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

      Effective in the fourth quarter of 2004, we realigned our business across two market segments to reflect how the company now operates: (i) Commercial Applications and (ii) Government. The information in this section presents our historical information restated to conform with our current operating segments.

      This “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” provides information that our management believes to be necessary to achieve a clear understanding of our financial statements and results of operations. You should read this “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” together with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Exhibit 99.01 “Risk Factors Affecting Our Business and Financial Results” in our 2004 Form 10-K as well as the unaudited interim consolidated financial statements and the notes thereto located elsewhere in this Form 10-Q.

Indicators of Our Financial and Operating Performance

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

•  Revenue. We derive revenue from products and services including recurring monthly service and subscriber fees, software licenses and related service fees for the design, development, and deployment of software and communication systems, and products and services derived from the delivery of information processing and communication systems to governmental agencies.

•  Cost of revenue and gross profit. The major items comprising our cost of revenue are compensation and benefits, third-party hardware and software, amortization of software development costs, and overhead expenses. The costs of hardware and third-party software are primarily associated with the delivery of systems, and fluctuate from period to period as a result of the relative volume, mix of projects, level of service support required and the complexity of customized products and services delivered. Amortization of software development costs, including acquired technology, is primarily associated with the recognition of systems revenue from our Commercial Applications segment.

•  Operating expenses. Our operating expenses are primarily compensation and benefits, professional fees, facility costs, marketing and sales-related expenses, and travel costs as well as certain non-cash expenses such as non-cash stock compensation expense, depreciation and amortization of property and equipment, and amortization of acquired intangible assets.

•  Liquidity and cash flows. The primary driver of our cash flows is the results of our operations. Important sources of our liquidity have been cash raised from our January 2004 and August 2004 financings in connection with our recent acquisitions (as described below under “Liquidity and Capital Resources”), and borrowings under our bank credit agreement and lease financings secured for the purchase of equipment.

•  Balance sheet. We view cash, working capital, tangible net worth (as defined in our amended credit agreement), and accounts receivable balances and days revenues outstanding as important indicators of our financial health.

      SwiftLink® and Xypoint® 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.

15

Results of Operations

Revenue and Cost of Revenue

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

      Total revenue in the third quarter of 2005 was $34.5 million, compared to $38.0 million in the third quarter of 2004, and total gross profit was $12.8 million for the 2005 quarter compared to $13.1 million in the third quarter of 2004. Lower revenue was primarily due to lower SwiftLink® systems sales to our government customers. Further details are set forth in the segment discussions below. The increase in gross profit is due to a more favorable revenue mix, with a lower proportion of our revenues generated by lower margin enterprise subscriber service.

      Total revenue for the nine-months ended September 30, 2005 was $95.7 million compared to $111.2 million in the comparable period of 2004, and total gross profit for the nine-months ended September 30, 2005 was $39.3 million for 2005 compared to $43.2 million in 2004. The decrease in revenue for the nine-months ended September 30, 2005 was mainly due to lower SwiftLink® sales. Further details are set forth in the segment discussions below. Gross profit for the nine-months ended September 30, 2005 in 2005 declined due to the lower revenue, but gross profit as a percentage of revenue improved from 39% to 41% due to the favorable changes in the revenue mix discussed above. The large license capacity sale included in the second quarter of 2004 also contributed in the decrease in gross profit for 2005, as license capacity tends to yield a large gross profit.

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      The following discussion addresses the revenue, direct cost of revenue, and gross profit for our two business segments:

Commercial Applications Segment:

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

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

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

      Fluctuations in each of the components of hosted, subscriber, and maintenance revenue are separately addressed below.

      Hosted offerings are mainly our wireless and Voice over IP (VOIP) E9-1-1 service and hosted Location Based Services (HLBS), for which revenue primarily consists of monthly recurring service fees that are recognized in the month earned. E9-1-1 and HLBS service fees are priced based on units served during the period, such as the number of customer subscribers or cell sites. Revenue from our hosted offerings increased for both the three- and nine-months ended September 30, 2005 primarily due to new Voice over IP E9-1-1 business. This increase was partly offset by decreases in the average unit prices realized from some cellular E9-1-1 customers.

      Subscriber revenue includes subscriptions to services for network access, real-time market data information accessed via wireless devices, and our client software applications such as Rand McNally Traffic^tm and Friend Finder. Enterprise subscriber revenues were approximately 45% lower in the three months ended September 30, 2005, and approximately 40% lower in the nine-months ended September 30, 2005 than in the comparable periods of 2004, primarily because of declining enterprise subscriber customers’ use of the data-only Mobitex network. Most subscriber costs are variable with revenue so that gross profit as a percentage of revenue from these businesses has been stable. We anticipated the shift to the new data networks such as CDMA wireless networks when we acquired these businesses, and after a number of delays we have begun to resell access to new networks. The decrease in enterprise subscriber revenue was partially offset by revenue from client software applications in 2005, including our Rand McNally Traffic application.

      Maintenance revenues on our systems and software licenses are collected in advance and recognized ratably over the maintenance period. Unrecognized maintenance fees are included in deferred revenue. Custom software

17

development, implementation and maintenance services may be provided under time and materials or fixed-fee contracts. The direct costs of maintenance revenue consist primarily of compensation and benefits. The maintenance fees increased to $2.0 million and $5.4 million for the three- and nine-months ended September 30, 2005, respectively, from $1.5 million and $4.3 million, respectively, in the comparable periods of 2004. Maintenance revenues are proportional to the cumulative installed base of our software licenses and systems, and the increase in 2005 is the result of an increase in the installed product base.

      The direct cost of our hosted, subscriber, and maintenance revenue consists primarily of network access, data feed and circuit costs, compensation and benefits, equipment and software maintenance. Some of the labor and circuit costs for our hosted E9-1-1 and carrier services network operations centers vary with the number of Public Service Answering Points (PSAPs) and cell sites to which we are connected, and during 2005 we have incurred increased facilities expenses to support our expanded and renovated principal network operations center. Data access and airtime costs for our subscriber customers declined proportionately to the decline in subscriber revenues. Partially offsetting the decreased data access and airtime costs, labor and contractor costs for hosted services increased during the third quarter of 2005 in connection with start-up work for VOIP E9-1-1 and greater overall volume of E9-1-1 business.

      Our gross profit from commercial hosted, subscriber, and maintenance revenues increased to $8.8 million in the third quarter of 2005 from $7.7 million in 2004’s third quarter, and gross profit was $25.8 million for the nine-months ended September 30, 2005 versus $23.6 million in the comparable period of 2004. Higher profit contributions from hosted services and maintenance more than offset lower profits from subscribers.

Commercial Services Revenue, Cost of Revenue, and Gross Profit

      We provide commercial engineering and consulting services for maintenance of geographic databases. Our services include compiling data from multiple sources, integrating and merging the data, and formatting it to be usable for our customers’ applications. We provide these engineering and consulting services under fixed fee contracts. We generate these revenues from the operations acquired in the Kivera Acquisition in September 2004, so that our Commercial services revenues were negligible for the nine-months ended September 30, 2004. The direct cost of our services revenue consists primarily of compensation, benefits, and data access fees.

      We generated $0.4 million of commercial services revenue and $0.2 million of gross profit from commercial services revenue in the third quarter of 2005 and $1.3 million of revenue and $0.7 million of gross profit for the nine-months ended September 30, 2005.

Commercial Systems Revenue, Cost of Revenue, and Gross Profit

      We sell systems for enhanced subscriber services to wireless carriers, and we sell asset tracking and mobile proof of delivery systems to enterprise customers. These systems are designed to incorporate our licensed software. We design our software to ensure that it is compliant with all applicable standards, notably including the GSM/ UMTS standards for location-based wireless services that are emerging in 2005. We are building our location-based software to comply with emerging standards, and as such, we believe our software is positioned for early adoption by carriers.

      Licensing fees for our carrier software are generally a function of its usage in our customer’s network. As a carrier’s subscriber base or usage increases, the carrier must purchase additional capacity under its license agreement and we receive additional revenue. Systems revenues typically contain multiple elements, which may include the product license, installation, integration, and hardware. The total arrangement fee is allocated among each element based on vendor-specific objective evidence of the relative fair value of each of the elements. Fair value is generally determined based on the price charged when the element is sold separately. In the absence of evidence of fair value of a delivered element, revenue is allocated first to the undelivered elements based on fair value and the residual revenue to the delivered elements. The software licenses are generally perpetual licenses for a specified number of users that allow for the purchase of annual maintenance at a specified rate. 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 the software; (3) the fee is fixed or determinable; and (4) collection of the fee is probable. Software projects that require significant customization are accounted for under the percentage-of-completion method. We measure progress to completion using costs incurred compared to estimated total costs or labor hours incurred compared to estimated total labor hours for contracts that have a significant component of third-party materials costs. We recognize estimated losses under long-term contracts in

18

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.

      Revenue from systems sales in our Commercial Applications segment decreased from $4.2 million for the three-months ended September 30, 2004 to $3.1 million for the comparable period of 2005. Revenue from systems sales decreased from $16.5 million for the nine-months ended September 30, 2004 to $11.5 million in the comparable period of 2005.

      The direct cost of our systems revenue consists primarily of compensation, benefits, purchased equipment, third-party software, travel expenses, and consulting fees as well as the amortization of both acquired and capitalized software development costs for all reported periods. The direct cost of our systems revenue contained approximately $0.2 million and $0.6 million of expense related to the amortization of software development costs for the three-and nine-months ended September 30, 2005, respectively, compared to $0.1 million and $0.4 million, respectively, for the comparable periods of 2004. Otherwise, the composition of direct cost of commercial systems revenue for the periods ended September 30, 2004 was comparable to the composition of direct costs discussed for 2005.

      Our commercial systems gross profit was $0.4 million in the third quarter of 2005 versus $1.1 million in the third quarter of 2004 and was $4.2 million for the nine-months ended September 30, 2005 versus $7.9 million in the comparable period of 2004. A larger proportion of high margin license sales in 2004 and the inclusion of a lower margin hardware sale in the third quarter of 2005 resulted in lower margins as a percentage of revenue for both the three-and nine- months ended September 30, 2005 than in the comparable periods of 2004.

      We ascribe the lower revenue and related gross profit in 2005 primarily to later than expected implementation of location-based service technology by wireless carriers, and longer than expected sales cycle times for enterprise proof-of-delivery systems.

Government Segment:

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

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

      Generally, we provide Government products and services under long-term contracts. We recognize contract revenue as billable costs are incurred and for fixed-price product delivery contracts using the percentage-of-completion method or proportional performance method, measured by either total labor hours or total costs incurred compared to total

19

estimated labor hours or costs. We recognize estimated losses on contracts in their entirety upon discovery. If we did not accurately estimate total labor hours or costs to complete a contract or do not manage our contracts within the planned budget, then future margins may be negatively affected or losses on existing contracts may need to be recognized. Under our contracts with the U.S. government, contract costs, including the allocated indirect expenses, are subject to audit and adjustment by the Defense Contract Audit Agency. We record revenue under these contracts at estimated net realizable amounts.

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

      In late 2004, we began offering basic and extended maintenance contracts on our systems. These maintenance fees are collected in advance and recognized ratably over the maintenance period. The direct costs of maintenance revenue consist primarily of compensation and benefits. These contracts yielded approximately $0.1 million of revenue and gross profit in the third quarter of 2005 and $0.2 million of revenue and gross profit for the nine-months ended September 30, 2005.

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

      Government services revenue primarily consists of communications engineering, program management, help desk outsource, network design and management for government agencies. Our Government segment also operates teleport facilities for data connectivity via satellite to and from North and South America, as well as Africa and Europe. Most such services are delivered under time and materials contracts. For fixed price service contracts, we recognize revenue using the proportional performance method. 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.

      Services revenues increased to $5.6 million for the three-months ended September 30, 2005 from $3.9 million for the comparable period of 2004, and for the nine-month periods, services revenues were $14.8 million in 2005 versus $10.8 million in 2004. These increases throughout 2005 were generated by new and expanded-scope contracts resulting from increased sales emphasis on these types of projects and cross-marketing of the network and management capabilities of our Commercial Applications segment to Government segment customers.

      Direct cost of government service revenue consists of compensation, benefits and travel incurred in delivering these services, and these costs increased as a result of the increased services volume in 2005.

      Our gross profit from government services increased to $1.8 million in the third quarter of 2005 from $1.2 million in the comparable period of 2004. Similarly, gross profit increased to $5.4 million for the nine-months ended September 30, 2005 from $4.0 million in the comparable period of 2004, due to higher revenue volume. Gross profit as a percentage of revenue remained about the same in 2005 and 2004 for both the three- and nine-months periods ended September 30.

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

      We generate systems revenue from the design, development, assembly and deployment of information processing and communication systems, primarily deployable communications systems, and integration of those systems into customer networks. Our principal government systems sales are of our SwiftLink® product line, which are lightweight, secure, deployable communications systems, to units of the U.S. Departments of State, Justice, and Defense and other agencies. We recognize contract revenue as billable costs are incurred and for fixed-price product delivery 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. Labor hours are used as a measure of progress for projects that contain a significant amount of third party materials 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. Systems sales in our Government segment decreased from $9.7 million for the three-months ended September 30, 2004 to $6.3 million in the comparable period of 2005. Systems revenue decreased from $21.5 million for the nine-months ended September 30, 2004 to $11.6 million in the comparable period of 2005. The fluctuation in systems revenues between periods is primarily due to decreased unit sales of our SwiftLink® and

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deployable communications systems throughout 2005 compared to the same period of 2004. We believe that government procurement patterns for our systems have been affected by the shift from greater mission-leader flexibility during the acute wartime environment of 2002 and 2003 to the more budget-conscious environment in 2005 to date. Our technology remains the de facto standard for the US special operations community and the pipeline for the fourth quarter represents the largest backlog at any time during 2005.

      The cost of our government systems revenue consists of compensation, benefits, travel, satellite “space segment” and airtime, and costs related to purchased equipment components, and the costs of third-party contractors that we engage. These equipment and third-party costs are variable for our various types of products, and margins may fluctuate between periods based on the respective product mixes.

      Our government systems gross profit declined to $1.5 million in the third quarter of 2005 from $3.0 million in the comparable period of 2004, and gross profit for the nine-months ended September 30, 2005 declined to $3.0 million from $7.7 million for the comparable period of 2004, mainly as a result of lower systems sales volume.

Major Customers

      For both the three- and nine-months ended September 30, 2005, customers that accounted for 10% or more of total revenue were Verizon Wireless and various U.S. Government agencies. The loss of either of these customers would have a material adverse impact on our business. The same two customers also accounted for 10% or more of total revenue for the comparable periods of 2004. Verizon Wireless is a customer of our Commercial Applications segment, and the various U.S. government agencies are customers of our Government segment.

Revenue Backlog

      As of September 30, 2005, we had unfilled orders, or backlog, of approximately $132 million, of which $82 million related to our Commercial Applications segment and $50 million related to our Government segment. We expect to realize approximately $24 million of this backlog in the balance of this year and $66 million of this backlog in the next twelve months, up from $57 million within 12 months at June 30, 2005. The remaining backlog primarily represents the balance of multi- year contracts for our service bureau and government customers. Total company backlog at September 30, 2004 was $87 million.

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

Operating Expenses

Research and development expense:

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

      Our research and development expense consists of compensation, benefits, travel costs, and a proportionate share of facilities and corporate overhead. The costs of developing software products are expensed prior to establishing technological feasibility. Technological feasibility is established for our software products when a detailed program design is completed. We incur research and development costs to enhance existing packaged software products as well as to create new software products including software hosted in our network operations center. These costs primarily include compensation and benefits as well as costs associated with using third-party laboratory and testing resources. We expense such costs as they are incurred unless technological feasibility has been reached and we believe that the capitalized costs will be recoverable.

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      The expenses we incurred relate to software applications which are being marketed to new and existing customers on a global basis. Throughout the nine-months ended September 30, 3005 and 2004, respectively, research and development was primarily focused on cellular and hosted location-based applications, blending the technology of our existing products while incorporating aspects from our 2004 acquisitions, and enhancing client deliverables.

      For the three- and nine-months ended September 30, 2005, we capitalized $1.1 million and $2.3 million, respectively, of software development costs for certain software projects in accordance with the above policy. The capitalized costs relate to our location-based software, our mobile asset management software, our Voice over IP E9-1-1 service, and our international financial market data. These costs will be amortized 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 (the revenue curve method). 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.

      We believe that these capitalized costs will be recoverable from future gross profits generated by these products. Prior to the second quarter of 2005, our estimates did not sufficiently demonstrate future realizability of our software development costs expended on such products; and accordingly, all such costs were expensed as incurred.

Sales and marketing expense:

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

      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 products and services to the U.S. Government primarily through direct sales professionals. Sales and marketing costs increased through the third quarter of 2005 compared to 2004, primarily as a result of adding additional Government segment sales personnel at the end of 2004, and increased public relations fees in 2005.

General and administrative expense:

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

      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, benefits, professional fees, travel, and a proportionate share of rent, utilities and other facilities costs which are expensed as incurred. The decrease in the third quarter of 2005 was due to the timing of indirect expenses, while the slight increase in year-to-date expenses is due to increased professional fees in the first and second quarters of 2005.

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Non-cash stock compensation expense:

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

      Non-cash stock compensation expense is comprised of expenses related to incentive stock options granted to employees and directors prior to our initial public offering and expense related to restricted stock granted to directors and certain key executives in 2003 and 2005. Net loss for the three-months ended September 30, 2005 is comprised of $0.2 million of non-cash stock compensation expense related to the restricted stock grants. Net loss for the three- months ended September 30, 2004 includes $0.1 million of non-cash stock compensation expense related to the options granted prior to our initial public offering and $0.1 million of non-cash stock compensation expense related to the restricted stock grants. Net loss for the nine-months ended September 30, 2005 and 2004 includes $0.1 million and $0.5 million, respectively, of non-cash stock compensation expense related to the options granted prior to our initial public offering and $0.5 million and $0.5 million, respectively, of non-cash stock compensation expense related to the restricted stock grants. 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 unaudited Consolidated Statement of Operations presented elsewhere herein.

      As a result of a recent change in the relevant accounting standards, effective January 1, 2006, we will begin to recognize expense for all stock options granted to employees, including those issued at an exercise price equal to the fair market value of our Class A Common Stock on the date of grant. We do not currently recognize expense for such options in our Consolidated Statement of Operations. As described in Note 1 to our unaudited Consolidated Financial Statements presented as Part I in this Quarterly Report on Form 10-Q, had we adopted the revised standard prior to September 30, 2005, the impact would have been as described in the disclosure of pro forma net loss and loss per share in Note 7 to those unaudited Consolidated Financial Statements.

      As described in Note 9 to our unaudited Consolidated Financial Statements, our Board of Directors adopted resolutions to accelerate the vesting of certain outstanding, unvested “out-of-the-money” stock options. The accelerated vesting provisions apply to all options with an exercise price of $6.00 or greater. As a result, options to purchase 1,455,000 shares of our stock became fully exercisable as of October 28, 2005.

      The primary purpose of the accelerated vesting was to eliminate future compensation expense the Company would otherwise recognize in its statement of operations with respect to these options upon the adoption of Statement No. 123(R), which we are required to adopt on January 1, 2006. Statement No. 123(R) will require that compensation expense associated with stock options be recognized in the statement of operations rather than as a pro forma footnote disclosure in our consolidated financial statements. The acceleration of the vesting of these options will eliminate the future non-cash stock compensation expense associated with these outstanding options. We estimate that the related future compensation expense to be recorded under Statement No. 123(R) that is eliminated as a result of the acceleration of vesting these options is approximately $1.2 million.

Depreciation and amortization of property and equipment:

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

      Depreciation and amortization of property and equipment represents the period costs associated with our investment in computers, telephone 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. The estimated useful life of an asset generally ranges from 5 years for furniture, fixtures, and leasehold improvements to 3 years for most other types of assets including computers, software, telephone equipment and vehicles. Expense

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generally increases year-over-year as a result of the level of capital expenditures made during the year to support our operations and development efforts. Our depreciable asset base increased significantly throughout 2004 and into 2005 as a result of several major capital projects, including enhancements to and the consolidation of facilities for our network operations center for our Commercial Applications segment, the property and equipment acquired in our two acquisitions during the year, and a company-wide computer hardware upgrade.

Amortization of acquired intangible assets:

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

      The acquired intangible assets associated with the Enterprise and Kivera acquisitions are being amortized over their useful lives of between three and five years using the greater of the straight-line method or the revenue curve method. Amortization of acquired intangible assets increased through the third quarter of 2005 due to the inclusion of amortization expense for the intangible assets acquired in the Kivera acquisition.

      The increase in the amortization expense for the nine-months ended September 30, 2005 is also the result of the finalization of the purchase price allocation for the Enterprise Acquisition during the first quarter of 2005. As a result of the finalization, we reclassified a gross amount of approximately $0.5 million to acquired intangible assets and software development costs from goodwill as of January 1, 2005. We believe the final purchase price allocation accurately reflects the value of the intangible assets acquired. The cumulative impact on amortization expense relating to prior periods from the revision of these valuations was $0.2 million, which was recorded as additional amortization expense in the first quarter of 2005.

Interest expense:

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

      Interest expense is incurred under notes payable, an 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% per annum while the equipment loan is at 5.5% per annum and any line of credit borrowing is at variable rates equal to 8% per annum as of September 30, 2005. As described in Note 8 to our unaudited Consolidated Financial Statements presented as Part I in this Quarterly Report on Form 10-Q, as of October 14, 2005 we had reached an agreement to amend and extend our line of credit. The amended line of credit expires in September 2008, our maximum line of credit increases from $15 million to $22 million, subject to borrowing base limitations, and the interest rate charged increases from prime plus 1% to prime plus 1.25% on drawings under the line. Our amended line of credit also contains certain modifications to the covenants for the line, which are detailed below in Liquidity and Capital Resources.

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      Our capital lease obligations include interest at various amounts depending on the lease arrangement. We entered into several new leases during the second half of 2004 and the first half of 2005, and therefore our interest under capital leases is slightly higher in 2005 than in 2004. Conversely, interest under the terms of our notes payable are primarily at stated interest rates of 7.75% per annum and our borrowings under the terms of our outstanding notes payable have decreased since 2004, and accordingly the interest expense under these notes has consistently decreased during that time period.

      In January 2004, we issued a convertible subordinated debenture with a face value of $15 million (the “Debenture”) to fund a portion of the Enterprise Acquisition. Debt discount relates to the amount of discount computed as part of the financing for the Debenture. Such discount was recorded as a reduction of debt and amortized over the life of the convertible subordinated debenture, which was converted prior to December 31, 2004.

      Deferred financing fees relate to the up-front payment of fees to secure our notes payable and our revolving line of credit facility. The amortization of the deferred financing fees for the three- and nine-months ended September 30, 2004 also includes deferred financing fees paid to secure the Debenture. The remaining deferred financing fees for the Debenture were recorded ratably to expense as the Debenture was converted prior to December 31, 2004, and are therefore not included in expense for 2005. All other deferred financing fees are being amortized over the term of the note or, in the case of the amended line of credit, the life of the facility, which now expires in September 2008. Prior to amending the line of credit in October 2005, we had not incurred any deferred financing fees since entering the Debenture in January 2004, and we will begin amortizing the deferred financing fees related to amending the line of credit in October 2005.

      Overall, our interest expense decreased for both the three- and nine-months ended September 30, 2005 compared to the comparable periods of 2004 primarily as a result of the conversion of the Debenture in 2004. As a result of the conversion, we did not recognize any interest on $15 million face value of the Debenture, amortization of the related deferred financing fees, or amortization of debt discount in 2005.

Other income/(expense), net:

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

      Other income/(expense), net 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. The changes in other income/(expense), net are primarily attributable to changes in the foreign currency translation/transaction gain or loss recorded for the period. The other components of other income/(expense), net typically remain comparable between periods, with the exception that no income related to the State of Maryland loan-to-grant is included for the periods ended September 30, 2005 since the entire loan had been forgiven prior to 2005.

Income taxes:

      Because we have generated significant net operating losses since 1999, no provision for federal or state income taxes has been made for the three- or nine-months ended September 30, 2005 or any portion of 2004. We have recorded a full valuation allowance for deferred tax assets as a result of the uncertainty regarding our ability to fully realize our net operating loss carry-forwards and other deferred tax assets.

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Net loss:

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

      Net loss decreased for the three-months ended September 30, 2005 compared to the comparable period of 2004 due primarily to the capitalization of certain research and development expenses deemed realizable during 2005, increased gross profit from our revenue sources, and other factors discussed above. Net loss increased for the nine- months ended September 30, 2005 compared to the comparable period of 2004 due primarily to decreased gross profit from our revenue sources and the other factors discussed above, partially offset by the capitalization of certain research and development expenses deemed realizable during 2005.

Liquidity and Capital Resources

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

      We have funded our operations, acquisitions, and capital expenditures primarily using revenue from our operations as well as the net proceeds from our January 2004 private placement of convertible subordinated debentures and common stock (described below), which generated net proceeds of approximately $19.9 million, our August 2004 placement of our common stock (described below), which generated net proceeds of approximately $8.4 million, leasing, and long-term debt.

      On October 14, 2005, we entered into an agreement with our bank to amend our line of credit. Under the amended agreement, the availability of the line is extended to October 2008, and our borrowing availability is increased from $15 million to $22 million. Borrowings at any time are limited based principally on accounts receivable and inventory levels and a working capital ratio, each as defined in the amended line of credit agreement. Borrowings are also limited by the amount of letters of credit outstanding ($0.9 million at September 30, 2005.) The amended line of

26

credit is secured by substantially all assets of the company, and bears interest at prime plus 1.25% per annum, with a minimum prime rate of 4.25% per annum and a borrowing rate of 8.0% per annum at September 30, 2005. Our amended line of credit contains covenants requiring us to maintain at least $29.5 million of tangible net worth, as defined, and at least $5 million in cash 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.

      In 2003 we borrowed $2.5 million under the terms of an equipment loan secured by purchased equipment for a term of three years. As of September 30, 2005, approximately $1.0 million was outstanding under the equipment loan, which bears interest at 5.5% per annum and is payable monthly through December 2006 and there was $8.0 million outstanding under our existing line of credit. Taking into account the pro forma impact of the October 14, 2005 amendment discussed above, we had approximately $4.6 million of unused availability under our line of credit and our tangible net worth, as defined, was $33.3 million as of September 30, 2005.

      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, however there can be no assurance in that regard. We have borrowing capacity available to us in the form of capital leases as well as our bank line of credit arrangement, which was amended on October 14, 2005 as discussed above. Management is evaluating term debt opportunities, and we may also consider raising equity capital. Although we may need to access the capital markets or establish new credit facilities in order to meet our capital and liquidity requirements, we can offer no assurances that we will be able to do so on terms acceptable to us or at all. In the absence of additional capital, and if we do not meet the levels of revenues and gross profits necessary for us to generate a level of cash that we consider adequate, we may need to reduce our research and development or other expenses to meet our cash flow needs over the next year.

      Operating cash flows improved in the first nine months of 2005 primarily as a result of increased cash provided by lower working capital needs, partially offset by lower earnings. Favorable changes in accounts receivable, inventory, accounts payable and accrued expenses, and deferred revenue were partially offset by the unfavorable changes in unbilled receivables, other current assets and accrued payroll.

      Net cash used in investing activities was unusually high in the first nine months of 2004 as a result of the Enterprise Acquisition (described below) and the Kivera Acquisition accounting for a total of $24.5 million, and we spent approximately $5.3 million for capital expenditures during that period. For 2005, significant uses of cash for investing activities were $3.4 million for capital expenditures, $2.3 million for capitalized software development costs, and $1.3 million for increased other long-term assets, principally deposits with our vendors for purchases with long lead-times.

      Net cash provided by financing activities was also unusually high during the first nine months of 2004 as a result of our January and August 2004 financings for the aforementioned acquisitions. These provided net proceeds of approximately $28.3 million. We also received $2.5 million in proceeds from the issuance of notes payable and $5.0 million from a net draw on our revolving line of credit in 2004, which was partially offset by $6.4 million of payments on our notes payable and capital leases. To date in 2005, we have made payments of approximately $7.5 million on our existing borrowings and have made a net draw of $3.0 million on our line of credit.

      On January 13, 2004, we purchased the Enterprise Division of Aether Systems, Inc. Consideration for the acquisition was valued at approximately $22.3 million, consisting of $18.2 million in cash, $1.0 million in the form of a note payable, approximately $2.1 million of direct costs incurred, 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 due in lump sum on January 13, 2009 in cash or shares of our Class A Common Stock, approximately 1.4 million newly issued shares of our Class A Common Stock and warrants to purchase 341,072 shares of our Class A Common Stock at a strike price of $6.50 per share, expiring in January 2007. The majority of the proceeds from this financing transaction were used to fund the purchase of the acquired assets.

      On September 20, 2004, we acquired substantially all of the assets of Kivera, Inc., for approximately $5.5 million in cash. To fund the Kivera acquisition, on August 30, 2004 we entered a Securities Purchase Agreement with the same

27

third party investors who purchased our securities used to finance the Enterprise Acquisition. Pursuant to this agreement, we raised $10.0 million in cash through the sale of 2,500,000 shares of our Class A Common Stock. Combined proceeds from both the January and August financings, after financing fees, were approximately $28.2 million.

      As of the same date, we entered into a Waiver Agreement with the holder of the Debenture. The Waiver modified certain provisions of the Debenture as follows: (1) the holder of the Debenture was 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 as an inducement to enter into the Waiver (an adjustment such that conversion of the Debenture yielded an additional 200,000 shares of Class A Common Stock). As additional consideration, we paid the holder of the Debenture a $1 million one-time fee in cash. As a result, the entire face amount of the Debenture had been converted into shares of our Class A Common Stock as of December 31, 2004.

Off-Balance Sheet Arrangements

      As of September 30, 2005, we had standby letters of credit totaling approximately $0.9 million. The standby letters of credit are in support of processing credit card and electronic payments and an outstanding bid.

Contractual Commitments

      As of September 30, 2005, 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, 2005 our commitments consisted of the following:

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

Related Party Transactions

      None.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

      We have limited exposure to financial market risks, including changes in interest rates. As discussed above under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources,” we have a line of credit that was increased to $22 million as of October 14, 2005. Based on our borrowing activity, a hypothetical 100 basis point adverse movement (increase) in the prime rate for the three- and nine-months ended September 30, 2005 would not have had a significant impact on our consolidated financial position, results of operations or cash flows.

      At September 30, 2005, we had cash and cash equivalents of $8.4 million. Cash and cash equivalents consisted of demand deposits and money market accounts that are interest rate sensitive. However, these investments have short maturities mitigating their sensitivity to interest rates. A hypothetical 100 basis point adverse movement (decrease) in interest rates would have increased our net loss for both the three- and nine-months ended September 30, 2005 by approximately $35,000, resulting in no significant impact on our consolidated financial position, results of operations or cash flows.

28

      There have not been any material changes to our interest rate risk as described in Item 7A of our 2004 Annual Report on Form 10-K.

Foreign Currency Risk

      For the three- and nine-months ended September 30, 2005, our foreign subsidiaries generated revenues of $1.2 million and $3.9 million, respectively. As of September 30, 2005, there were total assets of $4.0 million subject to foreign currency translation adjustments. The total average assets subject to exchange rate risk during the three- and nine-months ended September 30, 2005 was approximately $3.9 million and $4.3 million, respectively. A change in the relevant foreign currency exchange rates would not impact our net loss for the periods ended September 30, 2005, as the financial statements of these subsidiaries are prepared in the foreign currency and then revenues and expenses are translated to U.S. dollars at a common exchange rate. A 1% unfavorable change in exchange rates would have decreased our total assets by approximately $40,000 as of September 30, 2005, which would not have a significant impact on our Consolidated Financial Statements.

      For the three-and nine-months ended September 30, 2005, the majority of the revenues generated outside the U.S. by our domestic subsidiaries are denominated in U.S. dollars, and therefore a change in exchange rates would not have a material impact on our Consolidated Financial Statements. As of September 30, 2005, the accounts receivable and unbilled receivables for our domestic subsidiaries exposed to foreign currency exchange risk were not material. Transaction losses recorded for the three-months ended September 30, 2005 were not material, and we recorded $0.3 million on foreign currency transaction losses for the nine-months ended September 30, 2005.

      There have not been any material changes to our foreign currency risk as described in Item 7A of our 2004 Annual Report on Form 10-K.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

      As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

      In closing the third quarter of 2005, the Company became aware of issues with its documentation and procedures regarding revenue recognition of contracts with multiple element arrangements. Accordingly, we are implementing improvements that we expect will be effective prior to December 31, 2005. The Company believes that its quarterly financial statements presented herein are fairly stated. There were no other changes in internal control over financial reporting during the quarter ended September 30, 2005 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

29

PART II. — OTHER INFORMATION

Item 1. Legal Proceedings

      We are not currently subject to any material legal proceedings other than as previously disclosed in “Item 3. Legal Proceedings” in our 2004 Annual Report on Form 10-K.

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

      None.

Item 3. Defaults Upon Senior Securities

      None.

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

      None.

Item 5. Other Information

      (a) On October 14, 2005, we entered into an agreement with our bank to amend and restate our line of credit. Under the amended agreement, the availability of the line is extended to October 2008, and our borrowing availability is increased from $15 million to $22 million. Borrowings at any time are limited based principally on accounts receivable levels and a working capital ratio, each as defined in the amended line of credit agreement. Borrowings are also limited by the amount of letters of credit outstanding ($0.9 million at September 30, 2005). The amended line of credit is secured by accounts receivable and inventory and bears interest at prime plus 1.25% per annum, with a minimum prime rate of 4.25% per annum and a borrowing rate of 8.0% per annum at September 30, 2005. Our amended and restated line of credit contains customary terms and conditions along with covenants requiring us to maintain at least $29.5 million of tangible net worth, as defined, and at least $5 million in cash 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 certain indebtedness), guarantee debt, distribute dividends, and repurchase our stock. We are in compliance with all covenants to the amended agreement. The Credit Agreement is attached as Exhibit 10.46 to this Quarterly Report on Form 10-Q.

      (b) None.

Item 6. Exhibits

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

30

SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on the 8th day of November 2005.

TELECOMMUNICATION SYSTEMS, INC.

By:  /s/ Maurice B. Tosé

Maurice B. Tosé

Chairman, President and Chief Executive

Officer

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

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

31 EX-10.46 2 w14226exv10w46.htm EX-10.46

Exhibit 10.46

Silicon Valley Bank

Second 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:	October 14, 2005

     THIS SECOND 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 8020 Towers Crescent Drive, Suite 475, Vienna, Virginia 22182 and 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

     A. Silicon and Borrower have entered into that certain Amended and Restated Loan and Security Agreement dated July 24, 2003 (together with all modifications thereto, extensions or renewals thereof and substitutions therefore being hereinafter referred to as, the “Original Loan Agreement”), pursuant to which, Silicon agreed to make certain loans including, the Revolving Facility and the Equipment Loan described therein, and other financial accommodations to Borrower.

     B. Borrower has requested and Silicon has agreed pursuant to this Agreement to (i) increase the maximum principal amount of the Revolving Facility from Twelve Million Five Hundred Thousand Dollars ($12,500,000) to Twenty-Two Million Dollars ($22,000,000) (ii) add the Equipment Loan Sublimit (defined herein) in the maximum principal amount of Five Million Dollars ($5,000,000), (iii) increase the maximum availability under the Cash Management Sublimit from One Million Two Hundred Thousand Dollars ($1,200,000) to One Million Five Hundred Thousand Dollars ($1,500,000), and (iv) amend and restate the Original Loan Agreement in its entirety.

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  Silicon Valley Bank Second Amended and Restated Loan and Security 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”), and as part of the Revolving Loan, issue Letters of Credit, enter into FX Forward Contracts, make available the Equipment Loan Sublimit 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 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.

     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, including, without limitation, a change in the Maximum Credit Limit as a result of a change in the Adjusted Quick Ratio, the total of all outstanding Loans and all other monetary Obligations, including, without limitation, Exim Loans, Supplemental Equipment Loans, FX Forward Contracts, 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

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  Silicon Valley Bank Second Amended and Restated Loan and Security Agreement     

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.

     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 Two Million Five Hundred Thousand Dollars ($2,500,000) of the Loans (the “Cash Management Services Sublimit”) for Lender’s cash management services, which may include merchant services of up to $500,000, 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

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  Silicon Valley Bank Second Amended and Restated Loan and Security Agreement     

(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 Loan. Borrower acknowledges and agrees that as of the date hereof, the outstanding principal balance on the Equipment Loan is $972,222.32 and that such sum is due and payable without offset or defense of any kind whatsoever. No further sums may be advanced under the Equipment Loan. Prior to the occurrence of an Event of Default, the Equipment Loan is not part of the Maximum Credit Limit. From and after the occurrence of an Event of Default, the Equipment Loans shall be included in the Maximum Credit Limit.

     1.11 Supplemental Equipment Loans Sublimit. At the request of Borrower, as part of Loans, Silicon will make equipment loans to Borrower (the “Supplemental Equipment Loans”), in amounts determined by Silicon in its good faith business judgment, up to the amount shown on the Schedule, provided no Default or Event of Default has occurred and is continuing. The Supplemental 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 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:

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  Silicon Valley Bank Second Amended and Restated Loan and Security Agreement     

     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 State of Maryland. 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 Perfection Certificate 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 Perfection Certificate. 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 Perfection Certificate, 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 Perfection Certificate 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

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  Silicon Valley Bank Second Amended and Restated Loan and Security Agreement     

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 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.

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  Silicon Valley Bank Second Amended and Restated Loan and Security Agreement     

     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 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

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  Silicon Valley Bank Second Amended and Restated Loan and Security Agreement     

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, provided, however, during any Streamline Period all proceeds of Collateral may be deposited by Borrower into its operating account.

     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

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  Silicon Valley Bank Second Amended and Restated Loan and Security Agreement     

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 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

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  Silicon Valley Bank Second Amended and Restated Loan and Security Agreement     

$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, 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, other than (a) Borrower’s Indebtedness to Silicon under this Agreement or any other Loan Document; (b) Indebtedness existing on the Closing Date and disclosed in writing to Silicon; (c) Subordinated Debt; (d) Indebtedness to trade creditors incurred in the ordinary course of business; and (f) Indebtedness secured by Permitted Liens; (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

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  Silicon Valley Bank Second Amended and Restated Loan and Security Agreement     

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 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

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  Silicon Valley Bank Second Amended and Restated Loan and Security Agreement     

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

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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.

     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

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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, 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

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  Silicon Valley Bank Second Amended and Restated Loan and Security Agreement     

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 Second 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.

     “Contingent Obligation” is, for any Person, any direct or indirect liability, contingent or not, of that Person for (i) any indebtedness, lease, dividend, letter of credit or other obligation of another such as an obligation directly or indirectly guaranteed, endorsed, co-made, discounted or sold with recourse by that Person, or for which that Person is directly or indirectly liable; (ii) any obligations for undrawn letters of credit for the account of that Person; and (iii) all obligations from any interest rate, currency or commodity swap agreement, interest rate cap or collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; but “Contingent Obligation” does not include endorsements in the ordinary course of business. The amount of a Contingent Obligation is the stated or determined amount of the primary obligation for which the Contingent Obligation is made or, if not determinable, the maximum reasonably anticipated liability for it determined by the Person in good faith; but the amount may not exceed the maximum of the obligations under the guarantee or other support arrangement.

     “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.

     “EBITDA” is for any period of determination thereof, net income before interest, taxes, depreciation, amortization expense and non-cash compensation expense, all as determined in accordance with GAAP.

     “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

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  Silicon Valley Bank Second Amended and Restated Loan and Security Agreement     

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), and (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 fifty percent (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.

     “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.

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  Silicon Valley Bank Second Amended and Restated Loan and Security Agreement     

     “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).

     “Indebtedness” is (a) indebtedness for borrowed money or the deferred price of property or services, such as reimbursement and other obligations for surety bonds and letters of credit, (b) obligations evidenced by notes, bonds, debentures or similar instruments, (c) capital lease obligations and (d) Contingent Obligations.

     “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

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  Silicon Valley Bank Second Amended and Restated Loan and Security Agreement     

     “Loan Documents” means, collectively, this Agreement, the Perfection Certificate, 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.

     “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.

     “Maximum Credit Limit” means $15,000,000 at all times that Borrower’s Adjusted Quick Ratio is less than 1.25 to 1.00 as determined by Silicon based on the quarterly financial statements provided to Silicon pursuant to Section 8 of the Schedule, and $22,000,000 at all other times.

     “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 Perfection Certificate), “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.

     “Perfection Certificate” means the written representations and warranties provided by Borrower to Silicon in the Perfection Certificate referred to in the Schedule.

     “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, which consent may be withheld in its good faith business judgment, including, without limitation, liens on Borrower’s Accounts issued permitted pursuant to the terms of a Subordination Agreement; (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 a subordination

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  Silicon Valley Bank Second Amended and Restated Loan and Security Agreement     

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.

     “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.

     “Streamline Period” means any period where: (A) no Default or Event of Default has occurred and is continuing; and (B) Borrower’s Adjusted Quick Ratio is greater than or equal to 1.75:1.00.

     “Subordinated Debt” is junior debt incurred by Borrower in an aggregate amount not to exceed $15,000,000, which is junior or subordinated to Borrower’s indebtedness owed to Silicon and which is reflected in a Subordination Agreement approved by Bank in writing.

     “Subordination Agreement” means a Subordination Agreement or similar agreement in a form and substance acceptable to Silicon.

     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.

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

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  Silicon Valley Bank Second Amended and Restated Loan and Security Agreement     

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

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  Silicon Valley Bank Second Amended and Restated Loan and Security Agreement     

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’ 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

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  Silicon Valley Bank Second Amended and Restated Loan and Security Agreement     

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 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;

-23-

  Silicon Valley Bank Second Amended and Restated Loan and Security Agreement     

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 Second Amended and Restated Loan and Security Agreement     

Borrower:		Silicon:
TELECOMMUNICATION SYSTEMS, INC.		SILICON VALLEY BANK
By	/s/ Thomas B. Brandt, Jr.	By	/s/ Peter Bendoris
	Title: Senior Vice President and CFO		Title: Relationship Manager
	Name: Thomas B. Brandt, Jr.		Name: Peter Bendoris

-25-

Silicon Valley Bank

Schedule to

Second Amended and Restated Loan and Security Agreement

Borrower:	TELECOMMUNICATION SYSTEMS, INC.
Address:	275 West Street, Suite 400
	Annapolis, Maryland 21401
Date:	October 14, 2005

This Schedule forms an integral part of the Second 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) the Maximum Credit Limit, less the amount of any outstanding Letters of Credit, FX Forward Contracts, FX Reserves, Exim Loans, Supplemental Equipment Loans and the Cash Management Sublimit (the “Sublimit Outstandings”); or (ii) the sum of (a) eighty percent (80%) (the “Advance Rate”) of the amount of Borrower’s Eligible Receivables, plus (b) thirty percent (30%) of raw materials and finished goods inventory from Mobile Office and Mobile Finance, each a division of Enterprise Mobile Systems, (the “Eligible Inventory”), provided, however, that the maximum amount of Loans made against Eligible Inventory cannot at any time exceed the lesser of (yy) forty percent (40%) of Loans outstanding (including the face amount of issued Letters of Credit) or (zz) Five Hundred Thousand Dollars ($500,000), less the amount of Sublimit Outstandings.
	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

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  Silicon Valley Bank Second Amended and Restated Loan and Security Agreement     

	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).
Foreign Exchange
Sublimit
(Section 1.7)	Seven Hundred Fifty Thousand Dollars ($750,000)
Cash Management
Sublimit
(Section 1.8)	Two Million Five Hundred Thousand Dollars ($2,500,000)
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).
Supplemental Equipment
Loan Sublimit
(Section 1.11):	Five Million Dollars ($5,000,000).
2. INTEREST.
Interest Rate (Section 1.2):
	Except as set forth below, all Revolving Loans shall bear interest at a rate equal to the “Prime Rate” in effect from time to time per annum plus one and one quarter of one percent (1.25%) per annum.
	If in any two (2) consecutive quarterly periods Borrower meets its EBITDA forecast, then so long as Borrower continues to meet such forecast, Revolving Loans shall immediately, as of the first (1st) day of the following quarter, bear interest at a rate equal to the Prime Rate in effect from time to time per annum plus one percent (1.0%); furthermore, if in any four (4) consecutive quarterly periods Borrower meets its EBITDA forecast, then so long as Borrower continues to meet such forecast, Revolving Loans shall immediately, as of the first (1st) day of the following quarter, bear interest at a rate equal to the Prime Rate in effect from time to time per annum plus three quarters of one percent (0.75%); provided, however, if

2

  Silicon Valley Bank Second Amended and Restated Loan and Security Agreement     

	either Borrower fails to (i) deliver to Silicon a quarterly financial statement on a timely basis, or (ii) fails to meet its EBITDA forecast as of any quarter end, all Revolving Loans shall immediately, bear interest at a rate equal to the Prime Rate in effect from time to time per annum plus one and one quarter of one percent (1.25%) 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 (the “Equipment Loan Funding Date”), 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:	Three Hundred Thousand Dollars ($300,000), payable as follows:
	(a) One Hundred Seventy Five Thousand Dollars ($175,000) concurrently herewith; and
	(b) One Hundred Twenty Five Thousand Dollars ($125,000) shall be due and payable within five (5) Business Days of outstanding Obligations (including the face amount of all issued and outstanding Letters of Credit) exceeding Fifteen Million Dollars ($15,000,000).
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).
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

3

  Silicon Valley Bank Second Amended and Restated Loan and Security Agreement     

	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.
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 will continue to repay the outstanding balance of the Equipment Loan in equal monthly principal payments of principal and interest in accordance with Schedule 2 attached hereto. The provisions of this Agreement and the Loan Documents shall supersede all prior agreements with respect to the Equipment Loan.
5. REPAYMENT OF EQUIPMENT LOANS SUBLIMIT (Section 1.11):
	Borrower may request Supplemental Equipment Loans from the Closing Date through June 30, 2006 (the “Supplemental Equipment Availability End Date”), and Silicon will make Supplemental Equipment Loans not exceeding the Equipment Sublimit. To obtain an Supplemental Equipment Loan, Borrower will deliver to Silicon copies of invoices for the Equipment being financed, together with a UCC Financing Statement, if requested by Silicon, covering the Equipment described thereon, and such additional information as Bank may request at least five (5) Business Days before the proposed funding date. The Supplemental Equipment Loans may only be used to finance or refinance Equipment purchased three hundred sixty five (365) days before the date of each Supplemental 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 Supplemental Equipment Loan must be for a minimum of Two Hundred Thousand Dollars ($200,000).
	Interest accrues from the Funding Date of each Supplemental Equipment Loan at the rate in Section 1.2 and is payable monthly. Supplemental Equipment Loans are payable in thirty

4

  Silicon Valley Bank Second Amended and Restated Loan and Security Agreement     

	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 Supplemental Equipment Advance.
6. MATURITY DATE
(Section 6.1):
Loans	September 30, 2008
Exim Bank Loans
Equipment Loans	Unless sooner paid, all accrued and unpaid interest plus unpaid principal on the Equipment Loans shall be due and payable in full on December 31, 2006.
Supplemental Equipment      Loans	Thirty six (36) months from the date of each Supplemental Equipment Loan, provided, however, if the Maturity Date for the Loans is not extended, the then unpaid principal balance, together with all accrued and unpaid interest thereon, shall be due and payable in full on the Maturity Date for the Loans.
7. 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 Cash and Excess Availability:	Through October 15, 2005, 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).
Minimum Monthly Cash:	Borrower shall maintain unencumbered cash on deposit with Silicon of not less than Five Million Dollars ($5,000,000).
Minimum Tangible      Net Worth:	Borrower shall maintain a Tangible Net Worth of not less than Twenty-Nine Million Five Hundred Thousand Dollars ($29,500,000) at all times, plus (a) seventy-five percent (75%)

5

  Silicon Valley Bank Second Amended and Restated Loan and Security Agreement     

	of Borrower’s net income (without regard to any loss) adjusted quarterly beginning with the most recent quarter ended and plus (b) eighty-five percent (85%) of all subordinated debt and equity raised.
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:
	(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 (provided, however, that capitalized software costs shall be included as assets).
	(B) there shall be excluded from liabilities: all indebtedness which is subordinated to the Obligations under a Subordination Agreement.
	“Adjusted Quick Ratio” shall mean unrestricted cash (and equivalents) plus billed accounts receivable divided by Current Liabilities less the current portion of deferred revenue.
	“Current Liabilities” are the aggregate amount of Borrower’s Total Liabilities which mature within one (1) year.
	“Total Liabilities” is on any day, obligations that should, under GAAP, be classified as liabilities on Borrower’s consolidated balance sheet, and current portion Subordinated Debt allowed to be paid, but excluding all other Subordinated Debt.
8. 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

6

  Silicon Valley Bank Second Amended and Restated Loan and Security Agreement     

	upon each Loan request), provided, however, that the transaction reports and schedules of collections shall be provided monthly during any Streamline Period.
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 (15) days after the end of each month.
4.	During the Streamline Period, monthly reconciliations of accounts receivable agings (aged by invoice date), transaction reports, and general ledger, within fifteen (15) 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 (15) days after the end of each month.
6.	Monthly unaudited financial statements, as soon as available, and in any event within thirty (30) days after the end of each month.
7.	Monthly Compliance Certificates, within thirty (30) 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 (45) 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

7

  Silicon Valley Bank Second Amended and Restated Loan and Security Agreement     

			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 one hundred twenty (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.
9. BORROWER INFORMATION:
			Borrower represents and warrants that the information set forth in the Perfection Certificate of the Company dated October 14, 2005, previously submitted to Silicon (the “Perfection Certificate”) is true and correct as of the date hereof.
10. STREAMLINE PERIOD:
		Notwithstanding anything to the contrary set forth in this Agreement (including in Section 6 of this Schedule), during any Streamline Period:
		1. Reporting Requirements. Borrower shall provide Silicon with interim monthly financial statements, monthly agings of accounts receivables and accounts payables, transaction reports on Silicon’s standard form, including, sales, credit memos and collections journals within thirty (30) days after the end of each month.
		2. Notice Prior to Future Loans. Upon the earliest to occur of (a) the request by Borrower for a Loan after the date hereof, (b) the occurrence of a Default or Event of Default, (c) a breach of Borrower’s obligations under this Agreement, or (d) Borrower’s Quick Ratio is equal to or less than 1.75:1.00, the Streamline Period will automatically and without notice terminate and the standard terms and conditions as provided for in this Agreement will immediately take effect without any further action on the part of Silicon or Borrower.

8

  Silicon Valley Bank Second Amended and Restated Loan and Security Agreement     

11. 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 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 any addendums to the Intellectual Property Negative Pledge Agreement (the “IP Negative Pledge Agreement”) previously executed and delivered to Silicon.
	4.	Minimum Cash and Excess Availability. Silicon forbears Borrower’s compliances with the Minimum Cash and Excess Availability covenant set forth in Section 7 of the Schedule to the Original Loan Agreement through October 15, 2005.

9

EX-10.46

exv10w46

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Maurice B. Tosé, certify that:

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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	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
d)	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

e) The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

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.

/s/ Maurice B. Tosé                November 8, 2005

Maurice B. Tosé

Chairman, CEO and President

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Thomas M. Brandt, Jr, certify that:

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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	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
d)	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

e) The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

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.

/s/ Thomas M. Brandt, Jr.                November 8, 2005

Thomas M. Brandt, Jr.

Sr. Vice President & CFO

EX-32.1

EXHIBIT 32.1

Certification of Principal Executive Officer
Pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)

I, Maurice B. Tosé, President and Chief Executive Officer (principal executive officer) of TeleCommunication Systems, Inc. (the “Registrant”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

     (1) The Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2005 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Act of 1934 (15 U.S.C. 78m); and

     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Maurice B. Tosé

Maurice B. Tosé

Date: November 8, 2005

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

EXHIBIT 32.2

Certification of Principal Financial Officer
Pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)

I, Thomas M. Brandt, Jr., Chief Financial Officer (principal financial officer) of TeleCommunication Systems, Inc. (the “Registrant”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

     (1) The Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2005 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Act of 1934 (15 U.S.C. 78m); and

     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Thomas M. Brandt, Jr.

Thomas M. Brandt, Jr.

Date: November 8, 2005

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.