TELECOMMUNICATION SYSTEMS INC /FA/, 424B3, 2000-12-26

TELECOMMUNICATION SYSTEMS INC /FA/
424B3, 2000-12-26
RADIOTELEPHONE COMMUNICATIONS

Previous: AVISTAR COMMUNICATIONS CORP, PRER14C, 2000-12-26

Next: ANDA NETWORKS INC, RW, 2000-12-26

<PAGE> 1

Filed Pursuant to Rule 424(b)(3)
File Number 333-51656

PROSPECTUS OF PROXY STATEMENT OF
[TELECOMMUNICATION LOGO] [XYPOINT LOGO]
</TABLE>

December 22, 2000

Dear Shareholder of XYPOINT Corporation ("XYPOINT"):

Our board of directors has unanimously approved an agreement to merge our
company with TeleCommunication Systems, Inc. ("TCS"). TCS is a leading developer
of network applications that enable the delivery of Internet content, short
messages and enhanced data communication services to a wide variety of wireless
devices and the developer of custom software applications. Our shareholders,
option holders and warrant holders would receive a total of 4,300,000 of TCS
shares of TCS Class A Common Stock ("TCS Common Stock") in connection with the
merger, of which 400,000 shares would be held in escrow for one year to secure
indemnification claims TCS may have. The TCS Common Stock is listed on the
Nasdaq National Market under the symbol "TSYS." On December 20, 2000, the
closing price of the TCS Common Stock was $6.00 per share. Our board of
directors is excited about this opportunity and unanimously recommends that you
vote in favor of the merger and the other matters to be presented at the
meeting.

In order to complete the merger, you are asked to vote at a special meeting
of shareholders, to be held on January 15, 2001, beginning at 8:00 a.m. at the
DoubleTree Hotel, 300 112th Avenue SE, Bellevue, Washington 98004. At that
special meeting, our board of directors will ask you to approve: (a) the
agreement which provides that we will merge with and into a wholly-owned
subsidiary of TCS, (b) for the holders of XYPOINT Series A preferred stock and
Series X Junior preferred stock, the conversion of these shares into XYPOINT
common stock immediately prior to and conditioned upon the closing of the merger
and (c) certain matters in connection with stock options granted to key XYPOINT
employees. Only shareholders of record at the close of business on December 9,
2000 will be entitled to vote at the special meeting.

We cannot complete the merger unless our shareholders approve the merger.
Holders of outstanding shares of our preferred stock (other than our Series X
Junior preferred stock) are entitled to vote together as a separate class, on an
as-converted basis, to approve the merger. In addition, holders of all of our
outstanding shares of capital stock are entitled to vote as a class, on an
as-converted basis, to approve the merger. A failure to vote or return a proxy
will have the same effect as a vote against approval of the merger and the
merger agreement. The affirmative vote of a majority of both classes is required
to approve the merger. In addition, the vote of a majority of the outstanding
Series X Junior preferred stock is required for the Series X Junior preferred
stock to convert, and the vote of at least two-thirds of the outstanding Series
A preferred stock is required for the Series A preferred stock to convert. In
addition, completion of the merger is conditioned upon the approval of the
acceleration of the vesting of the unvested portions of stock option grants to
certain key employees of XYPOINT so as to avoid "parachute payment" treatment
under Section 280G of the Internal Revenue Code of 1986, as amended.
Accordingly, we ask that you send back the enclosed proxy card.

Shareholders representing 51.0% of our outstanding Series A, B, C, D and E
preferred stock and 54.02% of all of our outstanding capital stock (on an
as-converted basis) have previously entered into voting agreements with TCS
whereby they have agreed to vote all their equity securities "FOR" the approval
and adoption of the merger and the merger agreement and these holders have given
an irrevocable proxy to vote their shares to certain officers of TCS.

YOU SHOULD CONSIDER THE "RISK FACTORS" BEGINNING AT PAGE 24, AS WELL AS ALL
OF THE OTHER INFORMATION IN THIS PROXY STATEMENT/PROSPECTUS.

YOUR VOTE IS VERY IMPORTANT. TO VOTE YOUR SHARES, YOU MAY VOTE THE ENCLOSED
PROXY CARD OR ATTEND THE SPECIAL SHAREHOLDERS MEETING. I URGE YOU TO VOTE "FOR"
THE MERGER.

This document provides you with detailed information about the merger. I
encourage you to read this entire document carefully.

Very truly yours,

/s/ KENNETH ARNESON
Kenneth Arneson
President

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SHARES OF TCS COMMON STOCK TO BE
ISSUED UNDER THIS DOCUMENT OR DETERMINED IF THIS DOCUMENT IS ACCURATE OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

Proxy statement/prospectus dated December 22, 2000 and first mailed to
shareholders on or about December 23, 2000.
<PAGE> 2

XYPOINT CORPORATION
2200 Alaskan Way, Second Floor
Seattle, Washington 98121
(800) 723-3999 or (206) 674-1000 (phone)
(206) 674-1080 (facsimile)

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JANUARY 15, 2001

To the shareholders of XYPOINT Corporation ("XYPOINT"):

You are cordially invited to attend a special meeting of shareholders of
XYPOINT to be held on January 15, 2001, at the DoubleTree Hotel, 300 112th
Avenue SE, Bellevue, Washington 98004, beginning at 8:00 a.m., local time, to
consider and vote upon the following proposals:

1. To approve the Agreement and Plan of Reorganization, dated as of
November 15, 2000 (the "Agreement"), among TeleCommunication Systems,
Inc. ("TCS"), Windward Acquisition Corp. ("Windward"), a Washington
corporation wholly owned by TCS, and XYPOINT Corporation, and the
transactions contemplated thereby, including without limitation, (a) the
merger of XYPOINT with and into Windward, with Windward surviving the
merger as a wholly-owned subsidiary of TCS (the "Merger"), and (b) the
appointment of Joseph Manzinger as the Shareholders' Agent pursuant to
the Agreement and the Escrow Agreement related to the Merger (the
"Escrow Agreement"). By virtue of the Merger, all of the equity
securities of XYPOINT will be converted into the right to receive a
number of shares of TCS Common Stock to be determined pursuant to the
Agreement. A copy of the Agreement, the Escrow Agreement and other
exhibits are attached to the Proxy Statement/Prospectus accompanying
this notice.

2. With respect to holders of XYPOINT Series A preferred stock, to approve
the automatic and elective conversion of these shares to XYPOINT common
stock immediately prior to the closing of the Merger.

3. With respect to holders of XYPOINT Series X Junior preferred stock, to
approve the automatic and elective conversion of these shares to XYPOINT
common stock immediately prior to the closing of the Merger.

4. To approve, pursuant to Section 280G(b)(5)(B) of the Internal Revenue
Code of 1986, as amended (the "Code"), the acceleration of the vesting
of the unvested portions of stock option grants to certain key employees
of XYPOINT so as to avoid "parachute payment" treatment under Section
280G of the Code.

5. The transaction of other business as may properly be brought before the
special meeting or any adjournments or postponements of the special
meeting including potential adjournments for the purpose of soliciting
additional proxies in order to approve the matters described in
paragraph 1.

Only shareholders of record at the close of business on December 9, 2000
are entitled to notice of and to vote at the special meeting or any adjournments
or postponements of the special meeting. XYPOINT shareholders are entitled to
dissenters' rights under Washington law in connection with the Merger. The
Merger cannot be completed unless a majority of the outstanding shares of
XYPOINT preferred stock (other than the Series X Junior preferred stock), voting
together as a single class, on an as-converted basis, and a majority of all
outstanding shares of XYPOINT common stock and preferred stock, voting
<PAGE> 3

together as a single class, on an as-converted basis, approve the merger and the
merger agreement. The vote required for each of the other proposals is set forth
in the section of the Proxy Statement/Prospectus titled "The Special
Meeting -- Quorum; Vote Required."

YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL
MEETING, PLEASE COMPLETE, SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY CARD
IN THE ENCLOSED ENVELOPE.

If no instructions are indicated on your proxy, your shares will be voted
"FOR" the Merger and the other proposals presented at the special meeting. If
you do not return your proxy or vote in person, the effect is a vote against the
Merger and the other proposals presented at the special meeting. Your proxy may
be revoked at any time before it is voted. If the Agreement is approved and the
Merger is consummated, we will send you a letter of transmittal with
instructions for surrendering your certificates representing your XYPOINT equity
securities. Please do not send your share certificates until you receive these
materials.

By Order of the Board of Directors

/s/ CRAIG SHERMAN
Craig Sherman
Secretary

Seattle, Washington
December 22, 2000
<PAGE> 4

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER...................... 1
SUMMARY..................................................... 6
The Companies............................................. 6
The Merger................................................ 7
SUMMARY FINANCIAL DATA...................................... 16
Telecommunication Systems, Inc............................ 16
XYPOINT Corporation....................................... 18
Unaudited Summary Pro Forma Consolidated Financial Data... 20
COMPARATIVE PER SHARE DATA.................................. 21
MARKET PRICE INFORMATION.................................... 22
DIVIDEND POLICY............................................. 23
RISK FACTORS................................................ 24
Risks Related to the Merger............................... 24
Risks Related to TCS and the Combined Company Following
the Merger............................................. 28
Industry Risks............................................ 36
Technology Risks.......................................... 39
Risks Related to TCS' and the Combined Company's Capital
Structure and Common Stock............................. 42
THE XYPOINT SPECIAL MEETING................................. 45
General................................................... 45
Date, Time and Place of the Special Meeting............... 45
Record Date and Outstanding Shares........................ 45
Purpose of the Special Meeting............................ 45
Quorum; Vote Required..................................... 46
Recommendation of the Board of Directors of XYPOINT....... 47
Conversion of Series A Preferred Stock and Series X Junior
Preferred Stock........................................ 47
Voting of Proxies......................................... 48
Authorization to Vote on Adjournment and Other Matters.... 48
Revocation of Proxies..................................... 49
Solicitation of Proxies................................... 49
PROPOSAL 1: APPROVAL OF THE MERGER.......................... 50
THE MERGER.................................................. 50
General................................................... 50
Background of Merger...................................... 50
Joint Reasons for the Merger.............................. 52
TCS' Reasons for the Merger............................... 53
XYPOINT's Reasons for the Merger.......................... 53
XYPOINT's Financial Advisor............................... 55
Interests of Persons in the Merger........................ 55
Accounting Treatment...................................... 56
Material U.S. Federal Income Tax Consequences............. 56
Dividends................................................. 59
Payment of Indemnification Obligation..................... 59
Escrow Fund............................................... 59
Regulatory Approvals Required............................. 60
Nasdaq Stock Market Listing............................... 60
Appraisal Rights -- The Rights of XYPOINT Dissenting
Shareholders........................................... 60
</TABLE>

i
<PAGE> 5

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Resale of TCS Common Stock after the Merger............... 63
THE MERGER AGREEMENT........................................ 64
General................................................... 64
Merger Consideration...................................... 64
Directors and Officers of Windward after the Merger....... 64
Articles of Incorporation and Bylaws of Windward after the
Merger................................................. 65
Conversion of Securities; Fractional Shares............... 65
XYPOINT Stock Options; XYPOINT Warrants................... 67
Procedure for Exchanging XYPOINT Capital Stock for TCS
Common Stock........................................... 67
Exchange Procedures....................................... 67
Form S-8 Filing........................................... 68
Representations and Warranties............................ 69
Covenants of XYPOINT...................................... 70
Covenants of TCS.......................................... 73
Conditions to the Merger.................................. 75
Extension; Waiver......................................... 77
Amendment................................................. 77
Termination............................................... 77
ESCROW AND INDEMNIFICATION.................................. 78
Exclusive Remedy.......................................... 78
Escrow Fund............................................... 78
Shareholders' Agent....................................... 78
Indemnification........................................... 78
Certain Limitations....................................... 79
OTHER AGREEMENTS............................................ 79
Voting Agreements......................................... 79
Stock Restriction Agreements.............................. 79
PROPOSAL 2: CONVERSION OF SERIES A PREFERRED STOCK.......... 81
PROPOSAL 3: CONVERSION OF SERIES X JUNIOR PREFERRED STOCK... 82
PROPOSAL 4: APPROVAL OF VESTING OF STOCK OPTIONS............ 83
DESCRIPTION OF TCS CAPITAL STOCK............................ 85
Common Stock.............................................. 85
Preferred Stock........................................... 86
Special Meetings.......................................... 86
Advance Notice Provisions................................. 86
Amendment of Charter and Bylaw Provisions................. 87
Anti-Takeover Provisions of Maryland General Corporation
Law.................................................... 87
Limitation of Liability and Indemnification............... 89
Registration Rights of Stockholders....................... 89
Transfer Agent and Registrar.............................. 90
National Market Listing................................... 90
COMPARISON OF THE RIGHTS OF HOLDERS OF TCS COMMON STOCK AND
XYPOINT CAPITAL STOCK..................................... 91
General................................................... 91
Anti-Takeover Provisions.................................. 91
Removal of Directors...................................... 91
Classification of the Board of Directors.................. 92
Nominations for Election of Directors and Stockholder
Proposals.............................................. 92
</TABLE>

ii
<PAGE> 6

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Amendments to Articles of Incorporation................... 93
Amendments to Bylaws...................................... 93
Stockholder Vote by Written Consent....................... 94
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION...... 95
BUSINESS OF TELECOMMUNICATION SYSTEMS, INC. ................ 102
Company Overview.......................................... 102
The Market Opportunity.................................... 103
The TCS Solution.......................................... 104
Business Strategy......................................... 105
Product and Service Offerings............................. 107
Customers................................................. 115
Sales and Marketing....................................... 117
Competition............................................... 117
Research and Development.................................. 118
Government Regulation..................................... 119
Intellectual Property Rights.............................. 120
Employees................................................. 121
Properties................................................ 121
Legal Proceedings......................................... 121
SELECTED FINANCIAL DATA OF TELECOMMUNICATION SYSTEMS,
INC. ..................................................... 122
TELECOMMUNICATION SYSTEMS, INC. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................ 124
Company Background........................................ 124
Overview.................................................. 124
Results of Operations..................................... 128
Income Taxes.............................................. 133
Liquidity and Capital Resources........................... 133
Recent Accounting Pronouncements.......................... 135
Impact of Year 2000....................................... 135
Quantitative and Qualitative Disclosures About Market
Risk................................................... 135
BUSINESS OF XYPOINT CORPORATION............................. 136
Overview.................................................. 136
Industry Overview and Background.......................... 136
Market Opportunity........................................ 137
XYPOINT's Solution........................................ 137
XYPOINT's Products........................................ 137
Customers................................................. 139
Sales and Marketing....................................... 139
Technology................................................ 140
Research and Development.................................. 140
Intellectual Property..................................... 140
Competition............................................... 140
Employees................................................. 141
Properties................................................ 141
SELECTED FINANCIAL DATA OF XYPOINT CORPORATION.............. 142
XYPOINT CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 144
Overview.................................................. 144
</TABLE>

iii
<PAGE> 7

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Revenue................................................... 144
Results of Operations..................................... 146
Income Taxes.............................................. 148
Liquidity and Capital Resources........................... 148
Recent Accounting Pronouncements.......................... 149
Impact of Year 2000....................................... 149
Quantitative and Qualitative Disclosures About Market
Risk................................................... 150
MANAGEMENT OF TELECOMMUNICATION SYSTEMS, INC. .............. 151
Directors and Executive Officers.......................... 151
Board Composition......................................... 154
Compensation Committee.................................... 154
Audit Committee........................................... 154
Compensation Committee Interlocks and Insider
Participation.......................................... 154
Director Compensation..................................... 154
Executive Compensation.................................... 154
Benefit Plans............................................. 156
Stock Incentive Plan...................................... 156
Employee Stock Purchase Plan.............................. 158
401(k) Plan............................................... 159
Employment Agreements..................................... 159
CERTAIN TRANSACTIONS RELATING TO TELECOMMUNICATION SYSTEMS,
INC. ..................................................... 160
Sales of TCS Securities................................... 160
Transaction with Timothy J. Lorello....................... 160
Transactions with Maurice B. Tose......................... 160
Transaction with Andrew C. Barrett........................ 161
Transaction with Donald C. Hubbard, Jr.................... 161
Registration Rights....................................... 161
PRINCIPAL STOCKHOLDERS OF TELECOMMUNICATION SYSTEMS,
INC. ..................................................... 162
XYPOINT MANAGEMENT.......................................... 164
Executive Officers........................................ 164
Executive Compensation.................................... 164
Certain Transactions Relating to XYPOINT.................. 164
PRINCIPAL SHAREHOLDERS OF XYPOINT CORPORATION............... 165
FUTURE STOCKHOLDER PROPOSALS................................ 168
OTHER MATTERS............................................... 168
LEGAL MATTERS............................................... 168
EXPERTS..................................................... 168
WHERE YOU CAN FIND MORE INFORMATION......................... 168
FINANCIAL STATEMENTS OF TELECOMMUNICATION SYSTEMS, INC. .... F-2
FINANCIAL STATEMENTS OF XYPOINT CORPORATION................. F-24
</TABLE>

<TABLE>
<S> <C> <C>
APPENDIX A (Agreement and Plan of Reorganization, with Exhibits)....... A-1
APPENDIX B (Dissenters' Rights Statute)................................ B-1
</TABLE>

iv
<PAGE> 8

QUESTIONS AND ANSWERS ABOUT THE MERGER

Q: WHY DID THE COMPANIES DECIDE TO MERGE?

A: The members of the boards of directors of both companies believe that
the merger is advisable and in the best interests of their respective
stockholders. In reaching their decision, they relied on a number of
factors that are more fully described in this document. See "Joint
Reasons for the Merger" on page 52, "TCS' Reasons for the Merger" on
page 53 and "XYPOINT's Reasons for the Merger" on page 53.

Q: WHAT WILL XYPOINT SHAREHOLDERS, OPTION HOLDERS AND WARRANT HOLDERS
RECEIVE IN THE MERGER?

A: If the merger is completed, XYPOINT shareholders, option holders and
warrant holders will receive, in the aggregate, 4,300,000 shares of TCS
Class A common stock ("TCS Common Stock") in exchange for all of the
outstanding equity securities of XYPOINT. Instead of fractional shares,
XYPOINT shareholders will receive cash based upon the market price of
TCS Common Stock.

Q: WHAT WILL I RECEIVE IF I CURRENTLY OWN SHARES OF XYPOINT PREFERRED
STOCK?

A: If the merger is completed, each share of XYPOINT preferred stock will
convert into shares of TCS Common Stock. In accordance with the merger
agreement and XYPOINT's articles of incorporation, the number of shares
of TCS Common Stock received by each series of preferred stock will be
equal to the liquidation preference of each series divided by $17.07,
the average closing sales price of TCS Common Stock for the forty-five
consecutive days ending on and including the third trading day prior to
the date of execution of the merger agreement.

Q: SHOULD I CONVERT MY XYPOINT PREFERRED STOCK INTO XYPOINT COMMON STOCK
PRIOR TO THE MERGER?

A: Each shareholder of XYPOINT needs to make this decision individually.
If holders of XYPOINT preferred stock do not convert their shares, they
will be entitled to receive shares of TCS Common Stock having a value,
based on a price of $17.07 per share, equal to the liquidation
preference for their particular series of XYPOINT preferred stock as
calculated in the previous paragraph. Based upon the terms of the
merger agreement, holders of XYPOINT Series B, C, D and E preferred
stock will receive a greater number of shares of TCS Common Stock if
they do not convert their respective shares prior to the merger.
Holders of Series A preferred stock and Series X Junior preferred
stock, however, will receive a greater number of shares of TCS Common
Stock if they convert their respective shares into XYPOINT common stock
prior to the merger.

Q: WHY SHOULD HOLDERS OF XYPOINT SERIES A PREFERRED STOCK AND SERIES X
JUNIOR PREFERRED STOCK VOTE TO APPROVE THE CONVERSION OF THEIR SHARES?
1
<PAGE> 9

A: To maximize the consideration received in the merger, the holders of
Series A preferred stock and Series X Junior preferred stock should
convert their shares into XYPOINT common stock prior to the closing of
the merger. To facilitate this conversion, holders of Series A
preferred stock and Series X Junior preferred stock should vote in
favor of the automatic conversion reflected in Proposals 2 and 3,
respectively. According to XYPOINT's articles of incorporation, if the
holders of two-thirds of the Series A preferred stock or if a majority
of the holders of Series X Junior preferred stock vote to convert their
shares to XYPOINT common stock, all shares of these series shall
automatically convert to XYPOINT common stock.

Q: WHAT SHOULD I DO IF THE REQUISITE NUMBER OF HOLDERS OF XYPOINT SERIES A
PREFERRED STOCK AND SERIES X JUNIOR PREFERRED STOCK DO NOT VOTE TO
APPROVE THE CONVERSION OF THEIR SHARES, BUT I STILL WANT TO CONVERT MY
SHARES?

A: Even if the automatic conversion of the Series A or Series X Junior
preferred stock is not approved, each holder of Series A or Series X
Junior preferred stock is nevertheless entitled to convert his or her
shares. Individual holders of Series A or Series X Junior preferred
stock may, and should, opt to convert their shares prior to the
effective date of the merger in order to maximize the number of shares
of TCS Common Stock received by such holders.

Individual holders of Series A and Series X Junior preferred stock may
provide notice of their intentions to exercise their optional
conversion right by voting for automatic conversion of their shares on
the proxy card. After the special meeting, and only in the event the
automatic conversion is not approved, the individual shareholders who
opt to convert will be notified by XYPOINT of the procedure to
surrender their duly endorsed certificates.

Q: WHAT WILL I RECEIVE IF I CURRENTLY OWN SHARES OF XYPOINT COMMON STOCK?

A: If the merger is completed based upon the current information and
assumptions disclosed in this proxy statement/prospectus, shares of
XYPOINT common stock will convert into 0.089554 shares of TCS Common
Stock.

Q: WHAT WILL XYPOINT STOCK OPTION HOLDERS AND WARRANT HOLDERS RECEIVE IN
THE MERGER?

A: At the effective time of the merger, each XYPOINT stock option, whether
vested or unvested, and each warrant to purchase XYPOINT Series B and
Series C preferred stock will be converted into an option or warrant,
as the case may be, to purchase shares of TCS Common Stock according to
the relevant exchange ratios for each class or series of stock and will
no longer represent a right to acquire shares of XYPOINT capital stock.
According to their terms, unless exercised prior to expiration,
warrants to purchase shares of XYPOINT Series E and Series X Junior
preferred stock will expire upon completion of the merger.

2
<PAGE> 10

Q: WHEN DO YOU EXPECT TO COMPLETE THE MERGER?

A: We are working to complete the merger in January, 2001. Because the
merger is subject to governmental and other regulatory approvals, we
cannot predict the exact timing.

Q: WHAT DO I NEED TO DO?

A: After you have carefully read this document, mail your signed proxy
card in the enclosed envelope. The instructions on the accompanying
proxy card will give you more information on how to vote by mail. This
will enable your shares to be represented at the XYPOINT special
meeting. You also may attend the meeting in person instead of
submitting a proxy.

Q: SHOULD XYPOINT SHAREHOLDERS SEND IN THEIR STOCK CERTIFICATES?

A: No. XYPOINT shareholders should not send in their stock certificates at
this time. XYPOINT shareholders will exchange their certificates
representing XYPOINT equity securities for TCS Common Stock
certificates after we complete the merger.

Instructions for the exchange will be sent to XYPOINT shareholders
promptly after the merger is completed.

Q: ARE THERE RISKS I SHOULD CONSIDER IN DECIDING WHETHER TO VOTE FOR THE
MERGER?

A: Yes. We have set out under the heading "Risk Factors" beginning on page
24 of this proxy statement/prospectus some of the risk factors you
should consider.

Q: CAN I CHANGE MY VOTE AFTER I HAVE SUBMITTED MY PROXY WITH VOTING
INSTRUCTIONS?

A: Yes. You can change your vote at any time before the special meeting by
mailing a later-dated signed proxy card or by attending the special
meeting and voting in person.

Q: WHAT ARE THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER?

A: We expect the merger to qualify as a tax-free reorganization for U.S.
federal income tax purposes. If you are a XYPOINT shareholder, your
exchange of shares of XYPOINT shares for shares of TCS Common Stock
generally will not cause you to recognize any taxable gain or loss. A
XYPOINT shareholder will, however, recognize taxable gain or loss on
any cash received in lieu of a fractional share of TCS Common Stock. In
addition, if you exercise your dissenter's rights, you will incur a tax
liability to the extent you recognize a gain as a result. Please review
carefully the information under the caption "Material U.S. Federal
Income Tax Consequences" beginning on page 56 for a description of the
material U.S. federal income tax consequences of the merger. The tax
consequences to you will depend on your own situation. Please consult
your tax advisors for a full understanding of the tax consequences of
the merger to you.

Q: WHERE CAN I FIND MORE INFORMATION ABOUT TCS?

A: TCS files reports and other information with the Securities and
Exchange Commission. You may

3
<PAGE> 11

read and copy this information at the SEC's public reference facilities. Please
call the SEC at 1-800-SEC-0330 for information about these facilities. This
information is also available at the web site the SEC maintains at www.sec.gov.
You can also request copies of these documents from us. See "Where You
Can Find More Information" on page 168.

Q: IF I AM NOT GOING TO ATTEND THE SPECIAL MEETING, SHOULD I RETURN MY
PROXY CARD INSTEAD?

A: Yes. Please fill out and sign your proxy card and return it in the
enclosed envelope as soon as possible. Returning your proxy card
ensures that your shares will be represented at the special meeting.

Q: WHAT IS THE ESCROW FUND?

A: At the time the companies consummate the merger, TCS will place 400,000
of the 4,300,000 shares of TCS Common Stock to be issued to XYPOINT
shareholders in connection with the merger into an escrow fund. First
Union National Bank will hold the escrow fund. The escrow fund is
similar to a security deposit. XYPOINT has made various
representations, warranties and covenants in the merger agreement. If
these representations, warranties, covenants are inaccurate or
breached, TCS will be entitled to be compensated for resulting losses
from the escrow fund for all amounts in excess of $150,000. Subject to
any unresolved claims that TCS may have against the escrow fund, shares
of TCS Common Stock will be released from escrow to XYPOINT
shareholders promptly after the twelve month anniversary of the closing
of the merger.

Q: WHO IS THE SHAREHOLDERS' AGENT?

A: XYPOINT has appointed Joseph Manzinger, an employee of The Hillman
Company, XYPOINT's largest shareholder, as the shareholders' agent for
the XYPOINT shareholders. As such, Mr. Manzinger will represent your
interests after the merger and will be entitled to make certain
decisions regarding the escrow fund. By approving the merger agreement,
shareholders of XYPOINT will be approving the appointment of Mr.
Manzinger as their agent.

Q: AM I FREE TO IMMEDIATELY RESELL THE TCS COMMON STOCK I RECEIVE IN THE
MERGER?

A: No. Under the terms of the merger agreement that you are being asked to
approve, all of the shareholders of XYPOINT who have not executed a
voting agreement must sign a stock restriction agreement that restricts
the transfer of shares of TCS Common Stock. As a consequence, all
shares of TCS Common Stock issued in the merger will be "locked-up" for
a period of 120 days after the merger. Two-thirds of these shares will
be locked-up for an additional 60 days for a total of 180 days after
the merger, and one-third of these shares will be locked-up for an
additional 120 days for a total of 240 days after the merger.
Additionally, certain XYPOINT directors and officers have agreed not to
sell their shares of TCS Common Stock for 180 days, and

4
<PAGE> 12

in some cases 360 days, after the merger. There will be a legend on the TCS
Common Stock certificates you receive as a result of the merger reflecting these
restrictions. It is a condition to TCS' obligation to close the merger that
shareholders who hold at least 90% of the fully-diluted capital stock
of XYPOINT execute either a stock restriction agreement or a voting
agreement.

Q: HOW DO XYPOINT'S OFFICERS AND DIRECTORS PLAN TO VOTE ON THE MERGER?

A: XYPOINT's board of directors has unanimously approved the merger
agreement and the merger and has recommended that XYPOINT's
shareholders approve the merger agreement and the merger. You should
also be aware that certain XYPOINT executive officers and directors and
certain other shareholders have already agreed to vote in favor of the
merger agreement and the merger.

Q: MAY DISSENTING XYPOINT SHAREHOLDERS DISSENT AND SEEK APPRAISAL RIGHTS
IN THE MERGER?

A: Yes. XYPOINT shareholders may dissent and seek appraisal rights under
Washington law in the merger. However, if XYPOINT shareholders who
would receive in excess of 5% of the TCS Common Stock to be issued in
the merger demand an appraisal, TCS may terminate the merger agreement.
To perfect their appraisal rights, XYPOINT shareholders must strictly
comply with the procedures in Chapter 23B.13 of the Washington Business
Corporation Act. Failure to strictly comply with these procedures will
result in the loss of appraisal rights. We have attached a copy of
these provisions as Appendix B. See "Appraisal Rights - The Rights of
XYPOINT Dissenting Shareholders" on page 60.

Q: WILL MY RIGHTS AS A TCS STOCKHOLDER BE DIFFERENT FROM MY RIGHTS AS AN
XYPOINT SHAREHOLDER?

A: Yes. At the time of the merger, you will become a TCS stockholder.
There are important differences between the rights of shareholders of
XYPOINT and stockholders of TCS. Please carefully review the
description of these differences in the section entitled "Comparison of
the Rights of Holders of TCS Common Stock and XYPOINT Capital Stock" on
page 91 in this proxy statement/prospectus.

Q: WHOM SHOULD I CALL IF I HAVE QUESTIONS?

A: You should call Gregg Blodgett, XYPOINT's Chief Financial Officer, at
(206) 674-1030 with any questions about the merger or the related
transactions.

5
<PAGE> 13

SUMMARY

This summary highlights selected information from this document and may not
contain all of the information that is important to you. To understand the
merger fully, you should read carefully this entire proxy statement/prospectus
and the other attached documents. For more information about the companies, see
"Where You Can Find More Information."

THE COMPANIES

TELECOMMUNICATION SYSTEMS, INC.
275 West Street
Annapolis, Maryland 21401
(410) 263-7616

TCS provides wireless network application software and services and
communications engineering services. TCS was founded in 1987 as a provider of
communications engineering services, which have historically generated the
majority of its revenue. TCS' communications engineering services include
network design, installation and operation, network engineering and analysis,
and complex program management. Through its experience, TCS recognized the
demand for network application software that provides for the delivery of
Internet content, short messages and enhanced data communications services to
wireless devices, including phones, two-way pagers and personal digital
assistants. As a result, TCS has expanded its business over the past several
years to focus on the development of this software.

As part of TCS' focus on network application software, TCS developed its
Wireless Internet Gateway software, which allows wireless carriers and
enterprises to provide their customers and employees with real-time, wireless
access to Internet content, corporate intranets and e-mail. TCS also developed
Short Message Service Center software, which allows wireless device users to
send and receive text or data messages. When the Wireless Internet Gateway and
Short Message Service Center software are used together, TCS is able to provide
additional features such as confirming and prioritizing message delivery,
securing messages and data, and tracking the location of wireless devices. TCS
can perform these functions because its software was designed to access
information stored inside wireless networks, such as device on/off status and
billing and transaction records. As of November 30, 2000, TCS' software was
installed in 19 U.S. and international wireless carrier networks.

XYPOINT CORPORATION
2200 Alaskan Way
Second Floor
Seattle, Washington 98121
(206) 674-1000

services and applications. XYPOINT launched commercial E-911 services in 1998
and currently has agreements to provide such services to over 15 wireless
carriers located in the United States. E-911 services have represented
substantially all of XYPOINT's revenue to date.

WINDWARD ACQUISITION CORP.
275 West Street
Annapolis, Maryland 21401
(410) 263-7616

Windward, a Washington State corporation, is a wholly-owned subsidiary of
TCS. TCS formed Windward on November 14, 2000 solely for the purpose of
effecting the merger.

THE MERGER

THE SPECIAL MEETING

The special meeting of XYPOINT shareholders will be held on January 15,
2001 at the DoubleTree Hotel, 300 112th Avenue SE, Bellevue, Washington 98004,
at 8:00 a.m., Seattle time. Notice of the XYPOINT special meeting is being sent
to all holders of record of XYPOINT common and preferred stock. The record date
for XYPOINT shareholders entitled to receive notice of and to vote at the
XYPOINT special meeting was the close of business on December 9, 2000.

WHAT XYPOINT SHAREHOLDERS WILL RECEIVE IN THE MERGER

If the merger is completed, holders of shares of the following classes and
series of XYPOINT capital stock will receive the following for each 100 shares
held, plus cash instead of any fractional shares:

<TABLE>
<CAPTION>
CLASS OR SERIES OF CAPITAL STOCK SHARES OF TCS COMMON STOCK
-------------------------------- --------------------------
<S> <C>
Series A Preferred 8.9554
Series B Preferred 10.2537
Series C Preferred 10.2537
Series D Preferred 15.7613
Series E Preferred 9.0232
Series X Junior Preferred 8.9554
Common Stock 8.9554
</TABLE>

The preceding table assumes that prior to the consummation of the merger:
(1) all outstanding shares of XYPOINT Series A preferred stock and Series X
Junior preferred will be converted into shares of XYPOINT common stock, (2)
warrants for 216,250 shares of Series X Junior preferred stock will be
exercised, (3) warrants for 500,000 shares of Series X Junior preferred stock
and 259,740 shares of Series E preferred stock will not be exercised and will
expire by their terms. The actual exchange ratios will depend on XYPOINT's
capitalization at the closing of the merger.
7
<PAGE> 15

REASONS FOR THE MERGER

TCS and XYPOINT believe that the merger of XYPOINT with and into a wholly-
owned subsidiary of TCS will create a combined company that will:

- build upon existing complimentary business models and customer
relationships;

- enhance complimentary technologies and competitive strengths;

- offer customers a more complete software product services and portfolio;

- expand new production development opportunities through the integration
of existing products and services;

- leverage the two companies' distribution channels to provide
opportunities to increase market penetration and revenue growth;

- have greater capacity to respond to competition, market demands and
technological change;

- have increased management breadth and depth, as compared to each company
as a stand-alone entity; and

- be more favorably positioned to access capital and to potentially reduce
the cost of capital.

REQUIRED VOTE TO APPROVE MERGER

Under applicable Washington law and the charter documents of XYPOINT,
approval of the merger requires the affirmative vote of holders of:

- a majority of the outstanding shares of XYPOINT Series A, B, C, D and E
preferred stock, voting together on an as-converted basis; and

- a majority of all outstanding shares of XYPOINT common stock and
preferred stock, voting together on an as-converted basis.

As of the record date, there were:

- 123 shareholders of record of XYPOINT Series A, B, C, D and E preferred
stock, 27,949,044 shares of Series A, B, C, D and E preferred stock
outstanding on an actual basis and 28,263,138 shares of Series A, B, C, D
and E preferred stock outstanding on an as-converted basis; and

- 212 shareholders of record of XYPOINT's common stock and preferred stock,
37,631,006 shares of XYPOINT common stock and preferred stock outstanding
on an actual basis and 37,945,100 shares of XYPOINT common stock and
preferred stock outstanding on as-converted basis.

All XYPOINT executive officers, directors and their respective affiliates,
as well as certain other significant XYPOINT shareholders, have agreed to vote
all shares over which they exercise voting control for the approval of the
merger agreement and the merger. The vote of these shares by themselves is
sufficient to approve the merger agreement and the merger. As a result, approval
of the merger by XYPOINT shareholders is assured.

No approval by stockholders of TCS is required to effect the merger. TCS,
as the sole shareholder of Windward Acquisition Corp., has approved the merger
agreement and the merger.
8
<PAGE> 16

REQUIRED VOTE TO APPROVE CONVERSION OF XYPOINT SERIES A PREFERRED STOCK

To approve the automatic conversion of the Series A preferred stock into
XYPOINT common stock immediately prior to and conditioned upon the closing of
the merger, the affirmative vote of the holders of shares representing
two-thirds of the holders of Series A preferred stock is required. If this vote
is obtained, no other action is necessary and all shares of the Series A
preferred stock shall be automatically converted to XYPOINT common stock.

If, however, the automatic conversion of the Series A preferred stock is
not approved, under XYPOINT's amended and restated articles of incorporation,
each holder of Series A preferred stock is nevertheless entitled to convert his
or her shares. Individual holders of Series A preferred stock may, and should,
opt to convert their shares prior to the effective date of the merger in order
to maximize the number of shares of TCS Common Stock received by these holders.

Individual holders of Series A preferred stock may provide notice of their
intention to exercise their optional conversion right by voting for automatic
conversion of their shares on the proxy card. After the special meeting, and
only in the event the automatic conversion is not approved, the individual
shareholders who opt to convert will be notified by XYPOINT of the procedure to
surrender their duly endorsed certificates.

REQUIRED VOTE TO APPROVE CONVERSION OF XYPOINT SERIES X JUNIOR PREFERRED STOCK

To approve the automatic conversion of the Series X Junior preferred stock
into XYPOINT common stock immediately prior to and conditioned upon the closing
of the merger, the affirmative vote of the holders of shares representing a
majority of the holders of Series X Junior preferred stock is required. If this
vote is obtained, no other action is necessary and all shares of the Series X
Junior preferred stock shall be automatically converted to XYPOINT common stock.

If, however, the automatic conversion of the Series X Junior preferred
stock is not approved, under XYPOINT's amended and restated articles of
incorporation, each holder of Series X Junior preferred stock is nevertheless
entitled to convert his or her shares. Individual holders of Series X Junior
preferred stock may, and should, opt to convert their shares prior to the
effective date of the merger in order to maximize the number of shares of TCS
Common Stock received by these holders.

Individual holders of Series X Junior preferred stock may provide notice of
their intention to exercise their optional conversion right by voting for
automatic conversion of their shares on the proxy card. After the special
meeting, and only in the event the automatic conversion is not approved, the
individual shareholders who opt to convert will be notified by XYPOINT of the
procedure to surrender their duly endorsed certificates.

REQUIRED VOTE TO APPROVE VESTING

To approve the payments to disqualified individuals, the affirmative vote
of the holders of shares representing more than seventy-five percent (75%) of
the outstanding shares of XYPOINT's capital stock, voting together as a class
(excluding those holders who are disqualified individuals entitled to receive
payments pursuant to the transactions contemplated by the merger agreement and
certain people related to those disqualified individuals), is required.
9
<PAGE> 17

If the payments to be made to disqualified individuals pursuant to the
merger agreement are not approved by the shareholders, under Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code"), the payments could be
treated as "parachute payments" made in connection with a "change in control" of
XYPOINT (as that term is defined in Section 280G of the Code and which
definition the merger would meet). This treatment could cause XYPOINT to lose
compensation expense deductions for these payments and could result in the
imposition of a 20% excise tax on a portion of these payments, which tax would
be payable by the affected employees.

Under the merger agreement, XYPOINT agreed to obtain shareholders' approval
of these payments prior to the merger closing date.

RECOMMENDATION OF THE XYPOINT BOARD OF DIRECTORS

The XYPOINT board of directors has unanimously approved the merger
agreement and the merger and believes that the merger is fair to, and in the
best interests of, XYPOINT and its shareholders. The XYPOINT board of directors,
therefore, unanimously recommends that holders of XYPOINT capital stock vote
"FOR" approval of the merger agreement and the merger and the other proposals
presented at the special meeting.

INTERESTS OF XYPOINT OFFICERS AND DIRECTORS IN THE MERGER

In considering the XYPOINT board of directors' recommendation that you
approve the merger agreement and the merger, you should note that certain
XYPOINT officers and directors have interests in the merger that are different
from, or in addition to, your interests. Specifically, as a result of or in
connection with the merger:

- some XYPOINT officers and directors will become officers of the
surviving corporation;

- the vesting of all unvested stock options held by XYPOINT's
officers and directors will accelerate as a result of the merger;

- XYPOINT's directors and officers and their affiliates
beneficially own approximately 40% of XYPOINT's capital stock,
see "Principal Shareholders of XYPOINT Corporation";

- officers and employees of XYPOINT who become officers or
employees of TCS following the merger will receive additional
options from TCS after the merger;

- if the market price of TCS Common Stock is less than $17.07 per
share as of the closing date, holders of XYPOINT's preferred
stock will receive securities having a lower market value as of
the closing date than the liquidation preferences set forth in
XYPOINT's articles of incorporation, and, correspondingly,
XYPOINT's officers and directors, who generally hold XYPOINT
common stock or Series X Junior preferred stock or options or
warrants to acquire XYPOINT common stock or Series X Junior
preferred stock and in some cases Series A preferred stock, will
receive more consideration than they would otherwise if the
Series B through Series E preferred stock had received the amount
of their liquidation preferences calculated using a market price
as of the closing date; and
10
<PAGE> 18

- TCS expects to enter into an employment agreement with Kenneth
Arneson and potentially other officers of XYPOINT.

As a result, XYPOINT's directors and officers could be more likely to vote
to approve the merger agreement and the merger than XYPOINT shareholders
generally.

XYPOINT'S REASONS FOR THE MERGER

The XYPOINT board of directors believes that the merger is advisable and in
the best interests of XYPOINT and its shareholders. The members of the XYPOINT
board of directors unanimously approved the merger and the adoption of the
merger agreement and recommend that XYPOINT shareholders vote to approve the
merger by adoption of the merger agreement.

In reaching its decision, the XYPOINT board of directors considered a
number of factors, including the following (to which no relative weights were
assigned):

- the combined company's improved access to capital and current cash on
hand, as compared to XYPOINT's current cash position and access to
capital as an independent company;

- the liquidity for XYPOINT's shareholders is likely to be quicker as a
result of the merger;

- the ability of the combined company to take advantage of economies of
scale and opportunities for consolidation;

- a broader and deeper management team;

- the potential benefits to shareholder value of being a company that could
compete for high profile class projects; and

- possible synergies due to the complementary nature of the companies'
technologies, service offerings and customer bases;

- the combined company would have the opportunity to develop new products
to market to XYPOINT's existing customers;

- the combined company would have a complimentary sales force on both the
West coast and the East coast of the United States.

DISSENTERS' RIGHTS OF APPRAISAL

If the merger is completed, XYPOINT shareholders who do not vote for the
adoption of the merger agreement and who otherwise comply with the procedural
requirements of Washington law will be entitled to appraisal rights under
Washington law. To perfect their appraisal rights, XYPOINT shareholders must
strictly comply with the procedures in Chapter 23B.13 of the Washington Business
Corporation Act, including by delivering written notice to XYPOINT, prior to the
taking of the vote, of their intent to exercise dissenters' rights. Failure to
strictly comply with these procedures will result in the loss of appraisal
rights. A copy of these provisions is attached as Appendix B.

TCS may terminate the merger agreement if, immediately prior to the
completion of the merger, XYPOINT shareholders who would otherwise receive in
excess of 5% of the
11
<PAGE> 19

4,300,000 shares of TCS Common Stock to be delivered in connection with the
merger have demanded appraisal rights (which demands have not been withdrawn).

FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER

Assuming the merger qualifies as a reorganization within the meaning of
Section 368(a) of the Code, holders of XYPOINT shares that receive shares of TCS
Common Stock in the merger will not recognize gain or loss for U.S. federal
income tax purposes, except with respect to cash, if any, they receive in lieu
of a fractional share of TCS Common Stock. Although the merger is intended to
constitute a tax-free reorganization for federal income tax purposes, there
cannot be any assurance that the merger will so qualify. If the merger is not a
tax-free reorganization, XYPOINT shareholders may recognize gain or loss for
U.S. federal income tax purposes on the exchange of XYPOINT capital stock for
TCS Common Stock. The tax consequences of the transaction to a XYPOINT
shareholder will depend on his or her particular facts and circumstances. Your
basis in shares of TCS Common Stock received in the merger will generally equal
your basis in your shares of XYPOINT capital stock, except to the extent you
have recognized a gain as a result of receiving cash for any fractional shares
of TCS Common Stock to which you were otherwise entitled. XYPOINT shareholders
should consult a tax advisor for a full understanding of the tax consequences of
the merger to him or her. If you exercise your dissenters' rights, you may have
a tax liability to the extent you recognize a gain. See the more complete
discussion in "Material U.S. Federal Income Tax Consequences."

CONDITIONS TO THE MERGER

The merger will not be completed unless several conditions are satisfied or
waived, including:

- the continuing accuracy of the representations and warranties
made by TCS and XYPOINT in the merger agreement;

- the absence of any material change in the condition, results of
operations, assets, liabilities or business of TCS or XYPOINT;

- the receipt of requisite shareholder approvals, consents by third
parties and governmental and regulatory approvals;

- the approval by the requisite shareholder vote of any payments
and benefits to its employees which are characterized as
"parachute payments," within the meaning of Section 280G(b)(2) of
the Code as a result of the merger, the merger agreement or the
transactions contemplated by the merger agreement;

- the execution and delivery of the escrow agreement;

- the execution and delivery of stock restriction agreements by
shareholders, option holders and warrant holders, representing at
least 90% of the fully diluted capital stock of XYPOINT;

- the continuing effectiveness of the registration statement (of
which this document is a part) filed with the SEC; and

- the absence of legal restraints that prevent the completion of
the merger.
12
<PAGE> 20

NONSOLICITATION

XYPOINT has agreed that it shall not solicit or initiate any other offer or
proposal to acquire or invest in XYPOINT until the earlier of the termination of
the merger agreement or the date of the merger. XYPOINT has further agreed that
it will not provide information about itself to any other party or enter into
any agreements with any party in connection with a proposal to acquire or invest
in XYPOINT, except in the opinion of outside legal counsel to XYPOINT as may be
legally required to comply with the duties of the board of directors of XYPOINT
under applicable law, and upon receipt of a confidentiality agreement.

TERMINATION AND AMENDMENT OF THE MERGER AGREEMENT

TCS and XYPOINT may terminate the merger agreement at any time prior to
completion of the merger by mutual written consent. Either company also may
terminate the merger agreement at any time prior to the completion of the
merger:

- if the merger has not been completed by March 31, 2001, unless
the failure to complete the merger is the result of a breach of
the merger agreement by the party seeking to terminate the merger
agreement;

- if any final, nonappealable permanent injunction or other order
of a court or other competent authority prevents completion of
the merger and the transactions contemplated by the merger
agreement; or

- if the other party's representations or warranties under the
merger agreement were untrue when made in any material respect or
if the other party materially breaches any obligation under the
merger agreement and the breach remains uncured 30 days after
receipt of written notice from the other party.

The merger agreement may be amended at any time by execution of an
instrument in writing signed on behalf of each of the parties and, in the case
of TCS and XYPOINT, approved by their respective boards of directors. Any
amendment made subsequent to the adoption of the merger agreement by the
shareholders of XYPOINT shall not alter or change the amount or kind of
consideration to be received on conversion of the XYPOINT capital stock or alter
or change any of the terms and conditions of the merger agreement if the
alteration or change would materially adversely affect the holders of XYPOINT
capital stock.

ESCROW FUND

In connection with the merger, 400,000 shares of TCS Common Stock issuable
to XYPOINT shareholders in the merger will be placed in escrow with First Union
National Bank. Each XYPOINT shareholder will be deemed to have contributed into
the escrow fund in proportion to the aggregate number of shares of TCS Common
Stock that a shareholder would otherwise have been entitled under the merger
agreement. The escrow fund shall be the exclusive remedy to compensate TCS for
any losses as a result of any inaccuracy or breach of a representation or
warranty of XYPOINT contained in the merger agreement or any failure to comply
with any covenant contained in the merger agreement. TCS may not receive any
shares from the escrow fund for a breach of a representation, warranty or
covenant unless and until TCS suffers cumulative losses in
13
<PAGE> 21

excess of $150,000, subject to certain exceptions, in which case TCS will be
compensated for all damages in excess of $150,000. Subject to any unresolved
claims that TCS may have against the escrow fund, shares of TCS Common Stock
will be released from escrow to XYPOINT shareholders promptly after the 12 month
anniversary of the closing of the merger.

REGULATORY APPROVALS TCS AND XYPOINT MUST OBTAIN TO COMPLETE THE MERGER

TCS and XYPOINT cannot complete the merger unless it is approved by, among
others, the Federal Trade Commission and the Department of Justice. Further, TCS
and XYPOINT need to obtain waivers from federal and state rules in order to
continue to operate XYPOINT's business as it is currently being conducted. TCS
and XYPOINT plan to make the necessary filings with these regulatory authorities
and do not know of any reason why TCS and XYPOINT cannot obtain these regulatory
approvals in a timely manner.

RESTRICTIONS ON TRANSFER

Under the terms of the merger agreement, all of the shareholders of XYPOINT
who have not signed a voting agreement must sign a stock restriction agreement
that restricts the transfer of shares of TCS Common Stock. As a consequence,
unless TCS amends or waives the restrictive provisions earlier, all shares of
TCS Common Stock issued in the merger will be "locked-up" for a period of 120
days after the merger. Two-thirds of these shares will be locked-up for an
additional 60 days, for a total of 180 days after the merger, and one-third of
these shares will be locked-up for an additional 120 days, for a total of 240
days after the merger. Additionally, certain XYPOINT directors and officers have
agreed not to sell their shares of TCS Common Stock for 180 days, and in some
cases, 360 days after the merger. There will be a legend on the TCS Common Stock
certificates XYPOINT shareholders receive as a result of the merger reflecting
these restrictions. In addition, affiliates of TCS after the merger will be
subject to additional restrictions on the resale of TCS Common Stock. It is a
condition to TCS' obligation to close the merger that shareholders who hold at
least 90% of the fully-diluted capital stock of XYPOINT execute either a stock
restriction agreement or the voting agreement.

ACCOUNTING TREATMENT OF MERGER

For accounting purposes, TCS and XYPOINT expect to treat the merger as a
purchase.

SHARE INFORMATION AND MARKET PRICES

TCS Common Stock is quoted on the Nasdaq National Market under the symbol
"TSYS." TCS will list the additional shares of its Class A common stock to be
issued in connection with the merger on the Nasdaq National Market. On November
14, 2000, the day before the public announcement of the proposed merger, TCS
Common Stock closed at $16.13 and on December 20, 2000, TCS Common Stock closed
at $6.00 per share. XYPOINT stock is not publicly traded or quoted on any
exchange. The most recent private sale of stock by XYPOINT was made on August
18, 2000 when XYPOINT sold shares of its Series E preferred stock at $1.54 per
share.
14
<PAGE> 22

In accordance with the merger agreement and XYPOINT's articles of
incorporation the exchange ratios for XYPOINT's Series A, B, C, D and E
preferred stock, Series X Junior preferred stock and common stock were
calculated based on the average closing price of TCS Common Stock for the
forty-five days ending on and including the third trading day prior to the date
of execution of the merger agreement, which was $17.07 per share.

A WARNING ABOUT FORWARD-LOOKING STATEMENTS

This document contains 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.
TCS and XYPOINT generally identify forward-looking statements by the use of
terms such as "believe," "anticipate," "intend" or "expect." These
forward-looking statements relate to TCS' and XYPOINT's plans, objectives and
expectations for future operations. TCS and XYPOINT base these statements on
their beliefs as well as assumptions made using information currently available
to them. In light of the risks and uncertainties inherent in all projected
operational matters, the inclusion of forward-looking statements in this
document should not be regarded as a representation by TCS and XYPOINT or any
other person that their objectives or plans will be achieved or that any of
operating expectations will be realized. Revenues and results of operations are
difficult to forecast and could differ materially from those projected in the
forward-looking statements contained in this document as a result of factors,
including those set forth in the section of this document entitled "Risk
Factors." These factors should not be considered exhaustive. TCS and XYPOINT
undertake no obligation to release publicly the results of any future revisions
they may make to forward-looking statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events. TCS
and XYPOINT caution you not to put undue reliance on these forward-looking
statements.

TRADEMARKS

This proxy statement/prospectus contains trademarks and service marks of
TCS and XYPOINT and may contain trademarks of others. TCS' trademarks include
WINSuite, MOMenus, MO Buddies, MO Chat, MO Mail, QueryNet, MobiChat, InfoCafe,
MobileChat, Gabriel, Enabling Convergent Technologies and the TCS logo.
XYPOINT's registered trademarks include XYPOINT Technology, XYPOINT and Xybox,
and pending trademarks include Urgent Agents and Nomad. All other brand names or
trademarks appearing in this proxy statement/prospectus are the property of
their respective holders.
15
<PAGE> 23

SUMMARY FINANCIAL DATA

TELECOMMUNICATION SYSTEMS, INC.

The table that follows presents portions of TCS' financial statements and
is not complete. You should read the following selected financial data together
with TCS' financial statements and related notes and with "TeleCommunication
Systems, Inc. Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the more complete financial information included
elsewhere in this proxy statement/ prospectus. TCS has derived the statement of
operations data for the years ended December 31, 1997, 1998 and 1999 and the
balance sheet data as of December 31, 1998 and 1999 from TCS' financial
statements which have been audited by Ernst & Young LLP, independent auditors,
and which are included in this proxy statement/prospectus beginning on page F-2.
TCS has derived the statement of operations data for the nine months ended
September 30, 1999 and 2000 and the balance sheet data as of September 30, 2000
from TCS' unaudited financial statements included in this proxy
statement/prospectus beginning on page F-2 which include, in TCS' opinion, all
adjustments, consisting only of normal recurring adjustments, that it considers
necessary for the fair presentation of TCS' financial position and results of
operations for those periods. The historical results presented below for the
nine months ended September 30, 2000 are not necessarily indicative of the
results to be expected for any future period.

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -----------------
1997 1998 1999 1999 2000(1)
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUE:
Network applications:
Software licenses......................... $ 1,373 $ 2,104 $ 3,975 $ 2,933 $ 6,368
Services.................................. 3,815 5,806 7,345 5,178 8,376
------- ------- ------- ------- -------
Network applications.................... 5,188 7,910 11,320 8,111 14,744
Communications engineering services............ 22,636 17,078 34,440 23,963 26,231
------- ------- ------- ------- -------
Total revenue........................... 27,824 24,988 45,760 32,074 40,975
OPERATING COSTS AND EXPENSES:
Direct cost of network application
services................................ 2,918 4,252 4,993 3,539 6,545
Direct cost of communications engineering
services................................ 17,847 12,358 26,889 18,661 19,914
Sales and marketing....................... 1,045 1,455 2,285 1,621 4,433
Research and development.................. 204 354 1,098 791 2,711
General and administrative................ 3,091 4,001 5,329 3,783 7,592
Non-cash stock compensation expense....... -- -- -- -- 841
Depreciation and amortization of property
and equipment........................... 294 424 916 515 1,762
Amortization of software development
costs................................... 220 593 1,401 1,050 2,168
------- ------- ------- ------- -------
Total operating costs and expenses...... 25,619 23,437 42,911 29,960 45,966
------- ------- ------- ------- -------
</TABLE>

16
<PAGE> 24

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -----------------
1997 1998 1999 1999 2000(1)
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME (LOSS) FROM OPERATIONS.................. $ 2,205 $ 1,551 $ 2,849 $ 2,114 $(4,991)
Interest expense and other financing costs..... 1,263 1,550 1,741 1,203 472
------- ------- ------- ------- -------
Income (loss) before income taxes and
extraordinary item........................... 942 1 1,108 911 (5,463)
Income tax expense (benefit)................... -- -- 2,408 -- (2,140)
------- ------- ------- ------- -------
Income (loss) before extraordinary item........ $ 942 $ 1 $(1,300) $ 911 $(3,323)
======= ======= ======= ======= =======
Income (loss) attributable to common
stockholders................................. $ 942 $ 1 $(1,300) $ 911 $(4,082)
======= ======= ======= ======= =======
EARNINGS (LOSS) PER COMMON SHARE:
Basic..................................... $ 0.09 $ -- $ (0.12) $ 0.08 $ (0.28)
Diluted................................... $ 0.09 $ -- $ (0.12) $ 0.05 $ (0.28)
Basic shares used in calculation............... 10,788 10,788 10,788 10,788 14,447
Diluted shares used in computation............. 11,076 14,768 10,788 17,686 14,447
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
--------------------------- SEPTEMBER 30,
1997 1998 1999 2000
------- ------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Unrestricted cash............................ $ 864 $ 440 $ 3,257 $67,874
Working capital (deficit).................... (2,149) (360) 4,229 76,587
Total assets................................. 10,764 14,649 27,672 99,240
Long-term debt and capital leases............ 2,975 6,621 6,672 1,257
Total liabilities............................ 12,269 15,994 22,351 13,633
Series A preferred stock..................... -- -- 9,520 --
Total stockholders' equity (deficit)......... (1,736) (1,345) (4,199) 85,607
</TABLE>

---------------
(1) For the nine month period ended September 30, 2000, TCS recorded an
extraordinary loss on early extinguishment of debt of $(0.2) million, net of
a tax benefit. Approximately $9.3 million of TCS' initial public offering
proceeds were used to extinguish debt.
17
<PAGE> 25

XYPOINT CORPORATION

The table that follows presents portions of XYPOINT's financial statements
and is not complete. You should read the following selected financial data
together with XYPOINT's financial statements and related notes and with "XYPOINT
Corporation Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the more complete financial information included
elsewhere in this proxy statement/prospectus. XYPOINT has derived the statement
of operations data for the years ended December 31, 1997, 1998 and 1999 and the
balance sheet data as of December 31, 1998 and 1999 from XYPOINT's financial
statements which have been audited, and are included in this proxy
statement/prospectus beginning on page F-24. XYPOINT has derived the statement
of operations data for the nine months ended September 30, 1999 and 2000 and the
balance sheet data as of September 30, 2000 from XYPOINT's unaudited financial
statements included in this proxy statement/prospectus beginning on page F-24,
which include, in XYPOINT's opinion, all adjustments, consisting only of normal
recurring adjustments, that it would consider necessary for the fair
presentation of its financial position and results of operation for those
periods. The historical results presented below for the nine months ended
September 30, 2000 are not necessarily indicative of the results to be expected
for any future period.

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- -----------------
1997 1998 1999 1999 2000
------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue..................................... $ -- $ 239 $ 2,207 $ 1,332 $ 5,553
OPERATING EXPENSES:
Operations.................................. -- 2,250 2,813 2,024 2,863
Field marketing and deployment.............. -- 1,609 1,209 1,014 748
Sales and marketing......................... 1,404 1,253 639 539 1,575
Research and development.................... 2,862 1,871 1,794 1,229 2,912
General and administrative.................. 1,802 1,705 1,970 1,388 1,896
Stock option and warrant compensation....... 328 75 370 93 1,153
Restructuring charge........................ -- -- 181 166 --
Depreciation and amortization of property... 758 1,271 1,710 1,282 1,261
------- -------- ------- ------- -------
Total operating expenses............... 7,154 10,034 10,686 7,735 12,408
------- -------- ------- ------- -------
LOSS FROM OPERATIONS.......................... (7,154) (9,795) (8,479) (6,403) (6,855)
Interest, net and other expenses............ (144) 156 (59) (29) (124)
------- -------- ------- ------- -------
Net loss.................................... $(7,298) $ (9,639) $(8,538) $(6,432) $(6,979)
======= ======== ======= ======= =======
</TABLE>

18
<PAGE> 26

<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
----------------------------- SEPTEMBER 30,
1997 1998 1999 2000
------- -------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 5,091 $ 10,780 $ 3,949 $ 7,333
Working capital............................ 4,250 9,384 3,524 6,197
Total assets............................... 7,410 14,828 9,343 13,237
Long-term capital lease obligations........ 782 1,167 1,004 610
Total liabilities.......................... 1,820 3,329 3,428 4,085
Redeemable convertible preferred stock..... 10,372 26,092 26,523 36,589
Convertible preferred stock................ 5,970 5,951 7,424 7,427
Total shareholders' deficit................ (4,781) (14,592) (20,608) (27,438)
</TABLE>

19
<PAGE> 27

TCS AND XYPOINT

UNAUDITED SUMMARY PRO FORMA CONSOLIDATED FINANCIAL DATA

TCS and XYPOINT have included this unaudited summary pro forma consolidated
financial data for the purpose of illustration only. The data does not
necessarily indicate what the operating results or financial position of the
combined company would have been if the merger had been completed at the dates
indicated. Moreover, this information does not necessarily indicate what the
future operating results or financial position of the combined company will be.
This unaudited pro forma consolidated financial data reflects treatment of the
merger as a purchase for accounting purposes. The unaudited pro forma
consolidated statements of operations data gives effect to the merger as if it
occurred on January 1, 1999. The unaudited pro forma consolidated balance sheet
data gives effect to the merger as if it had occurred on September 30, 2000.

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1999 SEPTEMBER 30, 2000
-------------------- ---------------------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue............................. $ 47,967 $ 46,528
Total operating costs and expenses........ (63,081) (65,622)
-------- --------
Loss from operations...................... (15,114) (19,094)
Interest expense, net..................... (1,799) (596)
-------- --------
Loss before extraordinary item............ $(16,913) $(19,690)
======== ========
Loss before extraordinary item
attributable to common stockholders.... $(16,913) $(20,230)
======== ========
Loss per common share -- basic and
diluted................................ $ (1.17) $ (1.12)
======== ========
Weighted-average common shares
outstanding -- basic and diluted....... 14,426 18,085
======== ========
</TABLE>

<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 2000
------------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................. $ 75,207
Working capital........................... 80,384
Total assets.............................. 160,797
Long-term obligations..................... 1,867
Stockholders' equity...................... 140,679
</TABLE>

20
<PAGE> 28

COMPARATIVE PER SHARE DATA

The following table sets forth certain historical per share data of TCS and
XYPOINT and combined per share data on an unaudited pro forma basis after giving
effect to the merger. This data should be read in conjunction with the selected
historical financial information, the unaudited pro forma consolidated financial
information and the separate historical financial statements of TCS and notes
thereto and historical financial statements of XYPOINT and notes thereto,
included elsewhere in this proxy statement/prospectus. Pro forma share amounts
are computed as if the preferred shares of XYPOINT were converted to TCS Common
Stock from their date of issuance. The unaudited pro forma consolidated
financial information is not necessarily indicative of the operating results
that would have been achieved had the transaction been in effect as of the
beginning of the periods presented and should not be construed as representative
of future operating results.

The equivalent XYPOINT pro forma share amounts are calculated by
multiplying the combined pro forma per share amounts by the estimated conversion
ratio of 0.089554 per share of TCS Common Stock for each share of XYPOINT common
stock. The actual equivalents will depend on the class of XYPOINT capital stock
held and XYPOINT's capitalization at the closing of the merger.

Pro forma consolidated net loss per share reflects TCS' and XYPOINT's net
loss for the year ended December 31, 1999 and the nine months ended September
30, 2000 and is based upon the weighted average of TCS Common Stock outstanding
for the periods presented, and approximately 3,638,438 shares of TCS Common
Stock to be issued in the merger.

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1999 SEPTEMBER 30, 2000
----------------- ------------------
<S> <C> <C>
Historical -- TCS:
Basic and diluted net loss per share......... $ (0.12) $ (0.28)
Book value per share......................... $ (0.39) $ 3.51
Historical -- XYPOINT:
Basic net loss per share..................... $(57.10) $(15.65)
Book value per share......................... $(50.66) $(57.13)
Pro forma consolidated net loss per share:
Pro forma consolidated net loss per TCS
Common Stock.............................. $ (1.17) $ (1.12)
Equivalent pro forma net loss per XYPOINT
common share.............................. $ (0.10) $ (0.10)
Pro forma consolidated book value per share:
Pro forma book value per TCS Common Stock.... $ 7.78
Equivalent pro forma book value per XYPOINT
common share.............................. $ 0.70
</TABLE>

21
<PAGE> 29

MARKET PRICE INFORMATION

TCS Common Stock has been traded on the Nasdaq Stock Market's National
Market under the symbol "TSYS" since August 7, 2000. The following table sets
forth, for the periods indicated, the high and low closing prices for TCS Common
Stock as reported by the Nasdaq Stock Market's National Market:

<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Third Quarter 2000 (from August 7, 2000).................... $32.25 $16.00
Fourth Quarter 2000 (through December 20, 2000)............. $17.34 $ 6.00
</TABLE>

There is no established trading market for XYPOINT capital stock.

The table below sets forth the high and low sales prices per share of TCS
Common Stock on the Nasdaq Stock Market's National Market on November 14, 2000,
the last completed trading day prior to the signing and announcement of the
merger agreement, and on December 20, 2000. Also set forth is the implied
equivalent value of one share of each class of XYPOINT's capital stock on each
date based on the exchange ratios described in this proxy statement/prospectus.

<TABLE>
<CAPTION>
NOVEMBER 14, 2000 DECEMBER 20, 2000
----------------- ------------------
HIGH LOW HIGH LOW
------- ------- ------ ------
<S> <C> <C> <C> <C>
TCS Common Stock............................................ $16.25 $13.88 $7.19 $5.75
XYPOINT Capital Stock
Series A Preferred................................... $ 1.46 $ 1.24 $0.64 $0.51
Series B Preferred................................... $ 1.67 $ 1.42 $0.74 $0.59
Series C Preferred................................... $ 1.67 $ 1.42 $0.74 $0.59
Series D Preferred................................... $ 2.56 $ 2.19 $1.13 $0.91
Series E Preferred................................... $ 1.47 $ 1.25 $0.65 $0.51
Series X Junior Preferred............................ $ 1.46 $ 1.24 $0.64 $0.51
Common Stock......................................... $ 1.46 $ 1.24 $0.64 $0.51
</TABLE>

The foregoing table shows only historical comparisons. These comparisons
may not provide meaningful information to you in determining whether to approve
the merger and the merger agreement. Because the number of shares of TCS Common
Stock to be issued to the holders of XYPOINT shares is fixed, changes in the
market price of TCS Common Stock will affect the dollar value of TCS Common
Stock to be received by shareholders of XYPOINT in the merger. XYPOINT
shareholders are urged to obtain current market quotation for TCS Common Stock,
and to review carefully the other information contained in this proxy
statement/prospectus, prior to considering whether to approve the merger and the
merger agreement.
22
<PAGE> 30

DIVIDEND POLICY

TCS has never declared or paid cash dividends on its common stock,
including the TCS Common Stock. TCS currently intends to retain any future
earnings to fund the development, growth and operation of its business.
Therefore, TCS does not currently anticipate paying any cash dividends on the
TCS Common Stock in the foreseeable future.

XYPOINT has never declared or paid dividends on its capital stock. The
board of directors of XYPOINT presently intends to retain all future earnings to
fund the development, growth and operation of its business. Therefore, XYPOINT
does not currently anticipate paying any cash dividends on its capital stock in
the foreseeable future.
23
<PAGE> 31

RISK FACTORS

You should carefully consider the risks described below before making your
decision to vote in favor of the merger. Any of the events, contingencies,
circumstances or conditions described in the following risks could materially
adversely effect the business, operating results and financial condition of TCS,
XYPOINT or the combined company. You should consider these risk factors in
conjunction with the information contained elsewhere in this document.

RISKS RELATED TO THE MERGER

TCS AND XYPOINT MAY NOT REALIZE ANY BENEFITS FROM THE MERGER.

Achieving the benefits of the merger will depend in part on the integration
of technology, operations and personnel. The integration of TCS and XYPOINT will
be a complex, time consuming and expensive process and may disrupt TCS' business
if not completed in a timely and efficient manner. As a result of the different
nature of TCS' and XYPOINT's operations, it may be difficult to successfully
integrate the products, services, technologies, research and development
activities, administration, sales and marketing and other operations of the two
companies. The difficulties, costs and delays involved in integrating the
companies, which could be substantial, include the following:

- distracting management and other key personnel, particularly sales and
marketing personnel and senior engineers from the business of the
combined company;

- failure to integrate complex technology, product lines and development
plans and the difficulty of maintaining uniform standards, controls,
procedures and policies;

- demonstrating to customers and suppliers that the merger will not result
in adverse changes in client service standards or business focus;

- potential incompatibility of business cultures;

- inability to retain and integrate key personnel;

- costs and delays in implementing common systems and procedures;

- costs and logistical and managerial difficulties associated with
operating the combined company on the east coast and west coast;

- disruptions in the combined sales forces that may result in a loss of
current customers or the inability to close sales with potential
customers;

- additional financial resources that may be needed to fund the combined
operations; and

- impairment of relationships with employees and customers as a result of
changes in management.

Any of the above risks could prevent the combined company from realizing
any benefit from the merger. Neither TCS nor XYPOINT has experience in
integrating operations on the scale represented by the merger, and it is not
certain that TCS and XYPOINT can be successfully integrated in a timely or
efficient manner or at all or that any of the anticipated benefits of the merger
will be realized. Failure to do so could have a material adverse effect of the
business, financial condition and operating results of TCS and the combined
company.

24
<PAGE> 32

THE MARKET PRICE OF TCS COMMON STOCK MAY DECLINE AS A RESULT OF THE MERGER.

The market price of TCS Common Stock may decline as a result of the merger
if:

- the integration of TCS and XYPOINT is unsuccessful or takes longer than
expected;

- the perceived benefits of the merger are not achieved as rapidly or to
the extent anticipated by financial analysts or investors; or

- the effect of the merger on the combined company's financial results is
not consistent with the expectations of financial analysts or investors.

BECAUSE THE TOTAL MERGER CONSIDERATION IS FIXED, DECREASES IN TCS' TRADING PRICE
WILL REDUCE THE VALUE OF WHAT XYPOINT SHAREHOLDERS RECEIVE IN THE MERGER.

All of the outstanding shares of XYPOINT capital stock and the options and
warrants to purchase shares of XYPOINT's capital stock will be exchanged for a
fixed number of shares of TCS Common Stock and options and warrants to purchase
TCS Common Stock totaling approximately 4.3 million shares. There will be no
adjustment for changes in the market price of TCS Common Stock, and XYPOINT is
not permitted to withdraw from the merger or resolicit the vote of its
shareholders solely because of changes in the market price of TCS Common Stock.
Accordingly, the actual dollar value of TCS Common Stock that XYPOINT
shareholders will receive upon completion of the merger will depend on the
market value of TCS Common Stock at the time of completion of the merger. In
addition, if the market price of TCS Common Stock is less than $17.07 per share
as of the closing date, holders of XYPOINT's preferred stock will receive
securities having a lower market value as of the closing date than the
liquidation preferences set forth in XYPOINT's articles of incorporation. The
market price of TCS Common Stock on a recent date is set forth under "Market
Price Information."

IF TCS AND XYPOINT DO NOT INTEGRATE THEIR TECHNOLOGY QUICKLY AND EFFECTIVELY,
MANY OF THE POTENTIAL BENEFITS OF THE MERGER MAY NOT BE REALIZED.

TCS intends to integrate XYPOINT's technology into its own products and
services as well as offer XYPOINT's products and services separately. TCS and
XYPOINT cannot assure you that they will be able to integrate their technology
quickly and effectively. In order to obtain the benefits of the merger, TCS must
make XYPOINT's technology, products and services operate together with TCS'
technology, products and services. TCS may be required to spend additional time
and money on integration which would otherwise be spent on developing its own
products and services. If TCS does not integrate the technology effectively or
if management spends too much time on integration issues, it could harm the
combined company's business, financial condition and results of operations.

THE MERGER MAY RESULT IN A LOSS OF TCS OR XYPOINT EMPLOYEES.

Despite TCS' efforts to hire and retain quality employees, TCS might lose
some of XYPOINT's or its own employees following the merger. Competition for
qualified management, engineering and technical employees is intense, especially
in the Baltimore-Washington area where TCS' principal offices are located and in
the Seattle area where XYPOINT's principal offices are located. TCS and XYPOINT
have different corporate cultures, and XYPOINT employees may not want to work
for a larger, publicly-traded

25
<PAGE> 33

company instead of a smaller, privately-held company. The unvested options held
by employees of XYPOINT will fully vest as a result of the merger, and this may
affect TCS' ability to retain these employees. In addition, competitors may
recruit employees prior to the merger and during integration, as is common in
mergers of high technology companies. As a result, employees of XYPOINT or TCS
could leave with little or no prior notice. TCS and XYPOINT cannot assure you
that the combined company will be able to attract, retain and integrate
employees following the merger.

THE MERGER MAY RESULT IN A LOSS OF CUSTOMERS.

As a result of the merger some customers or potential customers may not
continue to do business with TCS or XYPOINT. In this case, the combined company
may lose significant revenue that either TCS or XYPOINT might have otherwise
received had the merger not occurred.

MERGER RELATED ACCOUNTING CHARGES WILL DELAY AND REDUCE TCS' PROFITABILITY.

The merger is being accounted for by TCS under the "purchase" method of
accounting. Under the purchase method, the purchase price of XYPOINT will be
allocated to identifiable assets and liabilities acquired from XYPOINT with any
excess being treated as goodwill. As a result, TCS will incur accounting charges
from the merger which may delay TCS' profitability. These charges are currently
estimated to include: in-process research and development of approximately $10.1
million, to be expensed in the period in which the merger is consummated,
amortization of intangible assets, estimated to be approximately $48.3 million
to be amortized over 5 years, and other costs not currently known.

IF THE CONDITIONS TO THE MERGER ARE NOT MET OR WAIVED, THE MERGER WILL NOT OCCUR
AND THE INTENDED BENEFITS OF THE MERGER WILL NOT BE REALIZED.

Several conditions must be satisfied or waived to complete the merger.
These conditions are described under "The Merger Agreement -- Conditions to the
Merger" and in detail in the merger agreement. TCS and XYPOINT cannot assure you
that each of the conditions will be satisfied. If the conditions are not
satisfied or waived, the merger will not occur or will be delayed, and TCS and
XYPOINT each may lose some or all of the intended benefits of the merger. For
example, if either party's representations and warranties are not materially
true and correct at the closing, the other party may not be required to close.
If the merger is not completed, XYPOINT will require substantial additional
capital resources to continue its business, which resources may not be available
on favorable terms, or at all.

FAILURE TO COMPLETE THE MERGER WOULD HARM XYPOINT'S FUTURE BUSINESS AND
OPERATIONS.

If the merger is not completed for any reason, XYPOINT may be subject to a
number of material risks, including the following:

- if XYPOINT continues to incur substantial operating losses, it will need
to immediately and successfully establish new sources of financing, the
availability of which is uncertain;

26
<PAGE> 34

- potential customers may defer purchases of XYPOINT's services; and

- employee turnover may increase.

The occurrence of any of these factors would likely result in serious harm
to XYPOINT's business, operating results and financial condition.

XYPOINT OFFICERS AND DIRECTORS HAVE CONFLICTS OF INTEREST ARISING OUT OF
PERSONAL BENEFITS TO BE RECEIVED IN THE MERGER THAT MAY INFLUENCE THEM TO
SUPPORT OR APPROVE THE MERGER.

Some of the directors and officers of XYPOINT may enter into agreements
with TCS that provide them with interests in the merger that are different from,
or are in addition to, your interests. TCS expects to enter into an employment
agreement with Kenneth Arneson. In addition, the vesting of unvested stock
options held by directors and officers of XYPOINT will accelerate as a result of
the merger. Also, if the market price of TCS Common Stock is less than $17.07
per share as of the closing date, holders of XYPOINT's preferred stock may
receive securities having a lower value as of the closing date than the
liquidation preferences set forth in XYPOINT's articles of incorporation, and,
correspondingly, XYPOINT's officers, who generally hold options to purchase
XYPOINT common stock, will receive more consideration than they would otherwise
if the holders of XYPOINT preferred stock had received the full amount of their
liquidation preferences based on the later market price of TCS Common Stock. As
a result, these officers and directors could be more likely to vote to approve
the merger agreement than if they did not hold these interests. XYPOINT
shareholders should consider whether these interests may have influenced these
officers and directors to support or recommend the merger. See "The
Merger -- Interests of Persons in the Merger."

THE MERGER MAY DEPRIVE XYPOINT SHAREHOLDERS OF OPPORTUNITIES.

As a consequence of the merger, XYPOINT shareholders will lose the chance
to receive the benefits of their investment in the development and exploitation
of XYPOINT's technologies and products on a stand-alone basis. The management of
the combined company may make strategic and operational decisions that differ
from those that would be made by XYPOINT as an independent company.
Consequently, shareholders of XYPOINT may not achieve a greater return on their
investment in the combined company than if XYPOINT were to remain an independent
company.

XYPOINT SHAREHOLDERS, OPTION HOLDERS AND WARRANT HOLDERS WILL NOT BE ABLE TO
SELL ANY OF THEIR TCS COMMON STOCK PRIOR TO MAY 15, 2001.

Under the terms of the merger agreement, all of the XYPOINT shareholders
must sign either a stock restriction agreement or a voting agreement that
restricts the sale or transfer of TCS Common Stock issued in the merger prior to
May 15, 2001. You cannot sell your TCS Common Stock for a period of 240 days
following the effective date of the merger except as follows: (i) on or after
the 120th day following the effective date of the merger, you can sell up to
one-third (1/3) of the shares of TCS Common Stock acquired by you in the merger;
(ii) on or after the 180th day following the effective date of the merger, you
can sell up to an additional one-third (1/3) of the shares of TCS Common Stock
acquired by you in the merger and (iii) on or after the 240th day following the
effective date of the merger, you can sell the remaining one-third (1/3) of the
shares of TCS Common Stock acquired by you in the merger. TCS cannot assure you
of the stock

27
<PAGE> 35

price of the TCS Common Stock at the expiration of the lock-up. Affiliates of
XYPOINT, and those persons who become affiliates of the combined company after
the merger, will also be restricted by securities laws which restrict sales by
affiliates.

RISKS RELATED TO TCS AND THE COMBINED COMPANY FOLLOWING THE MERGER

EACH OF TCS AND XYPOINT HAVE A HISTORY OF LOSSES, EXPECT LOSSES TO CONTINUE IN
THE FUTURE AND THE COMBINED COMPANY MAY NOT EVER BECOME PROFITABLE.

TCS incurred annual net losses in three of the past five years and nominal
income in each of the other two years. TCS incurred net losses of $3.5 million
for the nine months ended September 30, 2000 and $1.3 million for the year ended
December 31, 1999. As of September 30, 2000, TCS had an accumulated deficit of
$8.1 million. XYPOINT incurred annual net losses in each of the past five years.
XYPOINT incurred net losses of $7.0 million for the nine months ended September
30, 2000 and $8.5 million for the year ended December 31, 1999. As of September
30, 2000, XYPOINT had an accumulated deficit of $37.1 million. TCS expects to
incur significant expenses in the near term, especially product development,
sales and marketing and administrative expenses. Therefore, the combined company
will need to generate significant additional revenue and control costs to
achieve and sustain profitability on a quarterly or annual basis. The combined
company may not increase revenue or control costs, and if it does not, its
operating results and profitability could be adversely affected.

TCS' AND XYPOINT'S LIMITED OPERATING HISTORIES MAKE FINANCIAL FORECASTING AND
EVALUATION OF THE COMBINED COMPANY'S BUSINESS DIFFICULT AND EVALUATION OF YOUR
INVESTMENT IN THE COMBINED COMPANY DIFFICULT.

TCS' and XYPOINT's limited operating histories make it difficult to
forecast the combined company's future operating results. TCS has only a limited
history selling its current network application software products and related
services. Although TCS commenced operations in 1987, substantially all of its
revenue came from communications engineering services until 1997 when TCS began
generating revenue from its network application software products. For the year
ended December 31, 1999, TCS derived approximately 25% of its total revenue from
the sale of network application software licenses and services, of which
approximately 9% was derived from software licenses and 16% from network
application services. The remaining 75% of TCS' total revenue for this period
was derived from the sale of communications engineering services. XYPOINT was
founded in 1993 and began developing its current E-911 service in 1996. As of
September 30, 2000, substantially all revenue recognized by XYPOINT is related
to its E-911 products and services. Because TCS changed the focus of its
business and because XYPOINT does not have a long history upon which to base
forecasts of future operating results, you should not rely on either company's
past financial performance to evaluate its future financial performance and any
predictions about the combined company's future revenues and expenses may not be
as accurate as they would be if TCS and XYPOINT had longer, more stable business
histories.

28
<PAGE> 36

VARIATIONS IN QUARTERLY OPERATING RESULTS DUE TO FACTORS SUCH AS CHANGES IN
DEMAND FOR ITS PRODUCTS AND CHANGES IN ITS MIX OF REVENUES MAY CAUSE THE TCS
COMMON STOCK PRICE TO DECLINE.

TCS expects its and the combined company's quarterly operating results to
fluctuate. TCS therefore believes that quarter-to-quarter comparisons of its
operating results may not be a good indication of its future performance, and
you should not rely on them to predict its future performance or the future
performance of TCS Common Stock. TCS' quarterly revenues, expenses and operating
results could vary significantly from quarter-to-quarter. If its operating
results in future quarters fall below the expectations of market analysts and
investors, the market price of TCS Common Stock will fall.

THE LOSS OF KEY PERSONNEL OR ANY INABILITY TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL COULD HARM TCS' AND THE COMBINED COMPANY'S BUSINESS.

TCS' and the combined company's future success will depend in large part on
its ability to hire and retain a sufficient number of qualified personnel,
particularly in sales and marketing and research and development. If TCS is
unable to do so, its and the combined company's business would be harmed. TCS'
and the combined company's future success also depends upon the continued
service of its executive officers and other key sales, engineering and technical
staff. The loss of the services of TCS' executive officers and other key
personnel would harm TCS' and the combined company's operations. TCS maintains
key person life insurance on certain of its executive officers. TCS and the
combined company would be harmed if one or more of TCS' officers or key
employees decided to join a competitor or if it fails to attract qualified
personnel. None of TCS' officers or key personnel are bound by an employment
agreement. TCS expects to enter into an employment agreement with Kenneth
Arneson and other XYPOINT officers or employees.

MARKET PRICE FLUCTUATIONS OF TCS COMMON STOCK COULD HARM TCS' ABILITY TO ATTRACT
AND RETAIN PERSONNEL.

The market price of TCS Common Stock has fluctuated substantially since its
initial public offering in August 2000. Consequently, current and potential
employees may perceive TCS' equity incentives such as stock options as less
attractive. In that case, TCS' ability to attract and retain employees would be
harmed. All unvested options previously granted to XYPOINT officers and
employees will accelerate and become fully vested upon the closing of the
merger. New options granted to XYPOINT officers and employees at the current
market price of TCS Common Stock may not be sufficient to retain XYPOINT
officers and employees. In the event TCS' Common Stock price declines, the
retention value of stock options will decline and TCS' employees may choose not
to remain employed by TCS, which would harm TCS' and the combined company's
business.

IF TCS ACQUIRES ADDITIONAL COMPANIES OR TECHNOLOGIES IN THE FUTURE, THEY COULD
PROVE DIFFICULT TO INTEGRATE, DISRUPT TCS' AND THE COMBINED COMPANY'S BUSINESS,
DILUTE STOCKHOLDER VALUE OR ADVERSELY AFFECT OPERATING RESULTS OR THE MARKET
PRICE OF TCS COMMON STOCK.

In addition to the acquisition of XYPOINT, TCS may acquire or make
investments in other companies, services and technologies in the future. If TCS
fails to properly evaluate

29
<PAGE> 37

and execute acquisitions and investments, TCS' and the combined company's
business and prospects may be seriously harmed. To successfully complete an
acquisition, TCS must:

- properly evaluate the technology;

- accurately forecast the financial impact of the transaction, including
accounting charges and transaction expenses;

- integrate and retain personnel;

- combine potentially different corporate cultures; and

- effectively integrate products and services, and research and
development, sales and marketing and support operations.

If TCS fails to do any of these, TCS and the combined company may suffer
losses, its management may be distracted from day-to-day operations and the
market price of TCS Common Stock may be materially adversely effected. In
addition, if TCS consummates acquisitions using convertible debt or equity
securities, existing stockholders may be diluted which could have a material
adverse effect on the market price of TCS Common Stock.

BECAUSE SEVERAL OF TCS', XYPOINT'S AND THE COMBINED COMPANY'S COMPETITORS HAVE
SIGNIFICANTLY GREATER RESOURCES, TCS AND THE COMBINED COMPANY COULD LOSE
CUSTOMERS AND MARKET SHARE.

The businesses of providing network application software and communications
engineering services are highly competitive. Several of TCS', XYPOINT's and the
combined company's competitors are substantially larger than they are and have
greater financial, technical and marketing resources than they do. In
particular, larger competitors have certain advantages over TCS, XYPOINT, and
the combined company which could cause TCS and/or the combined company to lose
customers and impede their ability to attract new customers, including:

- financial, technical, marketing, personnel and other resources;

- more established relationships with wireless carriers;

- more funds to deploy products and services; and

- the ability to lower prices of competitive products and services because
they are selling larger volumes.

The widespread adoption of open industry standards such as the Wireless
Access Protocol specifications may make it easier for new market entrants and
existing competitors to introduce products that compete with TCS', XYPOINT's and
the combined company's software products. With time and capital, it would be
possible for competitors to replicate TCS', XYPOINT's and the combined company's
product and service offerings. Moreover, TCS', XYPOINT's and the combined
company's competitors may develop alternative wireless data communications,
messaging technologies and mobile location products that gain broader market
acceptance than TCS', XYPOINT's and the combined company's. Additionally, the
wireless communications industry continues to experience significant
consolidation which may make it more difficult for smaller companies such as
TCS, XYPOINT and the combined company to compete. Competition could reduce their
market share or force them to lower prices. As TCS and the combined company
enter new

30
<PAGE> 38

markets and introduce new services, they will face new competitors. TCS' and
XYPOINT's competitors include application developers, telecommunications
equipment vendors and information technology consultants, and may include
traditional Internet portals and Internet infrastructure software companies. TCS
expects that it and the combined company will compete primarily on the basis of
price, time to market, functionality, quality and breadth of product and service
offerings.

BECAUSE TCS' AND XYPOINT'S SOFTWARE MAY CONTAIN DEFECTS OR ERRORS, REVENUE COULD
DECREASE IF THIS INJURES TCS' AND THE COMBINED COMPANY'S REPUTATION OR DELAYS
SHIPMENTS OF THEIR SOFTWARE.

The software products that TCS and XYPOINT develop are complex and must
meet the stringent technical requirements of its customers. TCS and XYPOINT must
quickly develop new products and product enhancements to keep pace with the
rapidly changing software and telecommunications markets in which each operate.
Software as complex as TCS' and XYPOINT's is likely to contain undetected errors
or defects, especially when first introduced or when new versions are released.
TCS' and XYPOINT's software may not be error or defect free after delivery to
customers, which could damage TCS' and the combined company's reputation, cause
revenue losses, result in the rejection of their software or services, divert
development resources and increase service and warranty costs, each of which
could have a serious harmful effect on TCS and the combined company.

BECAUSE TCS RELIES ON LUCENT TO MARKET AND SELL WIRELESS INTELLIGENT NETWORK
APPLICATIONS AND SERVICES, THE COMBINED COMPANY'S BUSINESS WILL BE HARMED IF
LUCENT CEASES TO MARKET AND SELL THOSE PRODUCTS AND SERVICES.

TCS relies on Lucent to market and sell wireless intelligent network
applications and services that it develops under a development agreement TCS
entered into with Lucent. Lucent markets and sells these applications as part of
its own product and service offerings to its wireless carrier customers, many of
whom TCS may not be able to independently access. To date, almost all of TCS'
revenue from network application software products has resulted from sales to
wireless carriers by Lucent. The amount and timing of resources Lucent dedicates
to marketing and selling these products is not within TCS' control. Lucent may
change its strategic focus, pursue alternative technologies, develop competing
products, establish relationships with TCS' competitors or reduce its efforts to
market and sell TCS product and service offerings. For example, Lucent is
separately developing a new prepaid wireless application and has indicated that
it will no longer market the Prepaid Wireless application that was developed
under TCS' development agreement with Lucent. Unfavorable developments in the
relationship with Lucent would significantly harm TCS' and the combined
company's ability to market and sell their wireless intelligent network
products.

BECAUSE LUCENT CAN BUY OUT TCS' RIGHT TO RECEIVE REVENUE FROM CERTAIN NETWORK
APPLICATION SOFTWARE PRODUCTS FOR A NEGOTIATED LUMP-SUM PAYMENT, TCS' ABILITY TO
DERIVE REVENUE FROM THOSE PRODUCTS IN THE FUTURE IS UNCERTAIN.

TCS shares revenue with Lucent from the sale of the Short Message Service
Center and Prepaid Wireless software applications and will share revenue from
the sale of enhanced Over-The-Air software applications, once development is
complete. TCS'

31
<PAGE> 39

development agreement with Lucent provides that by mutual agreement, Lucent may
buy out TCS' right to receive revenue from the sale of these products in
exchange for a negotiated lump-sum payment from Lucent to TCS. If Lucent were to
buy out TCS' ability to receive revenue from sales of the Short Message Service
Center software application, TCS' and the combined company's business would be
adversely affected. Revenue from sales of the Short Message Service Center
software licenses and related services accounted for approximately 30% of TCS'
network applications revenue and 7% of its total revenue for the year ended
December 31, 1999 and approximately 39% of its network applications revenue and
14% of its total revenue for the nine months ended September 30, 2000. Moreover,
TCS sells its Wireless Internet Gateway and other products in conjunction with
the Short Message Service Center software application, and sales could decline
if TCS was unable to sell its Wireless Internet Gateway in conjunction with the
Short Message Service Center software application.

BECAUSE SALES TO THE U.S. GOVERNMENT AND LUCENT HAVE HISTORICALLY ACCOUNTED FOR
THE MAJORITY OF TCS' TOTAL REVENUE, A LOSS OF EITHER OF THEM WOULD SIGNIFICANTLY
REDUCE ITS AND THE COMBINED COMPANY'S REVENUE.

To date, the largest customers of TCS' product and service offerings in
terms of revenue generated have been the U.S. government and Lucent. For the
nine months ended September 30, 2000 and the years ended December 31, 1999 and
1998, TCS received substantially all of its network application software license
revenue from Lucent under the Application Development Agreement. Lucent
accounted for approximately 60% of TCS' network applications revenue and
approximately 22% of its total revenue for the nine months ended September 30,
2000, approximately 45% of its network applications revenue and approximately
11% of its total revenue for the year ended December 31, 1999 and approximately
47% of its network applications revenue and approximately 15% of its total
revenue for the year ended December 31, 1998. Various U.S. government agencies
accounted for approximately 34% of TCS' network applications revenue and
approximately 46% of its communications engineering services revenue for the
nine months ended September 30, 2000, approximately 46% of its network
applications revenue and approximately 70% of its communications engineering
services revenue for the year ended December 31, 1999, and approximately 47% of
its network applications revenue and approximately 76% of its communications
engineering services revenue for the year ended December 31, 1998. Network
applications revenue paid by various U.S. government agencies accounted for
approximately 12% of TCS' total revenue for the nine months ended September 30,
2000, approximately 11% of its total revenue for the year ended December 31,
1999, and approximately 15% of its total revenue for the year ended December 31,
1998. Communications engineering services revenue paid by various U.S.
government agencies accounted for approximately 29% of TCS' total revenue for
the nine months ended September 30, 2000, approximately 53% of its total revenue
for the year ended December 31, 1999, and approximately 52% of its total revenue
for the year ended December 31, 1998. TCS expects that it will generate a
significant portion of its total revenue from the U.S. government and Lucent for
the foreseeable future. TCS' and the combined company's growth depends on
maintaining relationships with these important customers and on developing other
customers and distribution channels.

TCS DERIVES A SIGNIFICANT PORTION OF ITS REVENUE FROM SALES TO THE U.S.
GOVERNMENT WHICH HAS SPECIAL RIGHTS UNLIKE OTHER CUSTOMERS AND EXPOSES TCS TO
ADDITIONAL RISKS THAT COULD

32
<PAGE> 40

HAVE A MATERIAL ADVERSE EFFECT ON ITS AND THE COMBINED COMPANY'S BUSINESS,
FINANCIAL CONDITION AND OPERATING RESULTS.

Sales to the U.S. government accounted for approximately 42% of TCS' total
revenue for the nine months ended September 30, 2000 and approximately 64% of
its total revenue for the year ended December 31, 1999. TCS' ability to earn
revenue from sales to the U.S. government can be affected by numerous factors
outside of its control including:

- THE U.S. GOVERNMENT MAY TERMINATE THE CONTRACTS IT HAS WITH TCS. All of
the contracts TCS has with the U.S. government are, by their terms,
subject to termination by the U.S. government either for its convenience
or in the event of a default by TCS. In the event of termination of a
contract by the U.S. government, TCS may have little or no recourse.

- TCS' CONTRACTS WITH THE U.S. GOVERNMENT MAY BE TERMINATED DUE TO CONGRESS
FAILING TO APPROPRIATE FUNDS. TCS' U.S. government contracts are
conditioned upon the continuing availability of Congressional
appropriations. Congress usually appropriates funds for a given program
on a fiscal-year basis even though contract performance may take more
than one year. Any failure by Congress to appropriate funds to any
program that TCS participates in could materially delay or terminate the
program and have a material adverse effect on TCS' business. For example,
the General Services Administration is one of TCS' primary U.S.
government customers and accounted for 30% of TCS' total revenue for the
nine months ended September 30, 2000 and 43% for the year ended December
31, 1999.

- TCS IS SUBJECT TO PROCUREMENT AND OTHER RELATED LAWS AND REGULATIONS
WHICH CARRY SIGNIFICANT PENALTIES FOR NON-COMPLIANCE. TCS is subject to
extensive and complex U.S. government procurement laws and regulations.
Failure to comply with these laws and regulations and with laws governing
the export of controlled products and commodities, and any significant
violations of any other federal law, could subject TCS to potential
contract termination, civil and criminal penalties, and under certain
circumstances, suspension and debarment from future U.S. government
contracts.

Additionally, the U.S. government may audit and review TCS' costs and
performance on their contracts, as well as its accounting and general
practices. The costs and prices under these contracts may be subject to
adjustment based upon the results of any audits. Future audits may harm
TCS' business.

- MANY OF TCS' U.S. GOVERNMENT CONTRACTS COULD RESULT IN UNREIMBURSED COST
OVERRUNS THAT TCS WOULD BE RESPONSIBLE FOR. TCS' U.S. government business
is performed under both cost-plus contracts and fixed-price contracts.
Fixed-price contracts accounted for approximately 36% of its U.S.
government revenues in the year ended December 31, 1999. There is a risk
of unreimbursable cost overruns with all fixed-price contracts. If any
cost overruns should occur, it could have a material adverse effect on
TCS' business.

33
<PAGE> 41

BECAUSE XYPOINT DERIVES A MAJORITY OF ITS REVENUE FROM VERIZON WIRELESS, THE
LOSS OF VERIZON WIRELESS WOULD HAVE A SERIOUS HARMFUL EFFECT ON XYPOINT AND THE
COMBINED COMPANY'S ABILITY TO GENERATE REVENUE.

For the nine months ended September 30, 2000, approximately 77% of
XYPOINT's revenue was generated from sales to Verizon Wireless, including the
pending acquisitions of Price Communication's wireless business by Verizon
Wireless. XYPOINT expects that a significant portion of its revenues will
continue to be derived from sales to Verizon Wireless in the foreseeable future.
Verizon Wireless was recently formed by the combination of several wireless
carriers and XYPOINT is currently in the process of renegotiating a single,
unified contract with Verizon Wireless. XYPOINT and the combined company cannot
assure you that this contract will be executed. The loss of Verizon as a
customer would significantly harm XYPOINT's and the combined company's business,
operating results and financial condition.

IF TCS AND THE COMBINED COMPANY ARE UNABLE TO USE THIRD PARTIES' RESEARCH AND
DEVELOPMENT RESOURCES, ITS ABILITY TO MAINTAIN THE COMPETITIVENESS OF ITS
NETWORK APPLICATION SOFTWARE PRODUCTS WOULD BE ADVERSELY AFFECTED AND ITS
RESEARCH AND DEVELOPMENT COSTS COULD INCREASE.

In addition to TCS' own research and development efforts, it relies on
third parties for the research and development of new network application
products. For example, Lucent provides TCS with access to its laboratories where
TCS is able to test new Lucent products and features for compatibility with its
software applications before these products and features become publicly
available. TCS' and the combined company's ability to develop new applications
and maintain the competitiveness and functionality of its product offerings
could be adversely affected if it was unable to use third parties' research and
development resources.

IF WIRELESS CARRIES DO NOT CONTINUE TO PROVIDE ADDITIONAL PRODUCTS AND SERVICES
TO THEIR SUBSCRIBERS, THE REVENUE OF TCS, XYPOINT AND THE COMBINED COMPANY COULD
BE HARMED.

If wireless carriers limit their product and service offerings or do not
purchase additional products containing its applications, TCS' and the combined
company's business will be harmed. Wireless carriers face implementation and
support challenges in introducing Internet-based services via wireless devices,
which may slow the rate of adoption or implementation of TCS' and the combined
company's products and services. Historically, wireless carriers have been
relatively slow to implement complex new services such as Internet-based
services. TCS' and the combined company's future success depends upon a
continued increase in the use of wireless devices to access the Internet and
upon the continued development of wireless devices as a medium for the delivery
of network-based content and services. TCS has limited or no control over the
pace at which wireless carriers implement these new services. The failure of
wireless carriers to introduce and support services utilizing TCS' and XYPOINT's
products in a timely and effective manner could reduce sales of TCS' and
XYPOINT's products and services and seriously harm the combined company's
business.

34
<PAGE> 42

BECAUSE TCS' OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS, IT MAY
NOT MEET EXPECTATIONS OF INVESTORS AND THE MARKET PRICE OF TCS' COMMON STOCK MAY
DECLINE.

TCS' quarterly revenue and operating results are difficult to predict and
are likely to fluctuate from quarter-to-quarter. For example, TCS generally
derives a significant portion of its network application software license
revenue from initial license fees. The initial license fees that it receives in
a particular quarter may vary significantly. In addition, the length of each
project that it performs in the communications engineering services business
varies. As these projects begin and end, quarterly results may vary. As a
result, in some future periods, TCS' results of operations may be below the
expectations of analysts and investors which could cause the market price of TCS
Common Stock to decline. Additional factors that have either caused TCS' results
to fluctuate in the past or that are likely to affect it in the future include:

- changes in TCS' relationships with Lucent, the U.S. government or other
customers;

- timing of introduction of new products and services;

- changes in pricing policies and product offerings by TCS or its
competitors;

- costs associated with advertising, marketing and promotional efforts to
acquire new customers;

- capital expenditures and other costs and expenses related to improving
its business, expanding operations and adapting to new technologies and
changes in consumer preferences; and

- TCS' lengthy and unpredictable sales cycle.

BECAUSE TCS' AND THE COMBINED COMPANY'S BUSINESS MAY NOT GENERATE SUFFICIENT
CASH TO FUND OPERATIONS, THE COMBINED COMPANY MAY NOT BE ABLE TO CONTINUE TO
GROW ITS BUSINESS IF IT DOES NOT OBTAIN ADDITIONAL CAPITAL.

Because TCS expects to continue to invest heavily in product development
and in sales and marketing to finance its growth, the combined company may
require additional capital. Currently, TCS' available cash resources, including
the net proceeds from its recent initial public offering will be sufficient to
fund the combined company's operating needs for at least the next 12 months. TCS
cannot assure you that the combined company will be able to raise additional
capital in the future on acceptable terms, or at all.

BECAUSE TCS' PRODUCT OFFERINGS ARE SOLD INTERNATIONALLY, IT IS SUBJECT TO RISKS
OF CONDUCTING BUSINESS IN FOREIGN COUNTRIES.

Wireless carriers in Australia, New Zealand and five countries in Central
and South America have purchased TCS' network application products through
Lucent. TCS believes its revenue will be increasingly dependent on business in
foreign countries, and it will be subject to the social, political and economic
risks of conducting business in foreign countries, including:

- inability to adapt its products and services to local cultural traits,
customs and mobile user preferences;

- costs of adapting its product and service offerings for foreign markets;

- inability to locate qualified local employees, partners and suppliers;

35
<PAGE> 43

- reduced protection of intellectual property rights;

- the potential burdens of complying with a variety of U.S. and foreign
laws, trade standards and regulatory requirements, including the
regulation of wireless communications and the Internet and uncertainty
regarding liability for information retrieved and replicated in foreign
countries;

- general geopolitical risks, such as political and economic instability
and changes in diplomatic and trade relations; and

- unpredictable fluctuations in currency exchange rates.

Any of the foregoing risks could have a material adverse effect on TCS' and
the combined company's business by diverting time and money toward addressing
them or by reducing or eliminating sales in such foreign countries.

FOLLOWING TCS' INITIAL PUBLIC OFFERING IN AUGUST 2000, TCS MAY NO LONGER BE ABLE
TO BID FOR CORPORATE CONTRACTS AS A MINORITY-OWNED BUSINESS ENTERPRISE.

From 1989 until June 1998, TCS participated as a minority-owned business
enterprise in the Section 8(a) Business Development Program under the U.S. Small
Business Act. TCS currently continues to perform some federal government
contracts awarded to it prior to June 1998. At September 30, 2000, approximately
$8.9 million, or 31%, of TCS' backlog was under such contracts. These contracts,
by their terms, terminate under the U.S. Small Business Act if TCS experiences a
change of control unless the Small Business Administration grants waivers with
respect to such contracts upon the applicable federal agency customer's request.
The sale of TCS Common Stock in its initial public offering was deemed to be a
change of control by the Small Business Administration. TCS was granted a waiver
of termination of its Section 8(a) contracts prior to the completion of its
initial public offering. If corporate enterprises no longer consider TCS a
minority-owned business, it may be more difficult for TCS to compete and its
business could be harmed. Additionally, Maurice B. Tose, President, Chief
Executive Officer and Chairman of the Board of TCS, could, without seeking
anyone else's approval, transfer voting control of TCS to a third party. Such a
transfer could also cause TCS to lose its status as a minority-owned business
among corporate enterprises.

INDUSTRY RISKS

BECAUSE THE WIRELESS DATA INDUSTRY IS A NEW AND RAPIDLY EVOLVING MARKET, TCS'
AND XYPOINT'S PRODUCT AND SERVICE OFFERINGS COULD BECOME OBSOLETE UNLESS THEY
RESPOND EFFECTIVELY AND ON A TIMELY BASIS TO RAPID TECHNOLOGICAL CHANGES.

The successful execution of TCS' and XYPOINT's business strategy is
contingent upon wireless network operators launching and maintaining mobile
location services and TCS' and XYPOINT's ability to create new network
application software products and adapt their existing network application
software products to rapidly changing technologies, industry standards and
customer needs. As a result of the complexities inherent in TCS' and XYPOINT's
product offerings, new technologies may require long development and testing
periods. Additionally, new products may not achieve market acceptance. Also,
TCS' and XYPOINT's competitors may develop alternative technologies that gain
broader market acceptance than its products. If TCS and the combined company are
unable to develop and introduce technologically advanced products that respond
to evolving

36
<PAGE> 44

industry standards and customer needs, or if TCS and the combined company are
unable to complete the development and introduction of these products on a
timely and cost effective basis, its business will suffer.

New laws and regulations that impact TCS' and XPOINT's industry could
increase costs or reduce opportunities to earn revenue. The wireless carriers
that use TCS and XYPOINT product and service offerings are subject to regulation
by domestic, and in some cases, foreign, governmental and other agencies.
Regulations that affect them could increase TCS' and XPOINT's costs or reduce
their ability to sell their products and services. In addition, there are an
increasing number of laws and regulations pertaining to wireless telephones and
the Internet under consideration in the United States and elsewhere.

The applicability to the Internet of existing laws governing issues such as
intellectual property ownership and infringement, copyright, trademark, trade
secret, taxation, obscenity, libel, employment and personal privacy is uncertain
and developing. Any new legislation or regulation, or the application or
interpretation of existing laws, may have a material adverse effect on TCS' and
the combined company's business, results of operations and financial condition.
Additionally, modifications to TCS' and the combined company's business plans or
operations to comply with changing regulations or certain actions taken by
regulatory authorities might increase its costs of providing its product and
service offerings and materially adversely effect its financial condition.

CONCERNS ABOUT PERSONAL PRIVACY AND COMMERCIAL SOLICITATION MAY LIMIT THE GROWTH
OF MOBILE LOCATION SERVICES AND REDUCE DEMAND FOR TCS'S AND XYPOINT'S PRODUCTS
AND SERVICES.

In order for mobile location products and services to function properly,
wireless carriers must locate their subscribers and store information on each
subscriber's location. Although data regarding the location of the wireless user
resides only on the wireless carrier's systems, users may not feel comfortable
with the idea that the wireless carrier knows and can track their location.
Carriers will need to obtain subscribers' permission to gather and use the
subscribers' personal information, or they may not be able to provide customized
mobile location services which those subscribers might otherwise desire. If
subscribers view mobile location services as an annoyance or a threat to their
privacy, that could reduce demand for TCS' and XYPOINT's products and services
and have an adverse effect on prospective sales.

BECAUSE THE COMBINED COMPANY'S PERFORMANCE IS BASED UPON ITS ABILITY TO DEVELOP
NEW PRODUCTS IN AN INDUSTRY UNDERGOING RAPID TECHNOLOGICAL AND REGULATORY
CHANGES, ITS FUTURE PERFORMANCE IS UNCERTAIN.

Phase I of the FCC's 911 mandate required operators to be able to locate
wireless 911 callers by April 1998. This service uses cell sector technology,
which provides a broad location estimate, based on the location of the tower and
the direction of the particular sector of the cell site. This technology can
identify which cell sector a wireless user is in, but cannot precisely locate
the user within the cell sector. Carriers' obligations to provide these services
are subject to request by public safety organizations. Due to complex
regulatory, funding and political issues many public safety organizations have
not yet requested this service. As of September 30, 2000, XYPOINT provided Phase
I services to

37
<PAGE> 45

approximately five million customer subscribers in fifteen states but it is
estimated that less than 5% of wireless network operations in the U.S. currently
comply with Phase I.

The combined company will be required to rely on third-party providers to
manufacture and deploy devices that determine the precise geographic location of
wireless users to comply with Phase II of the FCC order. Wireless carriers were
required to file a statement with the FCC on November 9, 2000 to detail the
basic type of technology they intend to deploy. Currently, it is estimated that
less than 1% of the wireless network in the United States and in Europe is
equipped with location devices that meet the improved technology standards that
the FCC requires for Phase II. With respect to Phase II wireless E9-1-1
services, the extent and timing of the combined company's deployment is
dependent both on public safety requests for such service and wireless carrier's
ability to certify the accuracy of and deploy the precise location technology.
XYPOINT expects that many public safety jurisdictions will continue to deploy
Phase I technology even after the October 2001 Phase II deadline. Because the
combined company will rely on third-party location technology instead of
developing the technology itself, the combined company has little or no
influence over its improvement. If the technology never becomes precise enough
to satisfy wireless users' needs or the FCC's requirements, the combined company
may not be able to increase or sustain demand for its products and services, if
at all.

The FCC has determined that E-911 is capable of being deployed over a
wireless carrier's network or through handsets. The FCC has recognized, however,
that the deployment of handset-based E-911 may be protracted, and has
established a separate Phase II implementation schedule. Under the handset-based
Phase II schedule, a wireless carrier's obligation to make E-911 available is
not subject to a prior request by a public safety organization. Instead,
wireless carriers are required to commence selling and activating E-911-capable
handsets by October 1, 2001.

Wireless carriers and wireless users may never exhibit sufficient demand
for certain of XYPOINT's and the combined company's mobile location services
unless more precise location technology is installed over much more of the
wireless network. Technical failures, time delays or the significant costs
associated with developing or installing improved location technology could slow
down or stop the deployment of XYPOINT's and the combined company's mobile
location products. If deployment of improved location technology is delayed,
stopped or never occurs, market acceptance of XYPOINT's and the combined
company's products and services may be adversely affected.

COST RECOVERY MECHANISMS NO LONGER BEING REQUIRED MAY CAUSE XYPOINT'S AND THE
COMBINED COMPANY'S BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION TO BE
ADVERSELY AFFECTED.

The FCC has delegated to state and local jurisdictions the authority to
develop cost recovery mechanisms appropriate to local conditions but cost
recovery is no longer a condition to wireless carriers' obligations to deploy
the service. XYPOINT expects that it and the combined company will be subject to
significant pressures from wireless carriers with respect to its pricing of
E-911 services as a result. In addition, the absence of cost recovery mechanisms
may cause the implementation of E-911 products and services to be delayed.

38
<PAGE> 46

XYPOINT IS DEPENDENT ON STATE AND LOCAL GOVERNMENTS REQUESTING E-911.

Under the FCC's mandate, a wireless carrier's obligation to provide E-911
services is required only if state and local governments request the service. If
state and local governments do not widely request that E-911 services be
provided, XYPOINT's E-911 business would be significantly harmed and future
growth of the combined company's business would be significantly reduced.

TECHNOLOGY RISKS

IF TCS IS UNABLE TO INTEGRATE ITS PRODUCTS WITH WIRELESS CARRIERS' SYSTEMS OR IF
XYPOINT IS UNABLE TO INTEGRATE ITS PRODUCTS WITH THE EQUIPMENT AND SYSTEMS OF
ITS CUSTOMERS, THE COMBINED COMPANY MAY LOSE SALES TO COMPETITORS.

TCS' network application software products operate with wireless carriers'
systems and various wireless devices. If TCS is unable to continue to design its
software to operate with these systems and devices, it may lose sales to
competitors. For example, if, as a result of technology enhancements or upgrades
to carrier systems, its products can no longer operate with such systems, TCS
may no longer be able to sell its products. Further, even if TCS successfully
redesigns its products to operate with these systems, TCS may not gain market
acceptance before its competitors.

XYPOINT's products may not operate properly when integrated with the
equipment and systems of its customers, or when used to deliver services to a
large number of wireless subscribers. In particular, its products must be
compatible with mobile telephone switches, which direct calls to various parts
of the network. These switches can be manufactured according to many different
standards and may have different variations within each standard. Combining
XYPOINT's products with each type of switch requires a specialized interface and
extensive testing. Because XYPOINT has not yet tested its products for
compatibility with all types of switches, XYPOINT may encounter obstacles when
it attempts to integrate its products with a particular switch. If XYPOINT's
software is not compatible with a third-party provider's technology, it may not
be able to sell its products and services to that provider, or they may require
XYPOINT to make changes to its products. These problems may also delay XYPOINT's
sales or increase its expenses. XYPOINT may not be able to redesign its products
to be compatible with its customers' systems at all, or within the time period
its customers are willing to accept. XYPOINT has a limited number of product
installations. Based on the limited market acceptance of its products to date,
it is difficult to predict how many or what kinds of compatibility problems
XYPOINT may have.

BECAUSE TCS' AND XYPOINT'S SYSTEMS MAY BE VULNERABLE TO SYSTEMS FAILURES AND
SECURITY RISKS, THE COMBINED COMPANY MAY INCUR SIGNIFICANT COSTS TO PROTECT
AGAINST THE THREAT OF THESE PROBLEMS.

TCS and XYPOINT provide for the delivery of information and content to and
from wireless devices in a prompt and timely manner. Any systems failure that
causes a disruption in their ability to facilitate the transmission of
information to these wireless devices could result in delays in end users
receiving this information and cause TCS and the combined company to lose
customers. TCS' and XYPOINT's systems could experience such failures as a result
of unauthorized access by hackers, computer viruses, hardware or software
failures, power or telecommunications failures and other accidental or
intentional

39
<PAGE> 47

actions which could disrupt their systems. TCS and the combined company may
incur significant costs to prevent such systems disruptions.

In addition, increasingly TCS' products will be used to create or transmit
secure information and data to and from wireless devices. For example, TCS'
software can be used to create private address lists. To protect private
information like this from security breaches, TCS may incur significant costs.
Further, if a third party were able to misappropriate TCS' proprietary
information or disrupt TCS' operations, TCS could be subject to claims,
litigation or other potential liabilities that could materially adversely impact
its business.

IF MOBILE EQUIPMENT MANUFACTURERS DO NOT OVERCOME CAPACITY, TECHNOLOGY AND
EQUIPMENT LIMITATIONS, M-COMMERCE MAY NOT GROW AND THE COMBINED COMPANY MAY NOT
BE ABLE TO SELL TCS' AND XYPOINT'S PRODUCTS AND SERVICES.

The wireless technology currently in use by most wireless carriers has
limited bandwidth, which restricts network capacity to deliver
bandwidth-intensive applications like data services to a large number of users.
Because of capacity limitations, wireless users may not be able to connect to
their network when they wish to, and the connection is likely to be slow,
especially when receiving data transmissions. Data services also may be more
expensive than users are willing to pay. To overcome these obstacles, wireless
equipment manufacturers will need to develop new technology, standards,
equipment and devices that are capable of providing higher bandwidth services at
lower cost. TCS and the combined company cannot be sure that manufacturers will
be able to develop technology and equipment that reliably delivers large
quantities of data at a reasonable price. If more capacity is not added, a
sufficient market for mobile location services is not likely to develop or be
sustained and sales of TCS' and XYPOINT's products and services would decline
and the combined company's business would suffer.

BECAUSE THERE IS NO ESTABLISHED MARKET FOR MOST MOBILE LOCATION PRODUCTS, THE
COMBINED COMPANY'S FUTURE SUCCESS IS UNCERTAIN.

The market for mobile location products and services is new and its
potential is uncertain. In order to be successful, the combined company needs
wireless network operators to launch and maintain mobile location services
utilizing its products, and need corporate enterprises and individuals to
purchase and use XYPOINT's WebWirelessNow services. The combined company cannot
be sure that wireless carriers or enterprises will accept their products or that
a sufficient number of wireless users will ultimately utilize their services. To
date, a number of wireless carriers have implemented XYPOINT's E-911 product,
but their roll-outs have been limited. XYPOINT recognized $2.2 million and $5.6
million in revenue for the year ended December 31, 1999 and the nine months
ended September 30, 2000, respectively, from its Phase I Wireless E-911
services. Such services generate monthly recurring revenue and XYPOINT has
received revenue from carriers in fifteen states for its E-911 services.

Currently, it is anticipated that XYPOINT will derive the majority of its
revenue in the future from its E-911, WebWirelessNow Nomad service and
commercial location services. The XYPOINT wireless E-911 service is fully
compliant with the Phase I requirements established by the FCC. The FCC requires
wireless carriers to provide Phase II compliant services commencing in October
2001. Phase II requires XYPOINT products and services to integrate technology
from third party providers of precise location (i.e.,

40
<PAGE> 48

x and y coordinates). Although XYPOINT has performed trials with certain
providers of such technology, it does not have any such products or services in
commercial production.

XYPOINT's Nomad wireless e-mail and commercial location services are at an
early stage of development, and their full potential is unknown. XYPOINT and the
combined company cannot be sure that the market will accept its products or
services or that these products and services will generate any material revenue,
if any. If significant sales do not develop, the combined company's financial
condition and results of operations will suffer.

IF WIRELESS DEVICES ARE NOT WIDELY ADOPTED FOR INTERNET-BASED SERVICES, THE
BUSINESS OF TCS, XYPOINT AND THE COMBINED COMPANY COULD SUFFER.

Individuals currently use many competing products, such as portable
computers and personal data assistants, to remotely access the Internet and
email. Unlike wireless telephones, these products generally are designed for the
visual presentation and input of data. If mobile users do not accept wireless
telephones as a method of accessing Internet-based services, that lack of
acceptance could have a material adverse effect on TCS', XYPOINT's and the
combined company's business, financial condition and results of operations.
There are many technological and market barriers that must be overcome before
the possibilities of mobile commerce, or m-Commerce, become reality, including:

- limited display capability and difficulty of data input in wireless
telephones;

- substantially slower connection speeds of wireless telephones compared to
competing products;

- lack of mobile applications and content customized for use on wireless
telephones;

- variety of competing wireless communication technologies, which may
prevent standardization and confuse wireless users;

- general unavailability of wireless devices that incorporate m-Commerce
capable technology; and

- challenge of developing handsets that reconcile wireless users' desires
for high speed and power, ease of use, long battery life, small size and
light weight.

Mass market acceptance of m-Commerce is unlikely unless and until
manufacturers and content providers successfully address these obstacles.
Because TCS, XYPOINT and the combined company do not manufacture equipment or
create content, each relies on third-parties to make these advances and can do
little to achieve the necessary improvements on its own. TCS and the combined
company cannot assure you that these hurdles can be overcome or, even if they
are, that wireless users will embrace Internet-based services or m-Commerce.

BECAUSE TCS SHARES OWNERSHIP RIGHTS IN CERTAIN NETWORK APPLICATION SOFTWARE
PRODUCTS WITH LUCENT, LUCENT COULD CHALLENGE THE SCOPE OF THOSE RIGHTS OR
RESTRICT TCS' ABILITY TO USE SUCH PRODUCTS FREELY OR TO DEVELOP COMPETING
PRODUCTS.

TCS developed several network application software products under its
development agreement with Lucent, including the Short Messaging Service Center
and Prepaid Wireless software applications. TCS has also recently agreed to
develop an enhanced Over-The-Air software application under this development
agreement. Under this agreement, TCS shares ownership rights in these
applications with Lucent. Further, under an

41
<PAGE> 49

amendment to this development agreement, TCS has granted Lucent the right to
incorporate software and other intellectual property developed by TCS under
their new prepaid wireless software application. The scope of each party's
ownership interest in these applications is subject to each party's various
underlying ownership rights in the intellectual property and confidential
information contributed to the applications and could be subject to challenge by
either party. If Lucent challenges or places any restrictions on TCS' ability to
sell, develop, pledge and/or modify the software code or other intellectual
property rights relating to these applications, TCS' and the combined company's
business could suffer. Additionally, if Lucent challenges or places limitations
on TCS' ability to develop similar applications for other customers based upon
the copyrighted software code or other intellectual property rights, TCS' and
the combined company's business would be adversely affected. Finally, TCS has
not entered into direct agreements with wireless carriers that have installed
its applications. Accordingly, TCS may have limited or no contractual claims
against wireless carriers if they violate its intellectual property rights.

IF TCS, XYPOINT AND THE COMBINED COMPANY ARE UNABLE TO PROTECT THEIR
INTELLECTUAL PROPERTY RIGHTS OR ARE SUED BY THIRD PARTIES FOR INFRINGING UPON
INTELLECTUAL PROPERTY RIGHTS, TCS AND THE COMBINED COMPANY MAY INCUR SUBSTANTIAL
COSTS.

TCS' and XYPOINT's success and competitive position depend in large part
upon their ability to develop and maintain the proprietary aspects of their
technology. Neither TCS nor XYPOINT currently have any issued patents that would
provide intellectual property protection. Instead, both rely on a combination of
copyright, trademark, service mark, trade secrets laws, confidentiality
provisions and various other contractual provisions to protect their proprietary
rights, but these legal means provide only limited protection. If TCS, XYPOINT
or the combined company fail to protect their intellectual property, they may be
exposed to expensive litigation or risk jeopardizing their competitive position.
Similarly, third parties could claim that TCS' or XYPOINT's current or future
products or services infringe upon their intellectual property rights. Claims
like these could require TCS, XYPOINT or the combined company to enter into
costly royalty arrangements or cause TCS, XYPOINT or the combined company to
lose the right to use critical technology.

TCS' and the combined company's ability to protect its intellectual
property rights is also subject to the terms of any future government contracts.
TCS cannot assure you that the federal government will not demand greater
intellectual property rights or restrict its ability to disseminate intellectual
property. TCS is also a member of the Wireless Application Protocol Forum, Ltd.
and has agreed to license some of its intellectual property to other members on
fair and reasonable terms to the extent that the license is required to develop
non-infringing products.

RISKS RELATED TO TCS' AND THE COMBINED COMPANY'S CAPITAL STRUCTURE AND COMMON
STOCK

BECAUSE TCS' FOUNDER, MAURICE B. TOSE, CONTROLS TCS AND WILL CONTROL THE
COMBINED COMPANY, HE CAN TRANSFER CONTROL OF TCS AND THE COMBINED COMPANY TO A
THIRD PARTY

42
<PAGE> 50

WITHOUT ANYONE ELSE'S APPROVAL OR COULD PREVENT A THIRD PARTY FROM ACQUIRING TCS
AND THE COMBINED COMPANY.

TCS has two classes of common stock: Class A Common Stock, or TCS Common
Stock, and Class B common stock. Holders of TCS Common Stock generally have the
same rights as holders of Class B common stock, except that holders of TCS
Common Stock have one vote per share while holders of Class B common stock have
three votes per share. Maurice B. Tose, President, Chief Executive Officer and
Chairman of the Board of TCS, controls 10,787,671 shares of Class B common stock
and beneficially owns 347,990 shares of TCS Common Stock. Therefore, in the
aggregate, Mr. Tose beneficially owns shares representing 66.3% of TCS' total
voting power prior to the merger and will beneficially own shares representing
61.0% of TCS' total voting power after the merger. Accordingly, Mr. Tose will be
able to control TCS and the combined company through his ability to determine
the outcome of elections of directors, amend the articles of incorporation and
bylaws and take other actions requiring stockholder action, including mergers,
going private transactions and other extraordinary transactions. Mr. Tose could,
without seeking anyone else's approval, transfer voting control of TCS and the
combined company to a third party. Such a transfer could cause TCS and the
combined company to lose its status as a minority-owned business and could have
a material adverse effect on the TCS Common Stock price, and its business,
operating results and financial condition. Mr. Tose will also be able to prevent
a change of control regardless of whether holders of TCS Common Stock might
benefit financially from such a transaction.

THE HOLDERS OF XYPOINT CAPITAL STOCK ARE REQUIRED TO MAKE A NEW INVESTMENT
DECISION REGARDING THE MERGER BECAUSE TCS COMMON STOCK HAS DIFFERENT RIGHTS THAN
THOSE OF XYPOINT CAPITAL STOCK.

An investment in TCS Common Stock is substantially different from an
investment in capital stock of XYPOINT. Among other things, the rights of and
restrictions applicable to holders of capital stock of XYPOINT are different
from those as a holder of TCS Common Stock. See "Comparison of the Rights of
Holders of TCS Common Stock and XYPOINT common stock."

BECAUSE ADDITIONAL SHARES OF TCS COMMON STOCK, INCLUDING THOSE ISSUED IN THE
MERGER, WILL BE ELIGIBLE FOR PUBLIC SALE IN THE FUTURE, THE MARKET PRICE OF TCS
COMMON STOCK COULD GO DOWN.

Future sales of shares of TCS Common Stock in the public market following
this merger could adversely affect the market price of the TCS Common Stock. In
addition, such sales could create the perception to the public of difficulties
or problems with TCS' products and services. As a result, these sales also might
make it more difficult for TCS to sell equity or equity-related securities in
the future at a time and price that TCS deems appropriate. After this merger,
TCS will have 17,239,064 shares of TCS Common Stock outstanding and 10,787,671
shares of Class B common stock outstanding. Class B common stock is convertible,
at the option of the holder, at any time into shares of TCS Common Stock on a
one-for-one basis.

In connection with TCS's initial public offering, TCS's officers, directors
and a majority of the TCS stockholders executed certain contractual "lock-up"
agreements which generally restrict the sale of their TCS Common Stock for a
period of 180 days. Unless the underwriters agree to amend or waive the
restrictive provisions earlier, the

43
<PAGE> 51

lock-up period will expire on February 3, 2000. In addition, under the terms of
the merger agreement, stockholders of XYPOINT who own at least 90% of the
fully-diluted capital stock of XYPOINT must execute agreements that restrict the
transfer of shares of TCS Common Stock that they will receive in the merger. As
a result, unless TCS amends or waives the restrictive provisions earlier,
substantially all shares of TCS Common Stock issued in the merger will be
locked-up for a period of 120 days after the merger. Two-thirds of these shares
will be locked-up for an additional 60 days, for a total of 180 days after the
merger, and one-third of these shares will be locked-up for an additional 120
days, for a total of 240 days after the merger. Additionally, certain XYPOINT
officers, directors and affiliates have agreed not to sell their shares of TCS
Common Stock for 180 days, and in some cases, 360 days after the merger.

TCS' GOVERNING CORPORATE DOCUMENTS CONTAIN CERTAIN ANTI-TAKEOVER PROVISIONS THAT
COULD PREVENT A CHANGE OF CONTROL THAT MAY BE FAVORABLE TO YOU.

TCS is a Maryland corporation. Anti-takeover provisions of Maryland law and
provisions contained in TCS' amended and restated articles of incorporation and
by-laws could make it more difficult for a third party to acquire control of TCS
and the combined company, even if a change in control would be beneficial to
you. These provisions include the following:

- authorization of the board of directors to issue preferred stock;

- prohibition of cumulative voting in the election of directors;

- limitation of the persons who may call special meetings of stockholders;
and

- establishment of advance notice requirements for nominations for election
to the board of directors or for proposing matters that can be acted on
by stockholders at stockholder meetings.

These provisions could delay, deter or prevent a potential acquiror from
attempting to obtain control of TCS and the combined company, depriving you of
an opportunity to receive a premium for your TCS Common Stock. These provisions
could therefore materially adversely affect the market price of the TCS Common
Stock.

TCS DOES NOT INTEND TO PAY DIVIDENDS, YOU WILL NOT RECEIVE FUNDS WITHOUT SELLING
SHARES AND YOU MAY LOSE THE ENTIRE AMOUNT OF YOUR INVESTMENT.

TCS has never declared or paid any cash dividends on its capital stock and
does not intend to pay dividends in the foreseeable future. TCS intends to
invest its future earnings, if any, to fund its growth. Therefore, you will not
receive any funds without selling your shares. TCS further cannot assure you
that you will receive a return on your investment when you sell your shares or
that you will not lose the entire amount of your investment.

44
<PAGE> 52

THE XYPOINT SPECIAL MEETING

GENERAL

TCS and XYPOINT are sending this proxy statement/prospectus to the
shareholders of XYPOINT in connection with the solicitation by the board of
directors of XYPOINT of proxies to be voted at the special meeting. This proxy
statement/prospectus is first being mailed to shareholders of XYPOINT on or
about December 23, 2000

DATE, TIME AND PLACE OF THE SPECIAL MEETING

The special meeting of XYPOINT shareholders will be held on January 15,
2001, 8:00 a.m., local time, at the DoubleTree Hotel, 300 112th Avenue SE,
Bellevue, Washington 98004.

RECORD DATE AND OUTSTANDING SHARES

The XYPOINT board of directors has fixed on December 9, 2000 as the record
date for the determination of the holders of equity securities of XYPOINT
entitled to receive notice of and to vote at the XYPOINT special meeting or any
adjournments or postponement of the special meeting. Only shareholders of record
on the record date will be entitled to receive notice of and to vote at the
XYPOINT special meeting. As of the record date there were: (1) 123 shareholders
of record of XYPOINT preferred stock (other than Series X Junior preferred
stock) and 28,263,138 shares of preferred stock outstanding on an as-converted
basis (other than Series X Junior preferred stock); (2) 212 shareholders of
record of XYPOINT common stock and preferred stock (including Series X Junior
preferred stock) and 37,945,100 shares of XYPOINT common stock and preferred
stock outstanding on an as-converted basis (including Series X Junior preferred
stock); (3) 64 shareholders of record of XYPOINT Series A preferred stock and
5,000,000 shares of Series A preferred stock outstanding; (4) 110 shareholders
of record of Series X Junior preferred stock and 9,201,232 shares of Series X
Junior preferred stock outstanding; and (5) 212 shareholders of XYPOINT capital
stock and 37,945,000 shares of XYPOINT capital stock outstanding on an
as-converted basis, excluding Gregg Blodgett, Reuven Carlyle, Greg Kleven and
John Clark. Each holder of shares of XYPOINT common stock and preferred stock is
entitled to that number of votes per share held of record on the record date as
set forth in the following chart:

<TABLE>
<CAPTION>
CLASS OR SERIES OF XYPOINT STOCK VOTES PER SHARE
-------------------------------- ---------------
<S> <C>
Common Stock 1.00000
Series X Junior Preferred Stock 1.00000
Series A Preferred Stock 1.00000
Series B Preferred Stock 1.01744
Series C Preferred Stock 1.01744
Series D Preferred Stock 1.06746
Series E Preferred Stock 1.00000
</TABLE>

PURPOSE OF THE SPECIAL MEETING

XYPOINT is furnishing this document to its shareholders in connection with
the solicitation of proxies by the XYPOINT board of directors for use at the
XYPOINT special meeting. The purpose of the special meeting is to consider and
vote upon (1) a proposal

45
<PAGE> 53

to approve the merger and the merger agreement, (2) with respect to holders of
XYPOINT Series A preferred stock, the automatic and elective conversion of such
shares into XYPOINT common stock immediately prior to and conditioned upon the
closing of the Merger pursuant to Article 2.3(b) of XYPOINT's amended and
restated articles of incorporation, (3) with respect to holders of XYPOINT
Series X Junior preferred stock, the automatic and elective conversion of such
shares into XYPOINT common stock immediately prior to and conditioned upon the
closing of the merger pursuant to Article 2.3(b) of XYPOINT's amended and
restated articles of incorporation, (4) certain matters in connection with stock
options granted to key XYPOINT employees, and (5) the transaction of such other
business as may properly come before the special meeting or any adjournments or
postponements thereof. XYPOINT shareholders will also be asked to consider and
vote upon any other matters that may be properly submitted at the special
meeting. Additionally, XYPOINT shareholders may be asked to vote upon a proposal
to adjourn or postpone the special meeting. Such adjournment or postponement
could be used for the purpose of allowing additional time for the soliciting of
additional votes to approve the merger agreement.

QUORUM; VOTE REQUIRED

At the special meeting, a majority in interest of all shares entitled to
vote on a matter representing shareholders of record in person or by proxy,
shall constitute a quorum of that voting group for action on that matter. If a
quorum exists, action on a matter is approved by a voting group if the votes
cast within the voting group favoring the action exceed the votes cast within
the voting group opposing the action, unless the question is one upon which a
different vote is required under Washington law or XYPOINT's articles of
incorporation or bylaws.

For purposes of Proposals 1-4, the voting requirements are as follows: The
affirmative vote of the holders of a majority of the Series A, B, C, D and E
preferred stock, voting together as a separate class, on an as-converted basis,
and a majority of the preferred stock and common stock, voting together as a
separate class, on an as-converted basis, is required to approve the merger.

If the merger is completed, XYPOINT shareholders who do not vote for the
adoption of the merger agreement and who otherwise comply with Chapter 23B.13 of
the Washington Business Corporation Act will be entitled to appraisal rights
under Washington law. A copy of these provisions is attached as Appendix B.

To approve the automatic conversion of the Series A preferred stock into
XYPOINT common stock, the affirmative vote of the holders of shares representing
two-thirds of the holders of Series A preferred stock, voting as a separate
class, is required.

To approve the automatic conversion of the Series X Junior preferred stock
into XYPOINT common stock, the affirmative vote of the holders of shares
representing a majority of the holders of the Series X Junior preferred stock,
voting as a separate class, is required.

To approve the payments to disqualified individuals, the affirmative vote
of the holders of shares representing seventy-five percent (75%) of the
outstanding shares of XYPOINT's capital stock, voting together as a class
(excluding those holders who are disqualified individuals entitled to receive
payments pursuant to the transactions

46
<PAGE> 54

contemplated by the merger agreement and certain people related to those
disqualified individuals), is required.

For the transaction of business at the special meeting, except as otherwise
provided, if a quorum exists, the action is approved if the votes cast in favor
of the action exceed the votes cast against the action.

Abstentions are counted for the purposes of determining the presence or
absence of a quorum for the transaction of business. Because each of the
proposals requires the affirmative vote of a specified percentage, an abstention
as to a proposal will have the effect of a vote against the proposal. All votes
will be tabulated by the inspector of election appointed for the special
meeting, who will separately tabulate affirmative and negative votes and
abstentions for each of the votes.

Holders of 51.0% of the issued and outstanding shares of XYPOINT Series A
through Series E preferred stock have agreed to vote for the approval of the
merger and the adoption and approval of the merger agreement. Holders of 54.02%
of the issued and outstanding shares of XYPOINT capital stock, on an
as-converted basis, have agreed to vote for the approval of the merger and the
adoption and approval of the merger agreement. As a result, approval of the
merger by XYPOINT shareholders is assured. However, XYPOINT believes the vote of
XYPOINT shareholders is important, and XYPOINT encourages its shareholders to
vote in person or by proxy.

RECOMMENDATION OF THE BOARD OF DIRECTORS OF XYPOINT

THE XYPOINT BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED AND DECLARED
ADVISABLE THE MERGER, THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED IN
CONNECTION WITH THE MERGER AGREEMENT, AND BELIEVES THAT THE MERGER IS IN THE
BEST INTERESTS OF XYPOINT SHAREHOLDERS. THE XYPOINT BOARD OF DIRECTORS
RECOMMENDS THAT THE XYPOINT SHAREHOLDERS VOTE: (1) FOR THE MERGER AND THE
ADOPTION AND APPROVAL OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY; (2) WITH RESPECT TO THE HOLDERS OF XYPOINT SERIES A PREFERRED STOCK,
FOR THE CONVERSION OF SUCH SHARES INTO XYPOINT COMMON STOCK IMMEDIATELY PRIOR TO
AND CONDITIONED UPON THE CLOSING OF THE MERGER; (3) WITH RESPECT TO HOLDERS OF
XYPOINT SERIES X JUNIOR PREFERRED STOCK, FOR THE CONVERSION OF SUCH SHARES TO
XYPOINT COMMON STOCK IMMEDIATELY PRIOR TO AND CONDITION UPON THE CLOSING OF THE
MERGER; (4) FOR THE APPROVAL OF THE VESTING OF THE UNVESTED PORTION OF STOCK
OPTION GRANTS TO CERTAIN KEY EMPLOYEES OF XYPOINT SO AS TO AVOID "PARACHUTE
TREATMENT" UNDER SECTION 280G OF THE CODE; AND (5) FOR THE TRANSACTION OF SUCH
OTHER BUSINESS AS MAY PROPERLY BE BROUGHT BEFORE THE SPECIAL MEETING OR ANY
ADJOURNMENT OR POSTPONEMENT OF THE SPECIAL MEETING INCLUDING POTENTIAL
ADJOURNMENT FOR THE PURPOSE OF SOLICITING ADDITIONAL PROXIES IN ORDER TO APPROVE
THE MATTER DESCRIBED ABOVE. See "The Merger -- Interests of XYPOINT's Officers
and Directors in the Merger" for a discussion of conflicts of interest that
certain directors and members of management may have in connection with the
merger.

CONVERSION OF SERIES A PREFERRED STOCK AND SERIES X JUNIOR PREFERRED STOCK

In order to maximize the consideration received in the merger, the holders
of Series A preferred stock and Series X Junior preferred stock should convert
their shares into XYPOINT common stock, prior to the closing of the merger. In
order to facilitate this conversion, holders of Series A preferred stock and
Series X Junior preferred stock should

47
<PAGE> 55

vote in favor of the automatic conversion reflected in Proposals 2 and 3,
respectively. According to XYPOINT's articles of incorporation, if the holders
of two-thirds of the Series A preferred stock or if a majority of the holders of
Series X Junior preferred stock elect to convert their shares to XYPOINT common
stock, all shares of such series shall automatically convert to XYPOINT common
stock.

Even if the automatic conversion of the Series A or Series X Junior
preferred stock is not approved, each holder of Series A or Series X Junior
preferred stock is nevertheless entitled to convert his or her shares.
Individual holders of Series A or Series X preferred stock may, and should, opt
to convert their shares prior to the effective date of the merger in order to
maximize the number of shares of TCS Common Stock received by such holders.

Individual holders of Series A and Series X Junior preferred stock may
provide notice of their intention to exercise their optional conversion right by
voting for automatic conversion of their shares on the proxy card. After the
special meeting, and only in the event the automatic conversion is not approved,
the individual shareholders who opt to convert will be notified by XYPOINT of
the procedure to surrender their duly endorsed certificates.

VOTING OF PROXIES

If the accompanying proxy card is properly signed and returned to XYPOINT
and not revoked before a vote is taken at the XYPOINT special meeting, it will
be voted in accordance with instructions indicated on the proxy card. If a proxy
card is signed and returned without indicating any voting instructions, the
shares of XYPOINT capital stock represented by the proxy will be voted FOR
approval of the merger by adoption and approval of the merger agreement.

XYPOINT is not aware of any business to be acted upon at the XYPOINT
special meeting, except as described in this document. If any other matters are
properly presented to the XYPOINT special meeting, or any adjournments or
postponements of the special meeting, the persons appointed as proxies in the
enclosed form of proxy or their substitutes will have discretion to vote or act
on the matter according to their best judgment and applicable law unless the
proxy indicates otherwise.

AUTHORIZATION TO VOTE ON ADJOURNMENT AND OTHER MATTERS

By signing the proxy, a XYPOINT shareholder authorizes the proxy holder to
vote in his discretion regarding any procedural motions which may come before
the XYPOINT special meeting. For example, this authority could be used to
adjourn the special meeting if XYPOINT believes it is desirable to do so.
Adjournment or other procedural matters could be used to obtain more time before
a shareholder vote in order to solicit additional proxies or to provide
additional information to XYPOINT shareholders. XYPOINT has no plans to adjourn
the special meeting at this time, but it may attempt to do so if it believes
that doing so would promote shareholder interests.

The XYPOINT directors, executive officers and their affiliates and certain
other shareholders of XYPOINT have entered into agreements to vote all shares of
XYPOINT capital stock owned by them and over which they exercise voting control
for approval of the merger and the merger agreement. See "The XYPOINT Special
Meeting -- Quorum; Vote Required."

48
<PAGE> 56

REVOCATION OF PROXIES

A XYPOINT shareholder may revoke a proxy at any time before it is voted by:

- filing written notice of revocation with the Secretary of XYPOINT, which
is actually received prior to the vote of shareholders at the special
meeting;

- filing with the Secretary of XYPOINT, a duly executed proxy bearing a
later date; or

- attending the XYPOINT special meeting, and voting in person. Attendance
at the special meeting will not by itself revoke the proxy.

A XYPOINT shareholder should send any such filing to the Secretary of
XYPOINT at XYPOINT Corporation, 2200 Alaskan Way, Second Floor, Seattle,
Washington 98121, Attn: Craig Sherman, Corporate Secretary.

SOLICITATION OF PROXIES

Proxies are being solicited by and on behalf of the XYPOINT board of
directors. XYPOINT will bear all expenses in connection with such solicitation.
In addition to solicitation by mail, XYPOINT directors, officers and employees
may solicit proxies from their shareholders by telephone, telegram, or personal
communication or by other means. These persons will not receive additional
compensation, but they may be reimbursed for reasonable out-of-pocket expenses
in connection with this solicitation.

XYPOINT may engage one or more proxy solicitation firms to assist in
obtaining proxies from its shareholders on a timely basis. As of the date of
this document, a proxy solicitation firm has not been employed and XYPOINT has
not committed itself to pay any fees related to this service.

49
<PAGE> 57

The following discussion summarizes the proposed merger and related
transactions. The discussion is not, however, a complete statement of all
provisions of the merger agreement and related agreements. Detailed terms and
provisions of the merger agreement and certain related transactions are
contained in the merger agreement, a copy of which is attached to this proxy
statement/prospectus as Appendix A. Statements made in this proxy statement/
prospectus with respect to the terms of the merger and such related transactions
are qualified by reference to, and holders of XYPOINT stock are urged to read,
the more detailed information set forth in the merger agreement and the other
documents annexed hereto.

PROPOSAL 1:
APPROVAL OF THE MERGER

THE MERGER

GENERAL

TCS completed its initial public offering in August, 2000, and from time to
time has evaluated entering into strategic relationships with, and strategic
acquisitions of, companies with complimentary businesses and technologies. Since
July, 2000, XYPOINT has been exploring a number of potential relationships with
corporate partners, including such partners making potential equity investments
in XYPOINT.

At the effective time of the merger, XYPOINT will merge with and into
Windward Acquisition Corp., a wholly owned subsidiary of TCS ("Windward"). After
the merger, the separate existence of XYPOINT will cease and Windward will
continue as a wholly-owned subsidiary of TCS.

The terms of the merger agreement are the result of arms-length
negotiations between representatives of TCS and XYPOINT. The following is a
brief discussion of the background of these negotiations, the merger and related
transactions.

BACKGROUND OF MERGER

On July 14, 2000, XYPOINT entered into a letter agreement with Broadview
International LLC ("Broadview") to act as financial adviser to XYPOINT and to
evaluate financing and strategic alternatives available to the company.

In September, 2000, Mr. Donald C. Hubbard, Jr., Senior Vice President and
head of corporate development of TCS, contacted Mr. Kenneth A. Arneson,
President and Chief Executive Officer of XYPOINT, to propose a meeting to
discuss a possible strategic relationship between TCS and XYPOINT. Mr. Hubbard
was previously employed by Alex. Brown & Sons, Inc. where in 1997 he assisted
XYPOINT in prior private capital raising efforts and again in 1998, while
working at Freidman Billings Ramsey. Based on this call, it was suggested that a
face-to-face meeting between the two companies would be productive. On September
6, 2000, TCS and XYPOINT entered into a Non-Disclosure Agreement to allow them
to conduct detailed investigations of each other which, if satisfactory to both
companies, would lead to further negotiations. Subsequent to signing the Non
Disclosure Agreement, several members of TCS' management, including, Mr.
Hubbard, Mr. Morin and Mr. Lorello, met with members of XYPOINT's management,
including Mr. Arneson, Mr. Covari and Mr. Blodgett, to determine whether the
technology used by their respective companies was compatible and interoperable.
In September 2000,

50
<PAGE> 58

TCS contacted Chase Securities Inc. to act as its financial adviser and
subsequently engaged Chase Securities Inc. with respect to the transaction.

On October 10, 2000 and October 11, 2000, several members of TCS management
met with members of XYPOINT management at XYPOINT's headquarters in Seattle,
Washington. At the meeting, attendees, including Mr. Hubbard and Mr. Arneson
discussed the business operations of the two companies and potential synergies
that could result from a strategic transaction. The management of both companies
agreed to proceed with further discussions.

As a result of discussions between Mr. Maurice B. Tose, President and Chief
Executive Officer of TCS, and Mr. Arneson, TCS and XYPOINT decided to consider
further a strategic relationship, including the acquisition of XYPOINT by TCS.

From September through mid-November, 2000, a series of meetings and
discussions were held in person and by telephone between the technical staffs
and the officers of the two companies. In addition, the legal and financial
advisers to XYPOINT and TCS conducted due diligence and negotiated the terms and
conditions of the potential merger, subject to satisfactory due diligence and
board approval.

On October 23, 2000, at a telephonic meeting of XYPOINT's board of
directors, Mr. Arneson and a representative from Broadview presented the board
of directors with an update on the status of XYPOINT's meetings and discussions
with TCS. The XYPOINT board of directors discussed at length financial, legal
and business issues related to the proposed merger.

On October 27, 2000, XYPOINT's board of directors met again by
teleconference to discuss the proposed merger. Mr. Arneson and a representative
from Broadview updated the board of directors on the latest negotiations on the
proposed merger structure, and a lengthy discussion ensued.

On or about October 27, 2000, the two companies reached a preliminary
non-binding agreement on the consideration that TCS would pay in the potential
merger and other key transaction terms, subject to satisfactory due diligence
and board approval.

On October 31, 2000, XYPOINT received the first draft of the agreement and
plan of reorganization from TCS' counsel. During the period of time between
October 31, 2000 and November 14, 2000, XYPOINT and TCS, and their respective
counsel and financial advisers, negotiated a definitive merger agreement.

On November 3, 2000, TCS and XYPOINT entered into an exclusivity agreement
in which XYPOINT agreed that for a period of thirty days, XYPOINT would not
directly or indirectly, through any director, officer, affiliate, employee or
agent, solicit, initiate, or encourage (including without limitation the
furnishing of non-public information or assistance) or take any other action to
facilitate any inquiries or the making of any proposal that constitutes, or may
reasonably be expected to lead to, any inquiry, proposal or offer from any
person relating to any direct or indirect acquisition or purchase of the capital
stock of XYPOINT (other than the exercise or commission of currently outstanding
options or securities) or any merger, consolidation, business combination, sale
or other disposition of any significant portion of the assets, recapitalization,
liquidation, dissolution or similar transaction involving XYPOINT.

51
<PAGE> 59

On or about November 10, 2000, TCS and its advisers completed business,
financial and legal due diligence on XYPOINT. In addition, the merger agreement
and other transaction documentation were substantially completed.

Between November 10 and November 14, 2000, XYPOINT and TCS and their
respective counsel and financial advisers finalized the proposed allocation and
exchange ratios for each class of XYPOINT capital stock.

On November 13, 2000, the TCS board of directors held a special meeting,
telephonically, to discuss and vote on the merger. At the meeting, senior
management of TCS, together with accounting and legal advisers, reviewed the due
diligence conducted to date, the historical performance and strategies of
XYPOINT, the financial terms of the proposed transaction, the proposed merger
and the merger agreement and other transaction documentation and the general
terms for the transaction. Following a thorough discussion and review, the TCS
board of directors unanimously approved the merger.

On November 13, 2000, at a telephonic meeting of the XYPOINT board of
directors, Mr. Arneson and a representative of Broadview, along with XYPOINT's
legal advisers, reviewed in detail the terms of the proposed merger with TCS. At
the meeting, the XYPOINT board of directors discussed the transaction and the
implications of the proposed transaction on XYPOINT's value from the standpoint
of XYPOINT shareholders. Following a thorough discussion and review, the XYPOINT
board of directors unanimously approved the merger.

On November 15, 2000, senior management of TCS and XYPOINT executed the
merger agreement and various individual shareholders of XYPOINT executed the
voting agreements. On November 15, 2000, TCS and XYPOINT issued a joint press
release announcing the transaction.

JOINT REASONS FOR THE MERGER

The boards of directors of TCS and XYPOINT have each unanimously approved
the merger agreement and the merger, and the XYPOINT board unanimously
recommends approval of the merger agreement and the merger by XYPOINT's
shareholders. They concluded that the combined company following the merger
would have the potential to realize long-term improved operating and financial
results and a stronger competitive position. The boards of both companies have
identified a number of potential benefits which they believe will contribute to
the success of the combined company, including:

- Existing complementary business models and customer relationships;

- Complementary technologies and competitive strengths;

- Expanded software product services and portfolio;

- Identifiable new product development opportunities through the
integration of existing products and services;

- Opportunities for increased market penetration by leveraging the two
companies' distribution channels;

52
<PAGE> 60

- More rapid and effective response to competition, market demands and
technological change in an industry that is experiencing rapid innovation
and increasing competition;

- Increased management breadth and depth; and

- More favorable ability to access capital and to reduce the cost of
capital for the combined company.

TCS' REASONS FOR THE MERGER

The TCS board of directors has approved the merger agreement and the merger
and the issuance of shares of TCS Common Stock in connection with the merger.

In reaching the decision to approve the merger agreement, the TCS board of
directors consulted with TCS' senior management, as well as with its financial
and legal advisers and identified the following principal reasons for the
merger:

- PROVIDES IMMEDIATE LEADERSHIP IN LOCATION BASED SERVICES. XYPOINT is a
leading provider of E-911 services to wireless carriers in the United
States. TCS can leverage this E-911 architecture to provide other
location-related enhanced services to wireless carriers and enterprises.
XYPOINT will provide TCS with a strong wireless location based services
platform on which to build future applications.

- ACCELERATES DEPLOYMENT OF ASP STRATEGY. XYPOINT operates redundant data
centers in Seattle, WA and Phoenix, AZ. The combined company is well
positioned to host certain applications for wireless carriers and
enterprise customers at these facilities.

- EXPANDS WIRELESS CARRIER BASE. The merger with XYPOINT will provide TCS
with access to XYPOINT's existing wireless carrier customers. TCS can
market its existing product and services to these carriers.

- BROADENS PRODUCT SUITE. TCS can offer a more complete product portfolio
to its users through the addition of XYPOINT's products and services.
This will position TCS more favorably with wireless carriers that are
seeking to limit the number of software and infrastructure vendors with
which they do business.

- PROVIDES ACCESS TO ADDITIONAL DISTRIBUTION CHANNELS AND STRATEGIC
PARTNERSHIPS. TCS will be able to leverage XYPOINT's sales channels and
strategic partnerships to sell existing TCS products and services.

- INCREASES PRODUCT DEVELOPMENT OPPORTUNITIES. XYPOINT's existing products
and services will be integrated to deliver new products and services to
existing TCS and XYPOINT customers as well as new customers.

XYPOINT'S REASONS FOR THE MERGER

In reaching its decision to approve the merger agreement and the merger and
to recommend adoption of the merger agreement to XYPOINT shareholders, the
XYPOINT board of directors consulted with management, its financial and legal
advisors and independently considered the proposed merger agreement and the
transactions contem-

53
<PAGE> 61

plated thereby. The XYPOINT board of directors in making its decision considered
among other things the following positive factors:

- FACILITATE CAPITAL RAISING. The merger would give XYPOINT access to TCS'
greater capital resources to accelerate the development of XYPOINT
products, services and technology. The merger would facilitate the
capital raising activities of the combined company, which capital could
be used to fund the combined company's marketing and sales expansion and
cover consolidation expenses.

- INCREASED LIQUIDITY. The merger provides XYPOINT and its shareholders
increased liquidity versus the uncertainty related to the possibility of
a strategic sale or public offering of XYPOINT common stock at some
future time at a valuation that might not be significantly higher than
that obtained in the merger.

- ECONOMIES OF SCALE. Similarities in the service offerings,
administration and product development functions of the two companies
would allow the combined company to achieve economies of scale and
opportunities for consolidation.

- MANAGEMENT STRENGTH. The combined company would have a strong and deep
management team, at both the operating and corporate levels.

- COMPETITIVENESS. The combined company would have increased ability to
compete for world-class projects.

- PRODUCT SYNERGIES. The product lines of XYPOINT and TCS are
complementary. Both TCS and XYPOINT have strength in the wireless carrier
market. Together, by developing and implementing a combined strategy, a
combined company could compete more effectively with larger and
better-established companies. The merger would potentially increase sales
of XYPOINT's products and services by exposing XYPOINT to TCS' customer
base, as well as creating additional cross-selling opportunities with
XYPOINT's existing customers.

- POTENTIAL PRODUCT DEVELOPMENT OPPORTUNITIES. The combined company will
have the opportunity to develop new products to market to XYPOINT's
existing customers.

- SALES AND MARKETING SYNERGIES; STRONGER SALES FORCE. A combined and
complementary sales force would strengthen the combined company on both
the West coast and the East coast of the United States.

The XYPOINT board of directors also identified and considered the following
potentially negative factors in its deliberations concerning the merger:

- The potential benefits sought in the merger might not be realized fully,
or within the time frame contemplated;

- The possibility that the merger would not be consummated, and the
potentially negative effect of the public announcement on XYPOINT's sales
and operating results;

- The risk that, despite the efforts of XYPOINT and TCS, key technical,
marketing and management personnel might choose not to remain employed by
TCS after the merger;

54
<PAGE> 62

- The substantial charges to be incurred in connection with the merger,
including the costs of integrating the two companies' businesses and the
transaction expenses arising from the merger;

- The potential disruption of existing and prospective relationships with
XYPOINT's customers that could result from the announcement or
consummation of the merger;

- The risk that the market price for TCS Common Stock might decline; and

- The other risk factors associated with the combined business and the
merger described under "Risk Factors."

The XYPOINT board of directors believed that some of these risks are
unlikely to occur and that others may be avoided or mitigated by XYPOINT and
that, overall, these risks are outweighed by the potential benefits of the
merger.

The foregoing discussion of the information and factors considered by the
XYPOINT board of directors is not intended to be exhaustive but is believed to
include all material factors considered by the XYPOINT board of directors in
evaluating the merger. In view of the variety of factors considered in
connection with its evaluation of the merger agreement and the merger, the
XYPOINT board of directors did not find it practicable to and did not quantify
or otherwise assign relative weight to the specific factors considered in
reaching its determination. In addition, individual members of the XYPOINT board
of directors may have given different weight to different factors.

After careful consideration, the XYPOINT board of directors unanimously
determined that the terms of the merger agreement are fair to and in the best
interests of XYPOINT and its shareholders and has approved the merger agreement
and the merger. The XYPOINT board of directors unanimously recommends that the
shareholders of XYPOINT vote FOR the merger by the adoption and approval of the
merger agreement.

XYPOINT'S FINANCIAL ADVISOR

XYPOINT retained Broadview to advise the XYPOINT board of directors
regarding the financial terms of TCS' offer to purchase XYPOINT. Broadview
regularly provides valuations of telecommunications companies in connection with
mergers, acquisitions and other securities transactions.

INTERESTS OF PERSONS IN THE MERGER

In considering the recommendation of the XYPOINT board of directors with
respect to the merger and merger agreement, XYPOINT's shareholders should be
aware that certain members of the XYPOINT board and management have certain
interests in the merger that are in addition to the interests of XYPOINT's
shareholders generally. The board was aware of these interests and considered
them, among other factors, in approving the merger agreement.

TCS expects to retain most employees of XYPOINT, including certain officers
and directors after the merger. TCS expects to enter into employment agreements
with Ken Arneson and one or more of XYPOINT's officers following the closing of
the merger.

If the market price of TCS Common Stock is less than $17.07 per share as of
the closing date, holders of XYPOINT's preferred stock will receive securities
having a lower

55
<PAGE> 63

market value as of the closing date than the liquidation preferences set forth
in XYPOINT's articles of incorporation, and, correspondingly, XYPOINT's officers
and directors, who generally hold XYPOINT common stock or Series X Junior
preferred stock or options or warrants to acquire XYPOINT common stock or Series
X Junior preferred stock and in some cases Series A preferred stock will receive
more consideration than they would otherwise if the Series B through Series E
preferred stock had received the amount of their liquidation preferences
calculated using a market price of the closing date.

Pursuant to XYPOINT's 1997 stock option plan, the vesting of unvested stock
options will accelerate upon consummation of the merger. As of November 15,
2000, the aggregate number of shares subject to options vesting as a result the
merger for each officer are as follows:

<TABLE>
<CAPTION>
NUMBER OF XYPOINT SHARES SUBJECT TO
OFFICER OPTIONS VESTING AS A RESULT OF THE MERGER
------- -----------------------------------------
<S> <C>
Gregg Blodgett 76,667
Reuven Carlyle 77,084
Greg Kleven 200,000
John Clark 37,500
</TABLE>

ACCOUNTING TREATMENT

The merger will be accounted for as a purchase in accordance with generally
accepted accounting principles. Therefore, the total merger consideration that
TCS will pay in connection with the merger, together with the direct costs of
the merger, will be allocated to XYPOINT's identifiable tangible and intangible
assets and liabilities based on their respective fair market values with any
excess being treated as goodwill. The assets and liabilities and results of
operations of XYPOINT will be consolidated into the assets and liabilities and
results of operations of TCS after the merger. See "Unaudited Pro Forma
Consolidated Financial Information."

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

The following general discussion summarizes the anticipated material U.S.
federal income tax consequences of the merger to XYPOINT shareholders. This
discussion addresses only those shareholders who hold their shares of XYPOINT
capital stock as a capital asset, and does not address all of the U.S. federal
income tax consequences that may be relevant to particular XYPOINT shareholders
in light of their individual circumstances, or to XYPOINT shareholders that are
subject to special rules, such as:

- financial institutions;

- mutual funds;

- tax-exempt organizations;

- insurance companies;

- dealers in securities or foreign currencies;

- traders in securities who elect to apply a mark-to-market method of
accounting;

- foreign holders;

56
<PAGE> 64

- persons who hold shares of XYPOINT common stock as a hedge against
currency risk or as part of a straddle, constructive sale or conversion
transaction; or

- holders who acquired their shares of XYPOINT common stock upon the
exercise of employee stock options or otherwise as compensation.

The following discussion is not binding on the Internal Revenue Service. It
is based upon the Code and the regulations, rulings and decisions thereunder in
effect as of the date of this document, all of which are subject to change,
possibly with retroactive effect. Tax consequences under state, local and
foreign laws and U.S. federal laws other than U.S. federal income tax laws, are
not addressed. XYPOINT SHAREHOLDERS ARE STRONGLY URGED TO CONSULT THEIR TAX
ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING
THE APPLICABILITY AND EFFECT OF U.S. FEDERAL, STATE AND LOCAL AND FOREIGN INCOME
AND OTHER TAX LAWS IN THEIR PARTICULAR CIRCUMSTANCES.

It is a condition to the closing of the merger that XYPOINT and TCS each
receive an opinion from tax counsel to the effect that the merger will qualify
as a reorganization within the meaning of Section 368(a) of the Code. These
opinions are based on customary assumptions and customary representations made
by, among others, XYPOINT, TCS and certain TCS stockholders. An opinion of
counsel represents counsel's best legal judgment and is not binding on the
Internal Revenue Service or any court. No ruling has been made by, or will be
sought from, the Internal Revenue Service as to the U.S. federal income tax
consequences of the merger.

Assuming the merger qualifies as a reorganization within the meaning of
Section 368(a) of the Code, holders of XYPOINT shares that receive shares of TCS
Common Stock in the merger will not recognize gain or loss for U.S. federal
income tax purposes, except with respect to cash, if any, they receive in lieu
of a fractional share of TCS Common Stock. Each stockholder's aggregate tax
basis in the shares of TCS Common Stock received in the merger will be the same
as such stockholder's aggregate tax basis in the shares of XYPOINT stock
surrendered in the merger, decreased by the amount of any tax basis allocable to
any fractional share interest for which cash is received. The holding period of
the shares of TCS Common Stock received in the merger by a holder of XYPOINT
shares will include the holding period of XYPOINT shares that such shareholder
surrendered in the merger. A holder of XYPOINT shares that receives cash in lieu
of a fractional share of TCS Common Stock will recognize gain or loss equal to
the difference between the amount of cash received and such stockholder's tax
basis in the XYPOINT shares allocable to the fractional share. That gain or loss
generally will constitute capital gain or loss. In the case of an individual
stockholder, any of this capital gain generally will be subject to a maximum
U.S. federal income tax rate of 20% if the individual has held his XYPOINT
shares for more than 12 months on the date of the merger. The deductibility of
capital losses is subject to limitations for both individuals and corporations.

A successful Internal Revenue Service challenge to the "reorganization"
status of the merger would result in all XYPOINT stockholders being treated as
if they sold their XYPOINT capital stock in a fully taxable transaction. In such
event, each XYPOINT stockholder would recognize gain or loss with respect to
each share of XYPOINT capital stock surrendered equal to the difference between
such stockholder's adjusted tax basis in such share and the fair market value,
as of the effective time of the merger, of the TCS Common Stock received in
exchange therefor. In such event, such stockholder's aggregate

57
<PAGE> 65

tax basis in the TCS Common Stock so received would equal its fair market value
as of the effective time of the merger and the holding period for such TCS
Common Stock would begin the day after the merger.

Irrespective of the merger's status as a reorganization, a XYPOINT
stockholder will recognize gain to the extent shares of TCS Common Stock
received in the merger are treated as received in exchange for services or
property other than solely XYPOINT capital stock. All or a portion of any such
gain could be taxable as ordinary income.

Because shares of TCS Common Stock will remain unchanged in the merger, the
merger will not cause TCS stockholders to recognize any gain or loss. No gain or
loss will be recognized by TCS, XYPOINT or Windward Acquisition Corp.

BACKUP WITHHOLDING AND INFORMATION REPORTING. Payments of cash to a holder
surrendering shares of XYPOINT capital stock will be subject to information
reporting and "backup" withholding at a rate of 31% of the cash payable to the
holder, unless the holder furnishes its taxpayer identification number in the
manner prescribed in applicable Treasury Regulations, certifies that number is
correct, certifies as to no loss of exemption from backup withholding and meets
certain other conditions. Any amounts withheld from payments to a holder under
the backup withholding rules will be allowed as a refund or credit against the
holder's U.S. federal income tax liability, provided the required information is
furnished to the Internal Revenue Service.

TAX CONSEQUENCES TO DISSENTING SHAREHOLDERS. If a XYPOINT shareholder
dissents to the merger and receives solely cash in exchange for his shares of
XYPOINT capital stock, the cash received will be treated as having been received
by him as a distribution in redemption of his shares of XYPOINT capital stock,
subject to the provisions and limitations of Section 302 of the Code. See
"Appraisal Rights -- The Rights of XYPOINT Dissenting Shareholders." Unless the
redemption is treated as a dividend under Section 302(d) of the Code, a
stockholder will recognize gain or loss measured by the difference between the
amount of cash received and the tax basis of the shares of XYPOINT capital stock
redeemed. This gain or loss will be capital gain or loss if the shares of
XYPOINT capital stock were held by the shareholder as a capital asset at the
time of the merger. If, on the other hand, the redemption is treated as a
dividend under Section 302(d) of the Code, the full amount of cash received by
the shareholder will be treated as ordinary income to the extent of XYPOINT's
current or accumulated earnings and profits.

Under the tests of Section 302 of the Code, the redemption of a dissenting
XYPOINT shareholder's XYPOINT capital stock generally will be treated as a
dividend unless the redemption (1) results in a "complete termination" of the
shareholder's direct or indirect stock interest in TCS under Section 302(b)(3)
of the Code, (2) is "substantially disproportionate" with respect to the
shareholder under Section 302(b)(2) of the Code or (3) is "not essentially
equivalent to a dividend" with respect to the shareholder under Section
302(b)(1) of the Code.

In order to determine whether there has been a complete termination, a
substantially disproportionate redemption or a redemption not essentially
equivalent to a dividend with respect to a dissenting XYPOINT shareholder, it is
necessary to consider the TCS Common Stock owned by persons from whom ownership
is attributed to such stockholder under the rules of Section 318 of the Code.
Under Section 318 of the Code, a stockholder is considered to own shares that
are directly or indirectly owned by certain members of
58
<PAGE> 66

their family or by certain trusts, partnerships or corporations in which they
have an ownership or beneficial interest. A stockholder is also considered to
own any shares underlying exercisable options he holds. In some cases, a
dissenting XYPOINT shareholder may be deemed to own constructively TCS Common
Stock held by persons who do not exercise appraisal rights.

DIVIDENDS

Any cash dividends paid by TCS on the shares held in escrow (except stock
dividends) will be paid out to the XYPOINT shareholders immediately following
their receipt by the escrow agent. Such dividends will be taxable to the XYPOINT
shareholders as ordinary income.

PAYMENT OF INDEMNIFICATION OBLIGATION

Some or all of the shares held in the escrow account may be transferred to
TCS in satisfaction of claims for breach of certain representations and
warranties made by XYPOINT in the merger agreement. Under these circumstances,
shares of TCS Common Stock held in escrow which are equal in value to the amount
of the claim will be transferred to TCS. Each XYPOINT shareholder may recognize
taxable gain or loss at the time shares are transferred out of the escrow to
TCS. The amount of such gain or loss will be equal to the difference, if any,
between the fair market value of the shares at the time they are transferred out
of escrow and the shareholder's tax basis in such shares. Any gain will be
long-term capital gain if such shareholder's holding period (taking into account
the holding period of the XYPOINT shares exchanged) is longer than one year as
of the date the shares are transferred out of escrow. Any loss will be capital
loss, the deductibility of which may be substantially limited. If and when a
claim is satisfied, each shareholder's basis in the remaining shares of TCS
Common Stock he or she holds will be increased by the fair market value of the
shares transferred out of escrow.

ESCROW FUND

The escrow fund will be used to indemnify TCS and its affiliates against
losses, claims, expenses, and other damages arising from or in connection with
(i) any breach of representations of warranties or representations made by
XYPOINT, or (ii) any breach of any covenant or obligation of XYPOINT under the
merger agreement, but only if the total amount of all damages with respect to
all such matters, taken together, exceeds $150,000 in which case TCS is entitled
to indemnification for all amounts of the damages in excess of $150,000
provided, however, that in the event XYPOINT's fees and expenses related to the
merger and the merger agreement exceed $2,000,000, TCS shall be entitled to make
a claim against the escrow fund without regard to or limited by the $150,000
threshold. TCS' ability to recover damages from the escrow fund will terminate
one year after the effective time of the merger. The amount of TCS Common Stock
XYPOINT shareholders will receive when the escrow fund terminates will be
reduced, on a pro rata basis, by the amount of any claims or other payments paid
from the escrow fund. The escrow fund shall be the exclusive remedy to
compensate TCS for any losses as a result of any inaccuracy or breach of a
representation or warranty of XYPOINT contained in the merger agreement or any
failure to comply with any covenant contained in the merger agreement.

The escrow fund will consist of 400,000 shares of TCS Common Stock held
back from the shares to be issued to XYPOINT's shareholders in the merger, on a
pro rata basis. For

59
<PAGE> 67

purposes of the escrow agreement and the making of all payments from the escrow
fund, each share of TCS Common Stock shall be valued at $17.07 per share. Any
dividends paid with regard to such shares shall be distributed to the beneficial
owners of such shares. First Union National Bank will act as escrow agent. The
escrow fund will be governed by the merger agreement and the escrow agreement, a
copy of which are included in Appendix A to this proxy statement/prospectus.

REGULATORY APPROVALS REQUIRED

TCS and XYPOINT cannot complete the merger unless it is approved by, among
others, the Department of Justice and the Federal Trade Commission.

NASDAQ STOCK MARKET LISTING

A condition to the merger is that any shares of TCS Common Stock issuable
in connection with the merger be authorized for quotation on the Nasdaq National
Market, subject to official notice of issuance.

APPRAISAL RIGHTS -- THE RIGHTS OF XYPOINT DISSENTING SHAREHOLDERS

The following is a brief summary of the rights of holders of XYPOINT
capital stock to dissent from the merger and receive cash equal to the fair
value of their XYPOINT capital stock instead of receiving shares of TCS Common
Stock. This summary is not exhaustive, and you should read the applicable
sections of chapter 23B.13 of the Washington Business Corporations Act ("WBCA"),
which is attached to this proxy statement/prospectus as Appendix B. If you are
contemplating the possibility of dissenting from the merger, you should
carefully review the text of Appendix B, particularly the procedural steps
required to perfect dissenters' rights, which are complex. You should also
consult your legal counsel. If you do not fully and precisely satisfy the
procedural requirements of the WBCA, you will lose your dissenters' rights.

REQUIREMENTS FOR EXERCISING APPRAISAL RIGHTS. To exercise dissenters'
rights, you must be a shareholder of XYPOINT on the record date and:

- file with XYPOINT, before the vote is taken at the special meeting,
written notice of your intent to demand payment for the fair value for
your XYPOINT capital stock if the merger is consummated and becomes
effective; and

- not vote your shares of XYPOINT capital stock at the special meeting in
favor of the proposal to approve the merger agreement.

If you do not satisfy each of these requirements, you cannot exercise
dissenters' rights and will be bound by the terms of the merger agreement.

Shareholders of XYPOINT are advised that:

- submitting a proxy card that does not direct how the XYPOINT capital
stock represented by that proxy is to be voted will constitute a vote in
favor of the merger and a waiver of your statutory dissenters' rights;
and

- voting against the proposal to approve the merger will not satisfy the
notice requirement referred to above.

60
<PAGE> 68

You must file the written notice of the intent to exercise dissenters'
rights with XYPOINT at: XYPOINT Corporation, 2200 Alaskan Way, Seattle, WA
98121, Attn: Gregg Blodgett.

APPRAISAL PROCEDURE. Within 10 days after the effective date of the
merger, XYPOINT will send written notice to all shareholders who have validly
given written notice in compliance with the dissenters' rights provisions of
Section 23B.13.210 of the WBCA and have not voted in favor of the merger as
described above. The notice will contain:

- the address where the demand for payment and certificates representing
shares of XYPOINT capital stock must be sent and the date by which they
must be received;

- any restrictions on transfer of uncertificated shares that will apply
after the demand for payment is received;

- a form for demanding payment that states the date of the first
announcement to the news media or to shareholders of the proposed merger
and requires certification of the date the shareholder, or the beneficial
owner on whose behalf the shareholder dissents, acquired the XYPOINT
capital stock or an interest in it; and

- a copy of the dissenters' rights provisions of the WBCA, attached as
Appendix B to this proxy statement/prospectus.

If you wish to assert dissenters' rights, you must demand payment and
deposit your XYPOINT certificates within 30 days after the notice is given. If
you fail to make demand for payment and deposit your XYPOINT certificates within
the 30 day period, you will lose the right to receive fair value for your shares
under the dissenters' rights provisions, even if you filed a timely notice of
intent to demand payment. Except as provided below, within 30 days of the later
of the effective time of the merger or XYPOINT's receipt of a valid demand for
payment, XYPOINT will remit to each dissenting shareholder who complied with the
requirements of the WBCA, the amount XYPOINT estimates to be the fair value of
the shareholder's XYPOINT capital stock, plus accrued interest. XYPOINT will
include the following information with the payment:

- financial data relating to XYPOINT;

- estimate of the fair value of the shares plus accrued interest and a
brief explanation of the method used to reach that estimate, and an
explanation of how interest was calculated;

- a copy of the dissenters' rights provisions of the WBCA, attached as
Appendix B to this proxy statement/prospectus; and

- a statement of the shareholder's right to demand supplemental payment and
a brief description of the procedures to be followed in demanding
supplemental payment.

For a dissenting shareholder who was not the beneficial owner of the shares
of XYPOINT capital stock before November 15, 2000, XYPOINT may withhold payment
and instead send a statement setting forth its estimate of the fair value of the
shares and offering to pay such amount, with interest, as a final settlement of
the dissenting shareholder's demand for payment. If you are dissatisfied with
your payment or offer for payment, you may, within 30 days of the payment or
offer for payment, notify XYPOINT

61
<PAGE> 69

in writing and demand payment of your estimate of fair value of your shares and
the amount of interest due.

If any dissenting shareholder's demand for payment is not settled within
sixty (60) days after receipt by XYPOINT of his or her payment demand, Section
23B.13.300 of the WBCA requires that XYPOINT commence a proceeding in King
County, Washington Superior Court and petition the court to determine the fair
value of the shares and accrued interest, naming all the dissenting shareholders
whose demands remain unsettled as parties to the proceeding. The court may
appoint one or more appraisers to receive evidence and make recommendations to
the court as to the amount of the fair value of the shares. The fair value of
the shares as determined by the court is binding on all dissenting shareholders
and may be less than, equal to or greater than the market price of the TCS
Common Stock to be issued to nondissenting shareholders for their XYPOINT
capital stock if the merger is consummated. If the court determines that the
fair value of the shares is in excess of any amount remitted by XYPOINT, then
the court will enter a judgment for cash in favor of the dissenting shareholders
in an amount by which the value determined by the court, plus interest, exceeds
the amount previously remitted. The court will determine the costs and expenses
of the court proceeding and assess them against XYPOINT, except that the court
may assess part or all of the costs against any dissenting shareholders whose
actions in demanding supplemental payments are found by the court to be
arbitrary, vexatious or not in good faith. If the court finds that XYPOINT did
not substantially comply with the relevant provisions of Sections 23B.13.200
through 23B.13.280 of the WBCA, the court may also assess against XYPOINT any
fees and expenses of attorneys or experts that the court deems equitable. The
court may also assess those fees and expenses against any party if the court
finds that the party has acted arbitrarily, vexatiously or not in good faith in
bringing the proceedings. The court may award, in its discretion, fees and
expenses of an attorney for the dissenting shareholders out of the amount
awarded to the shareholders, if it finds the services of the attorney were of
substantial benefit to the other dissenting shareholders and that those fees
should not be assessed against XYPOINT.

A shareholder of record may assert dissenters' rights as to fewer than all
of the shares registered in the shareholder's name only if he or she dissents
with respect to all shares beneficially owned by any one person and notifies
XYPOINT in writing of the name and address of each person on whose behalf he or
she asserts dissenters' rights. The rights of the partial dissenting shareholder
are determined as if the shares as to which he or she dissents and his or her
other shares were registered in the names of different shareholders. A
beneficial shareholder of XYPOINT capital stock may assert dissenters' rights as
to shares held on the beneficial shareholder's behalf only if the beneficial
shareholder obtains and submits the registered owner's written consent to
dissent not later than the time the beneficial shareholder asserts dissenters'
rights and the beneficial shareholder does so with respect to all shares of
which such shareholder is the beneficial shareholder or over which such
shareholder has power to direct the vote. For purposes of the WBCA, "fair value"
means the value of XYPOINT capital stock immediately before the effective time
of the merger, excluding any appreciation or depreciation in anticipation of the
merger, unless that exclusion would be inequitable. Under section 23B.13.020 of
the WBCA, a XYPOINT shareholder has no right, at law or in equity, to set aside
the approval and adoption of the merger or the consummation of the merger except
if the approval, adoption or consummation fails to comply with the procedural
requirements of chapter 23B.13 of the

62
<PAGE> 70

WBCA, Revised Code of Washington sections 25.10.900 through 25.10.955, XYPOINT's
amended and restated articles of incorporation or XYPOINT's bylaws, or was
fraudulent with respect to that shareholder or XYPOINT.

RESALE OF TCS COMMON STOCK AFTER THE MERGER

TCS Common Stock issued pursuant to the merger will be subject to
restrictions on transfer arising under the Securities Act of 1933, as amended.
See "Other Agreements -- Voting Agreements" and "-- Stock Restriction
Agreements".

THIS DOCUMENT DOES NOT COVER RESALES OF SHARES OF TCS COMMON STOCK RECEIVED
BY ANY PERSON WHO MAY BE DEEMED TO BE AN AFFILIATE OF TCS.

Persons who may be deemed to be affiliates of TCS generally include
individuals or entities that control, are controlled by, or are under common
control with TCS, and generally include the executive officers and directors of
TCS and entities controlled by directors of TCS. Affiliates may not sell their
shares of TCS Common Stock acquired in connection with the merger, except
pursuant to an effective registration under the Securities Act covering such
shares or in compliance with Rule 145 under the Securities Act (or Rule 144
under the Securities Act in the case of persons who become affiliates of TCS) or
another applicable exemption from the registration requirements of the
Securities Act.

In general, Rule 145 under the Securities Act provides that, for one year
following the effective time of the merger, an affiliate (together with certain
related persons) would be entitled to sell shares of TCS Common Stock acquired
in connection with the merger only through unsolicited "broker transactions" or
in transactions directly with a "market maker," as such terms are defined in
Rule 144 under the Securities Act. Additionally, the number of shares that an
affiliate can sell (together with certain related persons and certain persons
acting in concert) within any three-month period for purposes of Rule 145 under
the Securities Act may not exceed the greater of 1% of the outstanding shares of
TCS Common Stock or the average weekly trading volume of such shares during the
four calendar weeks preceding such sale (excluding such person's trading). Rule
145 under the Securities Act will remain available to affiliates if TCS timely
files reports under the Securities Exchange Act of 1934 with the SEC. One year
after the effective time of the merger, an affiliate will be able to sell such
shares of TCS Common Stock without being subject to such manner of sale or
volume limitations, provided that TCS is current with its Exchange Act
informational filings and such affiliate is not then an affiliate of TCS. Two
years after the effective time of the merger, an affiliate will be able to sell
such shares of TCS Common Stock without any restrictions so long as such
affiliate had not been an affiliate of TCS for at least three months prior to
the date of such sale.

63
<PAGE> 71

THE MERGER AGREEMENT

The following is a summary of the material terms of the merger agreement.
The following is not a complete statement of all the terms of the merger
agreement. This summary is qualified in its entirety by reference to the merger
agreement, which is incorporated by reference in its entirety and attached to
this document as Appendix A. You are urged to read the merger agreement in its
entirety for a more complete description of the merger.

GENERAL

Pursuant to the merger agreement, XYPOINT will be merged with and into
Windward in accordance with Washington law and other applicable law, the
separate corporate existence of XYPOINT shall cease and Windward, a wholly-owned
subsidiary of TCS, shall continue as the surviving corporation. XYPOINT
shareholders will become TCS stockholders. The effective date of the merger will
occur following the satisfaction or waiver, where permissible, of all conditions
to completion of the merger specified in the merger agreement. TCS and XYPOINT
expect that the effective date of the merger will occur on or about January 15,
2001.

On or prior to the effective date of the merger, TCS and XYPOINT will file
articles of merger with the Washington Secretary of State, and such document
will set forth the effective date of the merger. Either TCS or XYPOINT can
terminate the merger agreement if, among other reasons, the merger does not
occur on or before March 31, 2001. See "-- Termination."

MERGER CONSIDERATION

A total of 4,300,000 shares of TCS Common Stock will be issued or issuable
in the merger to XYPOINT shareholders, option holders and warrant holders,
subject to the escrow provisions described below. In addition, TCS has agreed to
assume options granted by XYPOINT to acquire no more than 250,000 shares of
XYPOINT common stock following the execution of the merger agreement and prior
to the effective date of the merger.

DIRECTORS AND OFFICERS OF WINDWARD AFTER THE MERGER

On the effective date, the directors and officers of XYPOINT shall resign
and be removed and the directors and officers of Windward immediately prior to
the effective date shall be the officers and directors of the surviving
corporation. The directors of Windward will be:

Maurice B. Tose

Richard A. Young

Donald C. Hubbard, Jr.

Thomas M. Brandt, Jr.

In addition, the officers of Windward will be:

Maurice B. Tose, Chairman and CEO

Richard A. Young, Executive Vice President

64
<PAGE> 72

Bruce A. White, Secretary

Thomas M. Brandt, Jr., Chief Financial Officer

Donald C. Hubbard, Jr., Senior Vice President

ARTICLES OF INCORPORATION AND BYLAWS OF WINDWARD AFTER THE MERGER

The current articles of incorporation and bylaws of Windward Acquisition
Corp. will become the articles of incorporation and bylaws of the surviving
corporation after the merger.

CONVERSION OF SECURITIES; FRACTIONAL SHARES

Once the merger is completed, the following will occur:

The merger agreement contains a calculation of the exchange ratio for each
class or series of XYPOINT capital stock. TCS will not be required to issue more
than 4,300,000 shares of TCS Common Stock in order to complete the merger.

The exchange ratios applicable to XYPOINT Series A preferred stock, Series
B preferred stock, Series C preferred stock, Series D preferred stock, Series E
preferred stock and Series X Junior preferred stock reflect that each
shareholder thereof is entitled to receive their respective liquidation
preference before the proceeds of the merger are allocated to XYPOINT common
stock. In addition, in calculating the Series B, C, and E preferred stock and
the Series X Junior preferred stock applicable exchange ratios, the warrants
exercisable for Series B preferred stock and Series C preferred stock are
assumed exercised in full as of the effective date of the merger, 216,250 of the
Series X Junior preferred warrants are assumed exercised in full as of the
effective date of the merger and 500,000 of the Series X Junior preferred stock
and 259,740 of the Series E preferred stock warrants are assumed to have expired
by their terms as of the effective date of the merger.

The common stock exchange ratio is (a) 4,300,000 minus the liquidation
share number (as defined below) divided by (b) the total number of shares of
XYPOINT common stock including options exercisable for common stock of XYPOINT
outstanding immediately prior to the completion of the merger.

The liquidation share number means the quotient of (a) (i) the number of
Series A preferred stock outstanding immediately prior to the completion of the
merger multiplied by $1.00 plus (ii) the number of Series B preferred stock
(plus warrants exercisable for Series B preferred stock) outstanding immediately
prior to the completion of the merger multiplied by $1.75 plus (iii) the number
of Series C preferred stock (plus warrants exercisable for Series C preferred
stock) outstanding immediately prior to the completion of the merger multiplied
by $1.75 plus (iv) the number of Series D preferred stock outstanding
immediately prior to the completion of the merger multiplied by $2.69 plus (v)
the number of Series E preferred stock (plus warrants exercisable for Series E
preferred stock) outstanding immediately prior to the completion of the merger
multiplied by $1.54 plus (vi) the number of Series X Junior preferred stock
(plus warrants exercisable for Series X Junior preferred stock) outstanding
immediately prior to the completion of the merger multiplied by $0.80 divided by
(b) the average closing sales price of TCS Common Stock as traded on the Nasdaq
National Market and reported by the Wall Street Journal, for the forty-five
consecutive trading days ending on and

65
<PAGE> 73

including the third trading day prior to the date of execution of the merger
agreement (which was $17.07 per share) (the "Closing Price").

The Series A exchange ratio is the quotient of $1.00 divided by the Closing
Price.

The Series B exchange ratio is the quotient of $1.75 divided by the Closing
Price.

The Series C exchange ratio is the quotient of $1.75 divided by the Closing
Price.

The Series D exchange ratio is the quotient of $2.69 divided by the Closing
Price.

The Series E exchange ratio is the quotient of $1.54 divided by the Closing
Price.

The Series X exchange ratio is the quotient of $0.80 divided by the Closing
Price.

Each share of XYPOINT capital stock will be converted into a number of
shares of TCS Common Stock as determined by the exchange ratio for that class or
series of XYPOINT capital stock.

The number of shares of TCS Common Stock to be received by the different
classes of XYPOINT capital stock depends on the liquidation preference of the
class of preferred stock. On November 22, 2000, the shareholders of XYPOINT by
written consent approved an amendment to XYPOINT's articles of incorporation.
The amendment conforms the manner of valuing non-cash consideration in the event
of a liquidating sale to the manner of valuing the TCS Common Stock described in
the merger agreement. A copy of the form of this amendment is included in
Appendix A.

As of the date of the execution of the merger agreement, holders of shares
of the following classes and series of capital stock of XYPOINT will receive the
following for each 100 shares held:

<TABLE>
<CAPTION>
CLASS OR SERIES OF XYPOINT CAPITAL STOCK SHARES OF TCS COMMON STOCK
---------------------------------------- --------------------------
<S> <C>
Series A Preferred Stock 8.9554
Series B Preferred Stock 10.2537
Series C Preferred Stock 10.2537
Series D Preferred Stock 15.7613
Series E Preferred Stock 9.0232
Series X Junior Preferred Stock 8.9554
Common Stock 8.9554
</TABLE>

The preceding table assumes that prior to the consummation of the merger:
(1) all outstanding shares of XYPOINT Series A preferred stock and Series X
Junior preferred will be converted into shares of XYPOINT common stock, (2)
warrants for 216,250 shares of Series X Junior preferred stock will be exercised
and (3) warrants for 500,000 shares of Series X Junior preferred stock and
259,000 shares of Series E preferred stock will not be exercised and will expire
by their terms. Additionally, the table also assumes that the outstanding number
of equity securities of XYPOINT will remain unchanged until the closing of the
merger. The actual exchange ratios will depend on XYPOINT's capitalization at
the closing of the merger.

Warrants to purchase shares 500,000 shares of XYPOINT Series X Junior and
259,740 shares of Series E preferred stock will be cancelled upon completion of
the merger, and therefore any such warrants not exercised prior to the
completion of the merger will terminate. XYPOINT management believes that these
additional warrants will be exercised

66
<PAGE> 74

only if the market price for the TCS Common Stock exceeds $17.07 on the closing
date (the fixed price of each share of TCS Common Stock assumed in the merger
agreement). If the 500,000 Series X Junior preferred stock and the 259,740
Series E preferred stock warrants are exercised in full, the exchange ratio for
the XYPOINT common stock, the Series A preferred stock and the Series X Junior
preferred stock will be reduced to 8.6434 in the event of a cash exercise. In
the event of a cashless exercise, the exchange ratio for the XYPOINT common
stock shall be greater than 8.6434 but less than 8.9554.

No fractional shares of TCS Common Stock shall be issued. In lieu of
fractional shares, each holder otherwise entitled to a fractional interest shall
receive from TCS an amount in cash (rounded to the nearest whole cent) based on
the market value of TCS Common Stock as determined by multiplying such fraction
by the price per share of TCS Common Stock, as listed on the Nasdaq National
Market, on the close of trading the day prior to closing of the merger.

XYPOINT STOCK OPTIONS; XYPOINT WARRANTS

At the effective time of the merger, each unexpired and unexercised XYPOINT
stock option, whether vested or unvested, is to be converted into an option to
purchase shares of TCS Common Stock, with the number of shares and options
prices adjusted to give effect to the conversion rate, and will no longer
represent a right to acquire shares of XYPOINT common stock. In addition, by the
terms of the XYPOINT options, upon the effective date of the merger, all
unvested options shall become vested. Each option to purchase one share of
XYPOINT common stock shall convert into an option to purchase .089554 shares of
TCS Common Stock.

In the merger, all outstanding warrants to purchase shares of XYPOINT
Series B and C preferred stock will be assumed by TCS at the effective time of
the merger and remain outstanding. However, each such warrant shall be converted
into warrants to purchase shares of TCS Common Stock. The number of shares of
TCS Common Stock issuable upon exercise of XYPOINT warrants shall be determined
in accordance with the applicable exchange ratio and the exercise price of
XYPOINT warrants will be adjusted to reflect the applicable exchange ratio of
TCS Common Stock for XYPOINT capital stock in the merger. In calculating the
applicable exchange ratios, the warrants exercisable for Series B preferred
stock and Series C preferred stock are assumed exercised in full as of the
effective date of the merger, 216,250 of the Series X Junior preferred warrants
are assumed exercised in full as of the effective date of the merger and 500,000
of the Series X Junior preferred stock and 259,740 of the Series E preferred
stock warrants are assumed to have expired by their terms as of the effective
date of the merger.

PROCEDURE FOR EXCHANGING XYPOINT CAPITAL STOCK FOR TCS COMMON STOCK

The merger agreement requires TCS, after the effective date, to make
available through an agent designated by TCS, for the benefit of the holders of
shares of XYPOINT capital stock, certificates representing the shares of TCS
Common Stock to be issued in the merger.

EXCHANGE PROCEDURES

Promptly after the effective time, TCS shall cause the exchange agent to
mail to each holder of record of a certificate or certificates which immediately
prior to the effective

67
<PAGE> 75

time represented outstanding shares of XYPOINT capital stock, whose shares were
converted into the right to receive shares of TCS Common Stock: (1) a letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the certificates shall pass, only upon receipt of the
certificates by the exchange agent, and shall be in such form and have such
other provisions as TCS may reasonably specify), and (2) instructions for use in
effecting the surrender of the certificates in exchange for certificates
representing shares of TCS Common Stock (and cash in lieu of fractional shares).
Upon surrender of a certificate, free and clear of all liens and other charges
thereon of every kind, for cancellation to the exchange agent, together with
such letter of transmittal, duly completed and validly executed in accordance
with the instructions thereto, the holder of such certificate shall be entitled
to receive in exchange therefor a certificate representing the number of whole
shares of TCS Common Stock (less the escrow shares to be deposited in the escrow
fund on such holder's behalf pursuant to the merger agreement and the escrow
agreement), and the certificate so surrendered shall forthwith be canceled.

XYPOINT SHAREHOLDERS SHOULD NOT FORWARD XYPOINT STOCK CERTIFICATES TO THE
EXCHANGE AGENT UNTIL THEY HAVE RECEIVED A TRANSMITTAL LETTER. XYPOINT
SHAREHOLDERS SHOULD NOT RETURN XYPOINT STOCK CERTIFICATES WITH THEIR PROXY OR
CONSENT.

XYPOINT shareholders should also note:

No dividends or other distributions of TCS Common Stock with a record date
after the effective date of the merger shall be paid to any holder of any
unsurrendered XYPOINT certificate with respect to the shares of TCS Common Stock
represented thereby until such XYPOINT stock certificate is surrendered to the
exchange agent.

If any certificate for shares of TCS Common Stock is to be issued in a name
other than that in which the certificate surrendered in exchange therefor is
registered, it shall be a condition of the issuance thereof that the certificate
so surrendered is properly endorsed and otherwise in proper form for transfer
and the person requesting such exchange will have paid to TCS or the exchange
agent any transfer or other taxes required by reason of the issuance of a
certificate for shares of TCS Common Stock in any name other than that of the
registered holder of the certificate surrendered, or established to the
satisfaction of TCS or the exchange agent that such tax has been paid or is not
payable.

In the event any certificate shall have been lost, stolen or destroyed, TCS
shall issue or cause to be issued in exchange for such lost, stolen or destroyed
certificate, upon the making of an affidavit of that fact by the holder thereof,
shares of TCS Common Stock; provided that TCS may, in its discretion and as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed certificate to deliver a bond in such sum as it may
reasonably direct as indemnity against any claim that may be made against TCS,
Windward or any of their agents with respect to the certificate alleged to have
been lost, stolen or destroyed.

FORM S-8 FILING

TCS has agreed to file with the Securities and Exchange Commission, no
later than 30 days after the closing of the merger, a Registration Statement on
Form S-8 (or any

68
<PAGE> 76

successor or other appropriate forms) to register the shares of TCS Common Stock
issuable pursuant to outstanding options under the XYPOINT Stock Option Plans
assumed in the merger.

REPRESENTATIONS AND WARRANTIES

The merger agreement contains customary representations and warranties made
by XYPOINT. These representations and warranties relate to various aspects of
XYPOINT's business, including:

- Organization and good standing as a corporation;

- Capital structure;

- Authorization, execution, delivery and enforceability of the merger
agreement and related agreements;

- Absence of conflict with, default under or violation of agreements or
laws;

- Absence of need for consent, approval or waiver from any governmental
entity or third party;

- Absence of undisclosed liabilities;

- Absence of changes in the business;

- Litigation matters;

- Intellectual property;

- Tax matters;

- Material contracts;

- Regulatory compliance for E-911 business;

- Disclosure of third party consents;

- Compliance with laws;

- Broker's and finder's fees incurred in connection with the merger;

- Board approval and the vote of XYPOINT shareholders necessary to approve
the merger;

- Compliance with Foreign Corrupt Practices Act; and

- Accuracy and completeness of representations and warranties made.

The representations and warranties of XYPOINT terminate one year after the
effective time of the merger, except that claims related to actual fraud or
willful misconduct shall survive indefinitely.

The merger agreement also contains customary representations and warranties
made by TCS and Windward. These representations and warranties relate to certain
aspects of TCS' and Windward's business, including:

- Organization and good standing as a corporation;

- Capital structure;

69
<PAGE> 77

- Authorization, execution, delivery and enforceability of the merger
agreement and related agreements;

- Accuracy and completeness of filings and reports with the Securities and
Exchange Commission and accuracy of financial statements;

- Absence of certain changes to TCS since September 30, 2000;

- Broker's and finder's fees in connection with the merger;

- Accuracy and completeness of representations and warranties made;

- Litigation matters; and

- Tax matters.

The representations and warranties of TCS and Windward terminate one year
after the effective time of the merger, except that claims related to actual
fraud or willful misconduct shall survive indefinitely.

The representations and warranties contained in the merger agreement are
complicated and not easily summarized. You are urged to carefully read the
articles of the merger agreement entitled "Representations and Warranties of
Target" and "Representations and Warranties of Acquiror and Merger Sub."

COVENANTS OF XYPOINT

XYPOINT has covenanted and agreed to take, or refrain from taking, certain
actions pending the closing of the merger, including:

INFORMATION. XYPOINT shall, upon reasonable notice, give to TCS and to
TCS' officers, accountants, counsel, financial advisers, and other
representatives, reasonable access during XYPOINT's normal business hours
throughout the period prior to the effective date to all of their properties,
books, contracts, commitments, and shareholder lists and records. XYPOINT will,
at its own expense, furnish TCS during such period with all such information
concerning their affairs as TCS may reasonably request.

REGULATORY APPROVALS; CONSENTS. XYPOINT will, as promptly as practicable,
make any filings necessary to obtain all regulatory approvals of the
transactions contemplated by the merger agreement, including filings required
for Hart-Scott-Rodino ("HSR Act") approval, and will use all commercially
reasonable efforts to secure favorable action on such filings and applications,
including without limitation efforts to pursue an appeal of a denial of a
regulatory approval.

XYPOINT will use commercially reasonable efforts to obtain any consents,
approvals, or waivers from third parties required to be obtained by XYPOINT in
connection with the transactions contemplated in the merger agreement.

CONDUCT OF BUSINESS. After the execution of the merger agreement and
pending the effective date, XYPOINT shall not do, cause or permit any of the
following, without the prior written consent of TCS:

- effect any change, supplement or amendment in its articles of
incorporation or bylaws;

70
<PAGE> 78

- except with respect to XYPOINT stock options, warrants or other
convertible or exercisable securities outstanding on the date of the
merger agreement which are or may become subject to exercise according to
their terms as existing on the date of the merger agreement, change its
authorized, issued, or outstanding capital stock or issue, deliver or
sell or authorize or propose the issuance, delivery or sale of, or
purchase or propose the purchase of, any shares of its capital stock or
securities convertible into, or subscriptions, rights, warrants or
options to acquire, or other agreements or commitments of any character
obligating it to issue any such shares or other convertible securities;
provided, however, XYPOINT may issue options for shares of XYPOINT common
stock, in an aggregated amount not to exceed 250,000, for the sole
purpose of hiring new employees, under its stock plans in individual
award amounts and on terms consistent with prior practices;

- declare or pay any cash or other dividends in respect of any shares of
its capital stock;

- increase employee compensation or benefit levels (except for annual
increases not in excess of amounts established by its regular past
practices), establish or make any increase in any employment,
compensation, bonus, pension, option, incentive or deferred compensation,
retirement, death, profit sharing, or similar agreements or benefits of
any of its past, present, or future officers or employees, or modify the
existing employment agreements with any officers or employees;

- make any change in any of its accounting policies or practices unless
required by GAAP;

- incur or commit to incur any indebtedness for borrowed money in excess of
$25,000 or guarantee any such indebtedness in excess of $25,000 or issue
or sell any debt securities or guarantee any debt securities of others;

- obligate itself to make or undertake to make any capital expenditure in
excess of $25,000 in the aggregate;

- enter into any material contract, agreement, license or commitment, or
violate, amend or otherwise modify or waive any of the terms of any of
its material contracts, agreements or licenses;

- transfer to or license any person or entity or otherwise extend, amend or
modify any rights to XYPOINT's intellectual property;

- revalue any of its assets, including without limitation writing down the
value of inventory or writing off notes or accounts receivable;

- sell, lease, license or otherwise dispose of or encumber any of XYPOINT's
properties or assets (other than sales of assets in the ordinary course
of business consistent with past practice);

- terminate or waive any right which would have a material adverse effect
on XYPOINT;

- commence a lawsuit or arbitration proceeding other than (1) for the
routine collection of bills, (2) in such cases where it in good faith
determines that failure to commence suit would result in the material
impairment of a valuable asset of its

71
<PAGE> 79

business, provided that it consults with TCS prior to the filing of such
a suit, or (3) for a breach of the merger agreement;

- acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial portion of the assets of, or by any other
manner, any business or any corporation, partnership, association or
other business organization or division thereof, or otherwise acquire or
agree to acquire any material amount of assets;

- make any tax election, change any tax election, adopt any tax accounting
method, change any tax accounting method, enter into any closing
agreement, settle any tax claim or assessment or consent to any tax claim
or assessment;

- accelerate, amend or change the period of exercisability or vesting of
options or other rights granted under its stock plans or authorize cash
payments in exchange for any options or other rights granted under any of
such plans;

- enter into or amend any agreements pursuant to which any other party is
granted exclusive marketing, manufacturing or other exclusive rights of
any type or scope with respect to any of XYPOINT's products or
technology;

- pay, discharge or satisfy in an amount in excess of $25,000 in any one
case or $50,000 in the aggregate, any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise),
other than (1) arising in the ordinary course of business and consistent
with past practice and (2) the payment, discharge or satisfaction of
liabilities reflected or reserved against in the XYPOINT financial
statements;

- take or agree in writing or otherwise to take, any of the actions
described in above, or any action which would make any of its
representations or warranties contained in the merger agreement untrue or
incorrect or prevent it from performing or cause it not to perform its
covenants hereunder, and

- engage in any related party transactions.

Furthermore, pending the effective date, XYPOINT shall (1) conduct its
business only in the ordinary course and use commercially reasonable efforts
consistent with past practice and policies to preserve intact its present
business organizations, keep available the services of its present officers and
key employees and preserve its relationships with customers, suppliers,
distributors, licensors, licensees and others having business dealings with it,
to the end that its goodwill and ongoing business shall be unimpaired at the
effective time, (2) continue in effect the present method of conducting its
business, (3) give all notices and other information required to be given to the
employees of XYPOINT, any collective bargaining unit representing any group of
employees of XYPOINT, and any applicable government entity under the National
Labor Relations Act (NLRA), the Code, the Consolidated Omnibus Budget
Reconciliation Act (COBRA), and other applicable law in connection with the
transactions provided for in the merger agreement, and (4) consult with TCS as
to making decisions or actions in material matters other than those in the
ordinary course of business.

APPROVAL OF SHAREHOLDERS OF XYPOINT; DOCUMENT PREPARATION. XYPOINT will
duly call and convene a meeting of its shareholders to act upon the transactions
contemplated in the merger agreement as soon as practicable after the
registration statement of which this proxy statement/prospectus is a part has
been declared effective and is available for

72
<PAGE> 80

distribution to its shareholders, or, in lieu thereof, will take any necessary
steps to seek such shareholder approval through a consent solicitation in
conformity with applicable law. XYPOINT and its board of directors will
recommend approval of the merger agreement and the merger to its shareholders,
and will use commercially reasonable efforts to obtain a favorable vote thereon.
The calling and holding of such meeting or the use of such a consent
solicitation and all notices, transactions, documents, and information related
thereto will be in material compliance with all applicable laws.

CURRENT INFORMATION; ADVICE OF CHANGES. Between the date of the merger
agreement and the closing of the merger, XYPOINT shall promptly advise TCS of
(1) the occurrence or non-occurrence of any event which would be likely to cause
any condition to the obligations of TCS to effect the merger and the other
transactions contemplated by the merger agreement not to be satisfied, or (2)
the failure of XYPOINT to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by it pursuant to the merger
agreement which would be likely to result in any condition to the obligations of
TCS to effect the merger and the other transactions contemplated by the merger
agreement not to be satisfied.

NO SOLICITATION OF OTHER OFFERS. XYPOINT has agreed that it shall not
solicit or initiate any other offer or proposal to acquire or invest in XYPOINT
until the earlier of the termination of the merger agreement or the date of the
merger. XYPOINT has further agreed that it will not provide information about
itself to any other party or enter into any agreements with any party in
connection with a proposal to acquire or invest in XYPOINT, except in the
opinion of outside legal counsel to XYPOINT as may be legally required to comply
with the duties of the board of directors of XYPOINT under applicable law and
upon receipt of a confidentiality agreement. If XYPOINT receives any inquiry or
an unsolicited acquisition proposal, XYPOINT has agreed to immediately notify
TCS and disclose the identity of the person making such inquiry or acquisition
proposal and the terms of such proposal.

PUBLIC ANNOUNCEMENTS. XYPOINT will consult with TCS before issuing any
press release or otherwise making any public statements with respect to the
merger agreement and the transactions contemplated thereby and shall not issue
any such press release or make any such public statement prior to such
consultation, except as counsel may advise is required by law.

TAX FREE REORGANIZATION. XYPOINT will not, either before or after
consummation of the merger, take any action or fail to take any action which
would cause the merger to fail to constitute a "reorganization" within the
meaning of Code Section 368 and XYPOINT will use commercially reasonable efforts
not to permit any of their directors, officers, employees, shareholders, agents,
consultants, or other representatives to take any such action.

COVENANTS OF TCS

INFORMATION. TCS will, at its own expense, furnish XYPOINT with all such
information concerning its affairs as XYPOINT may reasonably request.

APPLICATIONS TO GOVERNMENTAL ENTITIES. TCS and Windward will, as promptly
as practicable, make any filings necessary to obtain all regulatory approvals of
the transactions contemplated by the merger agreement, including filings
required for HSR Act approval, and will use all commercially reasonable efforts
to secure favorable action on

73
<PAGE> 81

such filings and applications, including without limitation efforts to pursue an
appeal of a denial of a regulatory approval. TCS and Windward will use
commercially reasonable efforts to obtain any consents, approvals, or waivers
from third parties required to be obtained by TCS and Windward in connection
with the transactions contemplated in the merger agreement.

TCS COMMON STOCK. At the effective date, TCS Common Stock to be issued in
exchange for the XYPOINT capital stock pursuant to the terms of the merger
agreement shall be duly authorized, validly issued, fully paid, and
non-assessable, free of preemptive rights and free and clear of all liens
created by or through TCS, with no personal liability attaching to the ownership
thereof. TCS Common Stock to be issued upon exchange for the XYPOINT capital
stock pursuant to the terms of the merger agreement will be issued in all
material respects in accordance with applicable state and federal laws, rules,
and regulations.

CURRENT INFORMATION; ADVICE OF CHANGES; CONDUCT OF BUSINESS. TCS shall
promptly advise XYPOINT of (1) the occurrence or non-occurrence of any event
which would be likely to cause any condition to the obligations of XYPOINT to
effect the merger and the other transactions contemplated by the merger
agreement not to be satisfied or (2) the failure of TCS to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it pursuant to the merger agreement which would be likely to result in any
condition to the obligations of XYPOINT to effect the merger and the other
transactions contemplated by the merger agreement not to be satisfied. Without
the approval and consent of XYPOINT, TCS and its subsidiaries will not agree to
acquire by merging or consolidating with, by purchasing an equity interest in,
or a portion of the assets of, or by any other manner, any business or any
corporation, partnership, association or other business organization or division
thereof if any such business or assets to be acquired includes products that
could reasonably be considered to be competitive with XYPOINT's business in any
material respect and would reasonably be likely to delay or prolong the waiting
period under the HSR Act with respect to the merger at any time before the
applicable waiting period with respect to the merger under the HSR Act shall
have expired or have been earlier terminated.

PUBLIC ANNOUNCEMENTS. TCS will consult with XYPOINT before issuing any
press release or otherwise making any public statements with respect to the
merger agreement and the transactions contemplated hereby and shall not issue
any such press release or make any such public statement prior to such
consultation, except as counsel may advise is required by law.

TAX FREE REORGANIZATION. Each of TCS and Windward will not, either before
or after consummation of the merger, take any action or fail to take any action
which would cause the merger to fail to constitute a "reorganization" within the
meaning of Code Section 368 and TCS and Windward will each use commercially
reasonable efforts not to permit any of its directors, officers, employees,
stockholders, agents, consultants, or other representatives to take any such
action. TCS and Windward each agree to file their respective federal and state
income tax returns consistent with treatment of the merger as a reorganization.

EMPLOYEE BENEFITS MATTERS. To the extent that service is relevant for
eligibility, vesting and (except as would result in duplication of benefits)
benefit accruals under any employee benefit plan, program or arrangement
maintained by TCS or any subsidiary of TCS, such plan, program or arrangement
shall credit each employee of XYPOINT who

74
<PAGE> 82

participates therein for service on or prior to the effective time with XYPOINT.
TCS agrees to offer to XYPOINT employees benefits commensurate with those
benefits conferred to TCS employees similarly situated. In addition, TCS shall
(1) waive limitations on benefits relating to any pre-existing conditions under
any TCS or subsidiary of TCS welfare benefit plan in which XYPOINT employees may
participate and (2) recognize, for purposes of annual deductible and
out-of-pocket limits under its medical and dental plans, deductible and
out-of-pocket expenses paid by XYPOINT employees and their respective dependents
under XYPOINT's medical, dental and other healthcare plans in the calendar year
in which the effective time occurs.

XYPOINT OFFICERS AND DIRECTORS. TCS agrees that all rights to
indemnification (including advancement of expenses) existing on the date of the
merger agreement in favor of the present or former officers and directors of
XYPOINT with respect to actions taken in their capacities as officers and
directors prior to the effective time of the merger, as provided in XYPOINT's
articles of incorporation or bylaws and indemnification agreements, shall
survive the merger and continue in full force and effect for a period of six
years following the effective time and shall be guaranteed by TCS.

TCS shall cause Windward to maintain in effect XYPOINT's current policy of
directors' and officers' liability insurance, or policies of at least the same
coverage and amounts containing no less advantageous terms, or coverage under
TCS' directors' and officers' liability insurance. These policies shall cover
acts and omissions occuring prior to the merger and, subject to certain limits,
shall be maintained for six years after the merger.

TCS also confirms its intent and plan to grant options to purchase TCS
Common Stock to management and employees after the effective date in amounts
sufficient to cause management and employees of XYPOINT to currently have
options for a number of shares of TCS Common Stock generally consistent with the
option levels held by comparable level employees of TCS.

CONDITIONS TO THE MERGER

There are numerous conditions that have to be satisfied or waived before
the merger can be completed. These conditions are divided into two categories,
and are summarized below.

THE OBLIGATIONS OF TCS AND WINDWARD TO COMPLETE THE MERGER. The
obligations of TCS and Windward to complete the merger are subject to the
following conditions:

- XYPOINT's representations and warranties must be true and correct in all
material respects as of the date the merger is to be completed as if made
at and as of such time, except to the extent XYPOINT's representation and
warranties address matters only as of a particular date in which case
they must be true and correct only as of that date;

- XYPOINT's shareholders shall have approved by the requisite vote the
merger and merger agreement;

- XYPOINT shareholders shall have approved by the requisite vote any
payments and benefits to its employees which are characterized as
"parachute payments," within the meaning of Section 280G(b)(2) of the
Code as a result of the merger, the merger agreement or the transactions
contemplated by the merger agreement;

75
<PAGE> 83

- no court order or other legal restraint or prohibition preventing the
consummation of the merger shall be in effect or pending;

- certain consents, waivers, assignments and approvals required to
consummate the merger shall have been obtained;

- TCS shall have received an opinion from its legal tax counsel to the
effect that the merger will constitute a reorganization within the
meaning of Section 368(a) of the Code, and such opinion shall not have
been withdrawn;

- TCS shall have received a legal opinion from legal counsel to XYPOINT;

- TCS, a shareholder's representative and the escrow agent shall have
executed and delivered the escrow agreement;

- the registration statement of which this proxy statement/prospectus is a
part shall have become effective and the TCS Common Stock issuable in the
merger shall have been approved for listing on the Nasdaq National
Market;

- TCS shall have received executed and delivered copies of 280G Agreements
for certain identified persons by XYPOINT;

- XYPOINT's officers and directors shall have resigned effective as of the
closing of the merger;

- TCS shall have received executed and delivered copies of the stock
restriction agreements from shareholders, option holders and warrant
holders representing at least 90% of the fully diluted capital stock of
XYPOINT; and

- XYPOINT shall have terminated its pension plan.

THE OBLIGATION OF XYPOINT TO COMPLETE THE MERGER. The obligation of
XYPOINT to complete the merger is subject to the following conditions:

- TCS' and Windward's representations and warranties must be true and
correct in all material respects as of the date the merger is to be
completed as if made at and as of such time, except to the extent TCS'
and Windward's representation and warranties address matters only as of a
particular date in which case they must be true and correct only as of
that date;

- XYPOINT's shareholders shall have approved by the requisite vote the
merger and merger agreement;

- No court order or other legal restraint or prohibition preventing the
consummation of the merger shall be in effect or pending;

- XYPOINT shall have received an opinion from its tax counsel to the effect
that the merger will constitute a reorganization within the meaning of
Section 368(a) of the Code, and such opinion shall not have been
withdrawn;

- XYPOINT shall have received a legal opinion from legal counsel to TCS;

- TCS, a shareholder's representative and the escrow agent shall have
executed and delivered the escrow agreement; and

76
<PAGE> 84

- The registration statement of which this proxy statement/prospectus is a
part shall have become effective and the TCS Common Stock issuable in the
merger shall have been approved for listing on the Nasdaq National
Market.

EXTENSION; WAIVER

At any time prior to the completion of the merger, to the extent legally
allowed, any party may:

- extend the time for the performance of any of the obligations or other
acts of the other party required in the merger agreement;

- waive any inaccuracies in the representations and warranties of the other
party contained in the merger agreement or in any document delivered
pursuant to the merger agreement; or

- waive compliance with any of the agreements or conditions for the benefit
of such party contained in the merger agreement.

AMENDMENT

The merger agreement may be amended at any time by execution of an
instrument in writing signed on behalf of each of the parties and, in the case
of TCS and XYPOINT, approved by their respective boards of directors; provided
that an amendment made subsequent to adoption of the merger agreement by the
shareholders of XYPOINT shall not alter or change the amount or kind of
consideration to be received on conversion of the XYPOINT capital stock or alter
or change any of the terms and conditions of the merger agreement if such
alteration or change would materially adversely affect the holders of XYPOINT
capital stock.

TERMINATION

The companies may terminate the merger agreement at any time prior to the
completion of the merger by mutual consent.

Either TCS or XYPOINT may terminate the merger agreement at any time prior
to the completion of the merger:

- if the merger has not been completed by March 31, 2001, unless the
failure to complete the merger is the result of a breach of the merger
agreement by the party seeking to terminate the merger agreement,

- if any final, nonappealable permanent injunction or other order of a
court or other competent authority prevents completion of the merger and
the transactions contemplated by the merger agreement, or

- if the other party's representations or warranties under the merger
agreement were untrue when made in any material respect or if the other
party materially breaches any obligation under the merger agreement and
such breach remains uncured 30 days after receipt of written notice from
the other party.

TCS may terminate the merger agreement, if, immediately prior to the
completion of the merger, XYPOINT shareholders who would otherwise receive in
excess of 5% of the 4,300,000 shares of TCS Common Stock to be delivered in
connection with the merger have demanded appraisal rights (which demands have
not been withdrawn).

77
<PAGE> 85

ESCROW AND INDEMNIFICATION

EXCLUSIVE REMEDY

If the merger is consummated and notwithstanding any other provision of the
merger agreement or the exhibits thereto to the contrary, recovery from the
escrow fund shall be the exclusive remedy available to TCS for damages under the
merger agreement.

ESCROW FUND

The escrow fund shall consist of 400,000 shares of TCS Common Stock which
would have been otherwise issuable in the merger to the shareholders of XYPOINT.
The escrow shares shall be registered in the name of, and, be placed in escrow
with First Union National Bank on the closing date, such deposit to constitute
an escrow fund to be governed by the terms set forth in the escrow agreement,
contemplated in the merger agreement.

SHAREHOLDERS' AGENT

By approving the merger agreement, XYPOINT shareholders will have consented
to the appointment of Joseph Manzinger, an employee of The Hillman Company,
XYPOINT's largest shareholder, to act as the shareholders' agent for the XYPOINT
shareholders. Mr. Manzinger will represent the interests of XYPOINT shareholders
after the merger and will be entitled to assert, prosecute or respond to any
claims for indemnification on behalf of all or any XYPOINT shareholders; to
authorize delivery of shares from the escrow fund and to take certain other
action on behalf of XYPOINT shareholders, all as more fully described in Article
IX of the merger agreement. XYPOINT shareholders are encouraged to read Article
IX of the merger agreement for a more detailed explanation of the escrow fund
and rights with respect thereto.

INDEMNIFICATION

Subject to certain limitations, the shareholders of XYPOINT will indemnify
and hold harmless TCS and its officers, directors, agents and employees, and
each person, if any, who controls or may control TCS within the meaning of the
Securities Act from and against any and all losses, costs, damages, liabilities
and expenses arising from claims, demands, actions, causes of action, including,
without limitation, reasonable legal fees, net of any recoveries by TCS under
existing insurance policies or indemnities from third parties resulting from (1)
any failure of any of the representations and warranties made by XYPOINT under
the merger agreement to be true and accurate at the time which they were made
(including, if applicable, as of the closing date) or (2) any breach or default
by XYPOINT of any covenant or agreement made by XYPOINT in the merger agreement,
the XYPOINT disclosure schedules or any exhibit or schedule to the merger
agreement and which is required to be performed by XYPOINT at or prior to the
effective time. The escrow fund shall be the sole security for this indemnity
obligation, subject to the limitations in the merger agreement.

Subject to certain limitations, TCS will indemnify and hold harmless
XYPOINT shareholders from and against any and all damages resulting from any
misrepresentation or breach of or default in connection with any representation,
warranty or covenant of TCS in the merger agreement.

78
<PAGE> 86

CERTAIN LIMITATIONS

- TCS' right to indemnification for damages shall accrue only if the
aggregate of all such damages exceeds $150,000 and then only to the
extent of any excess damages over such $150,000 amount.

- No indemnifying party shall be liable for any damages unless a written
claim for indemnification is given and received by the first anniversary
of the closing date.

OTHER AGREEMENTS

VOTING AGREEMENTS

Certain shareholders of XYPOINT have entered into voting agreements with
TCS in connection with the execution of the merger agreement. Under the voting
agreements, these shareholders have agreed to vote their shares in XYPOINT, as
well as any shares acquired in the future, in favor of the approval of the
merger by the adoption and approval of the merger agreement. The vote of these
shares by themselves is sufficient to approve the merger agreement and the
merger. In addition, the shareholders have agreed not to transfer any shares of
XYPOINT capital stock and to execute an irrevocable proxy in favor of TCS upon
demand by TCS. The irrevocable proxy would grant TCS the ability to vote the
shares of XYPOINT capital stock held by these shareholders for specific
purposes, including approval of the merger. The irrevocable proxy would also
grant TCS the ability to vote the shares of XYPOINT capital stock of these
shareholders against any proposal of a third party to acquire, merge or combine
with XYPOINT. The voting agreements terminate upon the earlier occurrence of (1)
the effective time of the merger, or (2) the termination of the merger
agreement.

The voting agreements also restrict the transfer of shares of TCS Common
Stock or any securities convertible into or exchangeable or exercisable for or
any other rights to purchase or acquire shares of TCS Common Stock for a period
of 240 days following the effective date of the merger except as follows: (1) on
or after the 120th day following the effective date of the merger, the
shareholder shall be entitled to sell up to one-third (1/3) of the shares of TCS
Common Stock acquired by such shareholder in the merger, (2) on or after the
180th day following the effective date of the merger, the Shareholder shall be
entitled to sell an additional one-third (1/3) of the shares of TCS Common Stock
acquired by such shareholder in the merger, and (3) on or after the 240th day
following the effective date of the merger, the shareholder shall be entitled to
sell the remaining one-third (1/3) of the shares of TCS Common Stock acquired by
such shareholder in the merger, unless TCS amends or waives the restrictive
provisions earlier.

STOCK RESTRICTION AGREEMENTS

Certain other shareholders of XYPOINT, who are not parties to the voting
agreements, will be required as a condition to the transaction to enter into
stock restriction agreements with TCS in connection with the execution of the
merger agreement. The stock restriction agreements restrict the transfer of
shares of TCS Common Stock or any securities convertible into or exchangeable or
exercisable for or any other rights to purchase or acquire shares of TCS Common
Stock for a period of 240 days following the effective date of the merger except
as follows: (1) on or after the 120th day following the effective date of the
merger, the shareholder shall be entitled to sell up to

79
<PAGE> 87

one-third (1/3) of the shares of TCS Common Stock acquired by such shareholder
in the merger, (2) on or after the 180th day following the effective date of the
merger, the shareholder shall be entitled to sell an additional one-third (1/3)
of the shares of TCS Common Stock acquired by such shareholder in the merger,
and (3) on or after the 240th day following the effective date of the merger,
the shareholder shall be entitled to sell the remaining one-third (1/3) of the
shares of TCS Common Stock acquired by such shareholder in the merger, unless
TCS amends or waives the restrictive provisions earlier. Additionally, certain
XYPOINT directors and officers have agreed not to sell their shares of TCS
Common Stock for 180 days, and in some cases 360 days, after the merger. These
agreements must be signed by shareholders, option holders and warrant holders
representing at least 90% of the fully diluted capital stock of XYPOINT prior to
the closing date of the merger.

80
<PAGE> 88

PROPOSAL 2:

CONVERSION OF SERIES A PREFERRED STOCK

Pursuant to Article 2.3(b) of XYPOINT's articles of incorporation, to
approve the automatic conversion of the Series A preferred stock into XYPOINT
common stock immediately prior to the closing of the merger, the affirmative
vote of the holders of shares representing two-thirds of the Series A preferred
stock is required. If such vote is obtained, no other action is necessary and
all shares of the Series A preferred stock shall be automatically converted to
XYPOINT common stock.

If, however, the automatic conversion of the Series A preferred stock is
not approved, under XYPOINT's articles of incorporation, each holder of Series A
preferred stock is nevertheless entitled to convert his or her shares.
Individual holders of Series A preferred stock may, and should, opt to convert
their shares prior to the effective date of the merger in order to maximize the
number of shares of TCS Common Stock received by such holders.

Based on the exchange ratios set forth above, XYPOINT management believes
that it is in the best interests of the holders of Series A preferred stock to
convert their shares into XYPOINT common stock prior to and conditioned upon the
closing of the merger. For example, if the automatic conversion is approved,
holders of Series A preferred stock which is converted to shares of XYPOINT
common stock would receive approximately 0.08955 shares of TCS Common Stock for
each share of XYPOINT common stock in the merger. If the automatic conversion is
not approved and a Series A preferred stock holder does not otherwise elect
convert to his or her shares of Series A preferred stock, the holder would
receive approximately 0.05859 shares of TCS Common Stock for each share of
Series A preferred stock in the merger.

81
<PAGE> 89

PROPOSAL 3:

CONVERSION OF SERIES X JUNIOR PREFERRED STOCK

Pursuant to Article 2.3(b) of XYPOINT's articles of incorporation, to
approve the automatic conversion of the Series X Junior preferred stock into
XYPOINT common stock immediately prior to the closing of the merger, the
affirmative vote of the holders of shares representing a majority of the Series
X Junior preferred stock is required. If such vote is obtained, no other action
is necessary and all shares of the Series X Junior preferred stock shall be
automatically converted to XYPOINT common stock.

If, however, the automatic conversion of the Series X Junior preferred
stock is not approved, under XYPOINT's articles of incorporation, each holder of
Series X Junior preferred stock is nevertheless entitled to convert his or her
shares. Individual holders of Series X Junior preferred stock may, and should,
opt to convert their shares prior to the effective date of the merger in order
to maximize the number of shares of TCS Common Stock received by such holders.

Based on the exchange ratios set forth above, XYPOINT management believes
that it is in the best interests of the holders of Series X Junior preferred
stock to convert their shares into XYPOINT common stock prior to and conditioned
upon the closing of the merger. For example, if the automatic conversion is
approved, holders of Series X Junior preferred stock which is converted to
shares in XYPOINT common stock would receive approximately 0.08955 shares of TCS
Common Stock in the merger. If the automatic conversion is not approved and a
Series X Junior preferred stock holder does not otherwise elect to convert his
or her shares of Series X Junior preferred stock, the holder would receive
approximately 0.04687 shares of TCS Common Stock for each share of Series X
Junior preferred stock in the merger.

82
<PAGE> 90

PROPOSAL 4:

APPROVAL OF VESTING OF STOCK OPTIONS

Under Section 280G of the Code, certain compensatory payments to employees
or other individuals who perform services for a corporation and who are
officers, highly-compensated individuals or significant shareholders are
considered "parachute payments" if such payments are contingent upon a change in
control of the corporation and the payments exceed three times the "base
amount." The base amount generally means an individual's annualized compensation
for the five most recent tax years ending before the change of control or, if an
individual has been employed by the employer for less than five years, the
period of his actual employment. Payments made under an agreement entered into
within one year prior to, or in connection with, a change in control are
presumed to be contingent on the change in control. On the other hand, payments
are not considered parachute payments if the taxpayer can show by clear and
convincing evidence that they constitute reasonable compensation for personal
services to be performed after the change in control or that they otherwise are
not contingent on the change in control. The value of the accelerated vesting of
shares of stock or options to purchase such shares are considered compensatory
payments for this purpose.

Excess parachute payments are not deductible by the corporation, and the
recipient must pay a nondeductible excise tax equal to 20% of the excess
parachute payment in addition to federal income and other taxes on those
payments. An "excess parachute payment" means an amount equal to the excess of
any parachute payment over the base amount allocated to such payment. An excess
parachute payment is reduced by any portion of the payment that the taxpayer
establishes by clear and convincing evidence is reasonable compensation for
personal services actually performed before the change in control. These
payments are applied first to offset the base amount.

Under an exemption, if the stock of the corporation making the payments is
not publicly-traded and if the compensatory payments have been approved by the
shareholders of the corporation, the payments are not considered parachute
payments. The approval of the payments must be by a separate vote of the holders
of stock possessing more than 75% of the voting power of the corporation's
outstanding capital stock immediately before the change in control, after the
material terms of the payments have been disclosed to shareholders. For this
purpose, stock actually or constructively owned by the intended recipient of the
payments is disregarded. Under the rules for determining constructive ownership
of stock, stock owned by a partnership is considered owned proportionately by
its partners, and stock owned by a corporation is considered proportionately
owned by any shareholder owning at least 50% of the corporation's stock. If a
shareholder is not an individual and a substantial portion of its assets
consists of the stock of the corporation making the parachute payments, the
approval by that shareholder must be made by a separate vote of the persons who
hold more than 75% of the voting power of the stock or interests in that
shareholder. Where a general partner of a limited partnership has the authority
to vote on issues involving the management of the partnership's investments, the
general partner has authority to vote to approve compensation payments under
Section 280G of the Code.

The above exemption for shareholder-approved payments requires that the
vote by the shareholders be determinative as to whether the intended recipient
would be entitled to the payments. Thus, the terms of the agreement under which
the payments are made

83
<PAGE> 91

must provide that if the shareholders do not approve the payments, the intended
recipient will not be entitled to receive or retain the payments.

VESTING OF STOCK OPTIONS

XYPOINT has granted the following stock options to its officers which,
subject to shareholder approval, will become vested and exercisable upon or in
connection with the merger:

<TABLE>
<CAPTION>
OPTION HOLDERS OPTIONS
-------------- -------
<S> <C>
Gregg Blodgett Option granted on May 29, 1998 to purchase 460,000 shares
at $0.25 per share, of which 383,333 shares are vested as
of November 15, 2000;
Reuven Carlyle Option granted on December 12, 1997 to purchase 50,000
shares at $0.25 per share, of which 45,833 shares are
vested as of November 15, 2000;
Option granted on August 25, 1998 to purchase 200,000
shares at $0.25 per share, of which 183,333 shares are
vested as of November 15, 2000;
Option granted on December 31, 1999 to purchase 75,000
shares at $0.54 per share, of which 18,750 shares are
vested as of November 15, 2000;
Greg Kleven Option granted on August 29, 2000 to purchase 200,000
shares at $0.54 per share, of which 0 shares are vested as
of November 15, 2000;
John Clark Option granted on May 29, 1998 to purchase 200,000 shares
at $0.25 per share, of which 183,333 shares are vested as
of November 15, 2000;
Option granted on May 29, 1998 to purchase 150,000 shares
at $1.50 per share, of which 137,500 shares are vested as
of November 15, 2000;
Option granted on May 29, 1998 to purchase 100,000 shares
at $2.25 per share, of which 91,666 shares are vested as of
November 15, 2000;
</TABLE>

The accelerated vesting of the above options are being submitted to the
XYPOINT shareholders for approval as required by the merger agreement. Such
accelerated vesting will occur only if the 75% shareholders' approval (as
described above) of such vesting is obtained.

84
<PAGE> 92

DESCRIPTION OF TCS CAPITAL STOCK

COMMON STOCK

TCS' authorized capital stock consists of 225,000,000 shares of Class A
common stock, par value $.01 per share, and 75,000,000 shares of Class B common
stock, par value $.01 per share. As of September 30, 2000, there were 13,600,626
outstanding shares of Class A common stock and 10,787,671 outstanding shares of
Class B common stock.

The holders of the TCS Class A common stock and Class B common stock have
substantially similar rights, except that the holders of the Class A common
stock are entitled to one vote per share held of record and holders of the Class
B common stock are entitled to three votes per share held of record on all
matters submitted to a vote of the stockholders. The holders of the Class A
common stock and Class B common stock will generally vote as a single class on
all matters upon which stockholders have a right to vote, subject to the
requirements of applicable laws. Each share of the Class B common stock is
convertible at any time, at the option of the holder, into one share of the
Class A common stock. Each share of the Class B common stock will convert
automatically into one share of the Class A common stock upon transfer, with
limited exceptions for transfers to related parties and estate-planning
transfers and certain permitted pledges.

Once converted into shares of the Class A common stock, shares of the Class
B common stock will be cancelled and not reissued. Neither the Class A common
stock nor the Class B common stock may be subdivided or combined unless the
shares of the other class are subdivided or combined in the same proportion.

Holders of both the Class A common stock and Class B common stock are
entitled to receive ratably dividends, if any, as the TCS Board of Directors may
declare out of legally available funds, subject to preferences that may be
applicable to any then-outstanding preferred stock. TCS may not make any
dividend or distribution to any holder of either class of common stock unless
simultaneously with such dividend or distribution TCS makes the same dividend or
distribution with respect to each outstanding share of the other class of common
stock. In the case of a dividend or other distribution payable in shares of a
class of common stock, including distributions pursuant to stock splits or
divisions of common stock, only shares of the Class A common stock may be
distributed with respect to Class A common stock and only shares of the Class B
common stock may be distributed with respect to Class B common stock. Whenever a
dividend or distribution, including distributions pursuant to stock splits or
divisions of the common stock, is payable in shares of a class of common stock,
the number of shares of each class of common stock payable per share of such
class of common stock shall be equal in number.

In the event of a liquidation, dissolution, or winding up of the company,
holders of the Class A common stock and holders of the Class B common stock will
be entitled to share ratably in the net assets legally available for
distribution to stockholders after payment of all of the liabilities and the
liquidation preferences of any preferred stock then outstanding. Holders of the
Class A common stock and holders of the Class B common stock have no preemptive
rights, subscription rights or conversion rights, except as described above.
There are no redemption or sinking fund provisions applicable to the Class A
common stock or Class B common stock.

In the event of a merger or consolidation of TCS with or into another
entity (whether or not TCS is the surviving entity), the holders of the Class A
common stock shall be

85
<PAGE> 93

entitled to receive the same per-share consideration as the per-share
consideration, if any, received by any holder of the Class B common stock in
such merger or consolidation.

The rights, preferences and privileges of holders of the Class A common
stock and holders of the Class B common stock are subject to the rights of the
holders of shares of any series of preferred stock that TCS may designate and
issue in the future. No shares of preferred stock are outstanding.

PREFERRED STOCK

Pursuant to TCS' amended and restated articles of incorporation, its Board
of Directors has the authority, without further action by the stockholders, to
issue shares of preferred stock in one or more series and to fix the relative
designations, powers, preferences and privileges of the preferred stock, any or
all of which may be greater than the rights of the common stock. TCS' Board of
Directors, without stockholder approval, can issue preferred stock with voting,
conversion or other rights that could adversely affect the voting power and
other rights of the holders of common stock. Preferred stock could thus be
issued quickly with terms that could delay or prevent a change in control or
make removal of TCS' management more difficult. Additionally, the issuance of
preferred stock may decrease the market price of the TCS Common Stock and may
adversely affect the voting and other rights of the holders of the TCS Common
Stock. TCS has no present plans to issue any preferred stock.

SPECIAL MEETINGS

TCS' amended and restated bylaws provide that special meetings of the
stockholders may only be called by a majority of the Board of Directors, the
chairperson of the Board, the Chief Executive Officer or holders of a majority
of the outstanding voting stock. These provisions may make it more difficult for
stockholders to take an action that the Board opposes.

ADVANCE NOTICE PROVISIONS

TCS' amended and restated bylaws establish an advance written notice
procedure for stockholders seeking:

- to nominate candidates for election as directors at any annual meeting of
stockholders; and

- to bring business before an annual meeting of our stockholders.

TCS' amended and restated bylaws provide that only persons who are
nominated by the Board or by a stockholder who has given timely written notice
to the TCS secretary before the meeting to elect directors will be eligible for
election as the directors. TCS' amended and restated bylaws also provide that
any matter to be presented at any meeting of stockholders must be presented
either by the Board or by a stockholder in compliance with the procedures
contained in the amended and restated bylaws. A stockholder must give timely
written notice to the secretary of its intention to present a matter before an
annual meeting of stockholders.

Under the amended and restated bylaws, to be timely, TCS must receive any
stockholder notice between 90 days and 120 days prior to the earliest of (a) the
annual meeting; (b) the first anniversary of the mailing date of the notice of
the preceding year's

86
<PAGE> 94

annual meeting; or (c) the anniversary of the preceding year's annual meeting.
Under the bylaws, a stockholder's notice must also contain the information
specified in the bylaws. These provisions may preclude or deter some
stockholders from bringing matters before a stockholders' meeting or from making
nominations for directors at an annual meeting.

AMENDMENT OF CHARTER AND BYLAW PROVISIONS

TCS' amended and restated articles of incorporation provide that the Board
of Directors may adopt, repeal, alter, amend or rescind any provision of its
amended and restated bylaws. TCS' amended and restated bylaws also provide that
only the holders of at least 80% of the total number of votes entitled to vote
generally in the election of directors may adopt, repeal, alter, amend or
rescind bylaw provisions.

The affirmative vote of holders of at least 80% of the total number of
votes entitled to vote generally in the election of directors is also required
to amend, modify or repeal the provisions of TCS' amended and restated articles
of incorporation relating to:

- the limitation of liability of TCS' officers and directors;

- indemnification of officers and directors;

- the exemption of Maurice B. Tose from the Maryland "business combination"
statute;

- the exemption of Maurice B. Tose from the Maryland "control share
acquisition" statute; and

- the provision requiring the affirmative vote of at least 80% of the total
number of voters entitled to vote generally in the election of directors
with respect to the foregoing matters.

In all other cases, the amended and restated articles of incorporation may
be amended by the affirmative vote of a majority of the number of votes entitled
to vote generally in the election of directors.

ANTI-TAKEOVER PROVISIONS OF MARYLAND GENERAL CORPORATION LAW

BUSINESS COMBINATIONS. The Maryland General Corporation Law prohibits
specified "business combinations" between a Maryland corporation and an
"interested stockholder." These business combinations include a merger,
consolidation, share exchange, an asset transfer or issuance or reclassification
of equity securities. Interested stockholders are either:

- anyone who beneficially owns 10% or more of the voting power of the
corporation's shares; and

- an affiliate or associate of the corporation who was an interested
stockholder or an affiliate or an associate of the interested stockholder
at any time within the two-year period prior to the date in question.

These business combinations are prohibited for five years after the most
recent date on which the stockholder became an interested stockholder.
Thereafter, any of these

87
<PAGE> 95

business combinations must be recommended by the board of directors of the
corporation and approved by the vote of:

- at least 80% of the votes entitled to be cast by all holders of the
corporation's voting shares; and

- at least 66 2/3% of the votes entitled to be cast by all holders of the
corporation's voting shares other than voting shares held by the
interested stockholder or an affiliate or associate of the interested
stockholder.

However, these special voting requirements do not apply if the
corporation's stockholders receive a minimum price for their shares (as
specified in the statute) and the consideration is received in cash or in the
same form previously paid by the interested stockholder for its shares.

This business combination statute does not apply to business combinations
that are approved or exempted by the corporation's board of directors prior to
the time that the interested stockholder becomes an interested stockholder. A
Maryland corporation may adopt an amendment to its charter electing not to be
subject to these special voting requirements. Any amendment would have to be
approved by at least 80% of the votes entitled to be cast by all holders of
outstanding shares of voting stock and 66 2/3% of the votes entitled to be cast
by holders of outstanding shares of voting stock who are not interested
stockholders. TCS has elected to be generally subject to this statute. However,
in the amended and restated articles of incorporation and the amended and
restated bylaws, TCS has elected not to have the statute apply to Mr. Tose.

CONTROL SHARE ACQUISITIONS. The Maryland General Corporation Law provides
that "control shares" of a Maryland corporation acquired in a "control share
acquisition" have no voting rights unless approved by a vote of two-thirds of
the votes entitled to be cast on the matter, excluding shares owned by the
acquiror or by the corporation's officers or directors who are employees of the
corporation. Control shares are shares of voting stock which, if aggregated with
all other shares of stock previously acquired, would entitle the acquiror to
exercise voting power in electing directors within one of the following ranges
of voting power:

- 10% or more but less than 33 1/3%;

- 33 1/3% or more but less than a majority; or

- a majority of all voting power.

Control shares do not include shares of stock an acquiring person is
entitled to vote as a result of having previously obtained stockholder approval.
A control share acquisition generally means the acquisition of, ownership of or
the power to direct the exercise of voting power with respect to, control
shares.

A person who has made or proposes to make a "control share acquisition,"
under specified conditions, including an undertaking to pay expenses, may
require the board of directors to call a special stockholders' meeting to
consider the voting rights of the shares. The meeting must be held within 50
days of the demand. If no request for a meeting is made, the corporation may
itself present the question at any stockholders' meeting.

If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as permitted by the statute, the
corporation

88
<PAGE> 96

generally may redeem any or all of the control shares, except those for which
voting rights have previously been approved. This redemption of shares must be
for fair value, determined without regard to voting rights as of the date of the
last control share acquisition or of any stockholders' meeting at which the
voting rights of the shares are considered and not approved. If voting rights
for "control shares" are approved at a stockholders' meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the stock
determined for purposes of appraisal rights may not be less than the highest
price per share paid in the control share acquisition. The limitations and
restrictions otherwise applicable to the exercise of dissenters' rights do not
apply in the context of a "control share acquisition."

The control share acquisition statute does not apply to stock acquired in a
merger, consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions previously approved or exempted by a provision
in the charter or bylaws of the corporation. TCS has elected to be generally
subject to this statute. However, in its amended and restated articles of
incorporation and its amended and restated bylaws, TCS has elected not to have
the statute apply to any shares of our common stock owned by Mr. Tose.

LIMITATION OF LIABILITY AND INDEMNIFICATION

TCS' amended and restated articles of incorporation provide that the
directors and officers shall be indemnified by TCS to the fullest extent
authorized by Maryland law. This indemnification would cover all expenses and
liabilities reasonably incurred in connection with their services for or on
behalf of TCS. In addition, the amended and restated articles of incorporation
provide that the directors will not be personally liable for monetary damages to
TCS for breaches of their fiduciary duty as directors, unless they violated
their duty of loyalty to TCS or the stockholders, acted in bad faith, knowingly
or intentionally violated the law, authorized illegal dividends or redemptions
or derived an improper personal benefit from their action as directors.

In addition, TCS anticipates entering into indemnification agreements with
all of the directors and officers indemnifying them to the fullest extent
permitted under Maryland law.

To the extent the provisions of the amended and restated articles of
incorporation provide for indemnification of directors for liabilities arising
under the Securities Act, those provisions are, in the opinion of the SEC,
against public policy as expressed in the Securities Act and are therefore
unenforceable.

REGISTRATION RIGHTS OF STOCKHOLDERS

On December 14, 1999, TCS entered into a Registration Rights Agreement
under which certain TCS stockholders holding an aggregate of 3,505,480 shares of
the Class A common stock have the right to cause TCS to register the sale of
their shares. Pursuant to the agreement, these stockholders have the right,
subject to certain restrictions set forth in the agreement and in lock-up
agreements that these stockholders have signed relating to TCS' initial public
offering, to require that TCS register, at its expense, on no more than two
occasions, any or all of their shares of Class A common stock. In addition to
these demand registration rights, and subject to certain restrictions set forth
in the agreement,

89
<PAGE> 97

these stockholders may require TCS to file an unlimited number of registration
statements on Form S-3 under the Securities Act once that form is available for
TCS' use, which is generally one year after its initial public offering. In each
case, the managing underwriter has the right to limit the number of securities
registered in such required registration.

The agreement also provides that, if at any time TCS proposes to register
any of its securities under the Securities Act for sale to the public (other
than securities issued in connection with acquisitions), the stockholders who
are parties to the agreement will be entitled to notice of the registration and
will have the right to include their shares in the registration, provided that
the managing underwriter will have the right to limit the number of securities
included in the registration. TCS must pay for all expenses in connection with
these registrations, other than underwriters' discounts and commissions.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the TCS Common Stock is American Stock
Transfer & Trust Company.

NATIONAL MARKET LISTING

Shares of TCS Class A Common Stock are listed on the Nasdaq National Market
under the symbol "TSYS."

90
<PAGE> 98

COMPARISON OF THE RIGHTS OF HOLDERS
OF TCS COMMON STOCK AND XYPOINT CAPITAL STOCK

The following is a summary of the material differences between the rights
of TCS stockholders and the rights of XYPOINT shareholders. The following does
not purport to be a complete description of the differences between the rights
of TCS and XYPOINT stockholders. Such differences may be determined in full by
reference to the TCS articles of incorporation and bylaws and the XYPOINT
articles of incorporation and bylaws.

GENERAL

TCS is incorporated in Maryland and XYPOINT is incorporated in Washington.
Upon consummation of the merger, XYPOINT shareholders, whose rights as
shareholders are currently governed by the XYPOINT articles of incorporation and
bylaws, will automatically become stockholders of TCS. As stockholders of TCS,
their rights will be governed by the TCS articles of incorporation and bylaws.

ANTI-TAKEOVER PROVISIONS

The TCS articles of incorporation and bylaws contain provisions that may be
deemed to have an anti-takeover effect and that may delay, defer or prevent a
change in control of TCS or other transaction that a TCS stockholder might
consider in its best interest, including a transaction that might result in a
premium over the market price for the shares held by TCS stockholders. These
provisions are expected to discourage various types of coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of TCS to negotiate first with the TCS board of directors. TCS'
management believes that the benefits of these provisions outweigh the potential
disadvantages of discouraging such proposals because, among other things,
negotiation of such proposals might result in an improvement of their terms. See
"Description of TCS Capital Stock -- Anti-Takeover Provisions of Maryland
General Corporation Law."

Chapter 23B.19 of the WBCA may delay, defer or prevent a change in control
of Washington corporations. However, Chapter 23B.19 does not apply to XYPOINT
because XYPOINT does not have a class of voting stock registered pursuant to
Section 12 of the Securities Exchange Act of 1934 and has not elected to be
subject to Chapter 23B.19 in its articles of incorporation or bylaws.

REMOVAL OF DIRECTORS

TCS directors may be removed from the TCS board of directors with or
without cause by the affirmative vote of the holders of at least a majority of
all the votes entitled to be cast generally for the election of the directors.
The stockholders shall elect directors to hold office until the next annual
meeting, subject to the rights of the holders of any class of stock separately
entitled to elect one or more directors, if any.

XYPOINT directors may be removed from the XYPOINT board of directors with
or without cause by the holders of common stock and preferred stock, voting as a
single class. However, as provided under the WBCA, any director who shall have
been elected by a specified group of shareholders may be removed, either for or
without cause, by, and only by, the affirmative vote of the holders of the
majority of the shares of such specified group, given at a special meeting of
such shareholders or by an action by written consent for that purpose. XYPOINT's
articles of incorporation and the voting provisions set forth

91
<PAGE> 99

in XYPOINT's Amended and Restated Registration Rights Agreement dated as of
August 18, 2000 provide that one director is elected by holders of Series B
preferred stock, one director is elected by holders of Series C preferred stock,
one director is elected by holders of Series E preferred stock, three directors
are elected by holders of common and preferred stock voting together and one
director is appointed by the remaining directors. XYPOINT's articles of
incorporation do not provide for cumulative voting, thus a director may be
removed only if the number of votes cast to remove the director exceeds the
number of votes cast not to remove the director. A director may be removed by
the shareholders only at a special meeting that is called for the purpose of
removing the director, and the notice of the meeting must state that the removal
vote is the purpose, or one of the purposes, of the meeting.

In addition, under the WBCA, the superior court of the county where a
corporation's principal office is located may remove a director of the
corporation from office in a proceeding commenced either by the corporation or
by its shareholders holding at least 10% of the outstanding shares of any class
if the court finds that the director engaged in fraudulent or dishonest conduct
with respect to the corporation, and removal is in the best interest of the
corporation. The court that removes a director may bar the director from
reelection for a period prescribed by the court.

CLASSIFICATION OF THE BOARD OF DIRECTORS

Neither company has a classified board of directors. Each board's directors
stand for reelection at each company's annual meeting of stockholders.

NOMINATIONS FOR ELECTION OF DIRECTORS AND STOCKHOLDER PROPOSALS

In order for TCS stockholders to nominate an individual for election for
director or to present any proposal at any annual or special meeting of
stockholders, the stockholder must provide written notice, delivered or mailed
by first class U.S. mail postage prepaid, to the TCS secretary not later than
the close of business of the tenth day following the day on which notice of the
meeting was mailed to the TCS stockholders. Such notice must contain certain
information prescribed by TCS' articles of incorporation.

XYPOINT's articles of incorporation do not provide for nominations for
election of directors. Accordingly, under the WBCA, a special meeting of the
shareholders shall be held if the holders of not less than 10% of all the votes
entitled to be cast on any issue proposed to be considered at a such special
meeting have dated, signed and delivered to the secretary one or more written
demands for such meeting, describing the purpose or purposes for which it is to
be held. Under the WBCA, the record date for determining the shareholders
entitled to demand a special meeting is the date the first shareholder signs the
demand. Only business that is described as the purpose(s) of the meeting, may be
conducted at a special shareholder's meeting.

92
<PAGE> 100

AMENDMENTS TO ARTICLES OF INCORPORATION

TCS' amended and restated articles of incorporation may be amended by the
affirmative vote of a majority of the number of votes entitled to vote generally
in the election of directors except as follows:

- the limitation of liability of its officers and directors;

- indemnification of officers and directors;

- the exemption of Maurice B. Tose from the Maryland "business combination"
statute;

- the exemption of Maurice B. Tose from the Maryland "control share
acquisition" statute; and

- the provision requiring the affirmative vote of at least 80% of the total
number of voters entitled to vote generally in the election of directors
with respect to the foregoing matters.

XYPOINT's articles of incorporation can be amended if the board of
directors recommend an amendment to the shareholders and a majority of all the
votes entitled to be cast approve the amendment. In addition, some types of
amendments to the XYPOINT articles of incorporation, including the creation of a
new class of stock senior to the existing classes, require a majority of the
Series A, Series B, Series C, Series D and Series E preferred stock, voting
together.

The board of directors of XYPOINT can amend the articles of incorporation
without shareholder action:

- to delete the name and addresses of the initial directors;

- to delete the name and address of the initial registered agent or
registered office, if a statement of change is on file with the
Washington Secretary of State;

- to change the corporate name; and

- to make any other changes without shareholder action as allowed under
Washington State.

AMENDMENTS TO BYLAWS

In order for the TCS board of directors to amend the TCS bylaws, a majority
of the TCS directors must vote to approve the amendment at a meeting held in
accordance with the bylaws. TCS stockholders may amend the TCS bylaws if the
holders of at least 80% of the total number of votes entitled to vote generally
in the election of directors vote to amend the bylaw provisions. The notice of
the meeting must include notice of such proposal.

XYPOINT bylaws may be amended by its board of directors or majority vote of
shareholders. XYPOINT shareholders may amend the XYPOINT bylaws at any regular
or special meeting of the shareholders if notice of the proposed amendment is
contained in

93
<PAGE> 101

the notice of the meeting. In addition, XYPOINT cannot amend the bylaws in a way
that would alter the rights of the Series A, B, C, D and E preferred stock
without first obtaining the approval of at least a majority of the then
outstanding shares of Series A, B, C, D and E preferred stock, voting as a
single class.

STOCKHOLDER VOTE BY WRITTEN CONSENT

Any action required or permitted to be taken at a meeting of TCS
stockholders may be taken without a meeting only if unanimous written consent,
which sets forth the action, is signed by each stockholder entitled to vote on
the matter. If there is a right of TCS stockholder dissent, a written waiver is
needed that is signed by each stockholder who is entitled to notice of the
meeting but not entitled to vote at it.

XYPOINT shareholder action may be taken without a meeting if the action is
taken by all of the shareholders entitled to vote on the action, or the action
is taken by shareholders holding of record, or otherwise entitled to vote, in
the aggregate, not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote on the action were present and voted.

To the extent that the WBCA requires prior notice of any such action to be
given to nonconsenting or nonvoting shareholders, such notice shall be made
prior to the date on which the action becomes effective, as required by the
WBCA. The form of notice shall be sufficient to apprise the nonconsenting or
nonvoting shareholder of the nature of the action to be effected.

94
<PAGE> 102

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

The following sets forth the unaudited pro forma consolidated balance sheet
of TCS as of September 30, 2000, and the unaudited pro forma consolidated
statement of operations for the year ended December 31, 1999 and the nine months
ended September 30, 2000.

The following unaudited pro forma consolidated financial information gives
effect to TCS' proposed acquisition of XYPOINT as if the transaction had
occurred on September 30, 2000 for purposes of the unaudited pro forma balance
sheet data, and as of January 1, 1999 for purposes of the unaudited pro forma
statements of operations data. The acquisition will be recorded using the
purchase method of accounting. The following unaudited pro forma statements are
based on the historical statements of TCS and XYPOINT during the periods
presented, adjusted to give effect to the proposed acquisition. The total
estimated purchase price of the acquisition of XYPOINT has been allocated on a
preliminary basis to identifiable assets acquired and liabilities assumed based
on management's best estimates of their relative fair values with the excess
cost over the net tangible and intangible assets acquired allocated to goodwill.
This allocation is subject to change pending a final analysis, including
completion of a third-party appraisal, of the total purchase price and the fair
value of the assets acquired and liabilities assumed. The impact of these
changes could be material.

The unaudited financial information of TCS and XYPOINT has been prepared in
accordance with generally accepted accounting principles applicable to interim
financial information and, in the opinion of TCS' and XYPOINT's management,
includes all adjustments necessary for a fair presentation of the financial
information for such interim periods.

The accompanying unaudited pro forma consolidated financial information
should be read in conjunction with the historical financial statements of TCS
and XYPOINT and the related notes thereto, included elsewhere in this proxy
statement/prospectus and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The unaudited pro forma consolidated
financial information is not necessarily indicative of the operating results or
financial position that would have occurred if the transaction had been
consummated at the times indicated, nor is it necessarily indicative of the
future financial position and the results of operations of TCS.

95
<PAGE> 103

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

AS OF SEPTEMBER 30, 2000
(AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
TCS XYPOINT ADJUSTMENTS CONSOLIDATED
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $67,874 $ 7,333 $ -- $ 75,207
Restricted cash................................. 1,445 -- -- 1,445
Accounts receivable............................. 12,562 1,946 -- 14,508
Unbilled receivables, net....................... 4,230 -- -- 4,230
Deferred income taxes........................... 241 -- -- 241
Other current assets............................ 2,150 393 -- 2,543
------- -------- -------- --------
Total current assets..................... 88,502 9,672 -- 98,174
Property and equipment, net....................... 3,232 3,340 -- 6,572
Software development costs, net................... 6,900 -- 5,000(A) 11,900
Goodwill.......................................... -- -- 43,320(A) 43,320
Other assets...................................... 606 225 -- 831
------- -------- -------- --------
Total assets............................. $99,240 $ 13,237 $ 48,320 $160,797
======= ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses........... $ 6,446 $ 1,875 $ 2,400(B) $ 10,721
Accrued payroll and related liabilities......... 2,081 155 -- 2,236
Deferred revenue................................ 1,040 485 -- 1,525
Notes payable to related parties................ 1,426 -- -- 1,426
Current portion of long-term debt and capital
lease obligations............................. 922 960 -- 1,882
------- -------- -------- --------
Total current liabilities................ 11,915 3,475 2,400 17,790
Capital lease obligations, less current portion... 1,257 610 -- 1,867
Deferred income taxes............................. 461 -- -- 461
Redeemable convertible preferred stock:
Senior convertible preferred stock................ -- 36,589 (36,589)(C) --
Stockholders' equity:
Convertible preferred stock:
Senior convertible preferred stock............ -- 6,151 (6,151)(C) --
Junior convertible preferred stock............ -- 1,276 (1,276)(C) --
Warrants issued................................. -- 1,692 (1,692)(C) --
Common Stock.................................... -- 594 (594)(C)
Class A Common Stock............................ 136 -- 36(E) 172
Class B Common Stock............................ 108 -- -- 108
Additional paid-in capital...................... 93,429 -- 65,136(E) 158,565
Accumulated deficit............................. (8,066) (37,150) 27,050(D) (18,166)
------- -------- -------- --------
Total stockholders' equity............... 85,607 (27,437) 82,509 140,679
------- -------- -------- --------
Total liabilities and stockholders'
equity................................. $99,240 $ 13,237 $ 48,320 $160,797
======= ======== ======== ========
</TABLE>

See accompanying notes and management's assumptions to pro forma information.

96
<PAGE> 104

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1999
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
TCS XYPOINT ADJUSTMENTS CONSOLIDATED
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue:
Network applications:
Software licenses........................ $ 3,975 $ -- $ -- $ 3,975
Services................................. 7,345 2,207 -- 9,552
------- ------- ------- --------
Network applications................ 11,320 2,207 -- 13,527
Communications engineering services......... 34,440 -- -- 34,440
------- ------- ------- --------
Total revenue..................... 45,760 2,207 -- 47,967
Operating costs and expenses:
Direct cost of network applications
services................................. 4,993 4,023 -- 9,016
Direct cost of communications engineering
services................................. 26,889 -- -- 26,889
Sales and marketing......................... 2,285 639 -- 2,924
Research and development.................... 1,098 1,794 -- 2,892
General and administrative.................. 5,329 1,970 -- 7,299
Non-cash stock compensation expense......... -- 370 -- 370
Depreciation and amortization of property
and equipment............................ 916 1,710 -- 2,626
Amortization of software development
costs.................................... 1,401 -- 1,000(F) 2,401
Goodwill amortization....................... -- -- 8,664(G) 8,664
Restructuring charge........................ -- 181 (181)(J) --
------- ------- ------- --------
Total operating costs and
expenses....................... 42,911 10,687 9,483 63,081
------- ------- ------- --------
Loss from operations.......................... 2,849 (8,480) (9,483) (15,114)
Interest expense.............................. (1,741) (58) -- (1,799)
------- ------- ------- --------
Income (loss) before income taxes............. 1,108 (8,538) (9,483) (16,913)
Income tax expense (benefit).................. 2,408 -- (2,408)(H) --
------- ------- ------- --------
Net loss...................................... (1,300) (8,538) (7,075) (16,913)
Accretion and dividends on Redeemable
Convertible Preferred Stock................. -- (431) 431(I) --
------- ------- ------- --------
Loss attributable to common stockholders...... $(1,300) $(8,969) $(6,644) $(16,913)
======= ======= ======= ========
Loss per share -- basic and diluted........... $ (0.12) $ (1.17)
======= ========
Weighted-average shares outstanding -- basic
and diluted................................. 10,788 3,638(E) 14,426
======= ======= ========
</TABLE>

See accompanying notes and management's assumptions to pro forma information.

97
<PAGE> 105

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
TCS XYPOINT ADJUSTMENTS CONSOLIDATED
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue:
Network applications:
Software licenses............................. $ 6,368 $ -- $ -- $ 6,368
Services...................................... 8,376 5,553 -- 13,929
------- ------- ------- --------
Network applications..................... 14,744 5,553 -- 20,297
Communications engineering services............. 26,231 -- -- 26,231
------- ------- ------- --------
Total revenue............................ 40,975 5,553 -- 46,528
Operating costs and expenses:
Direct cost of network applications services.... 6,545 3,611 -- 10,156
Direct cost of communications engineering
services...................................... 19,914 -- -- 19,914
Sales and marketing............................. 4,433 1,575 -- 6,008
Research and development........................ 2,711 2,912 -- 5,623
General and administrative...................... 7,592 1,896 -- 9,488
Non-cash stock compensation expense............. 841 1,153 -- 1,994
Depreciation and amortization of property and
equipment..................................... 1,762 1,261 -- 3,023
Amortization of software development costs...... 2,168 -- 750(F) 2,918
Goodwill amortization........................... -- -- 6,498(G) 6,498
------- ------- ------- --------
Total operating costs and expenses....... 45,966 12,408 7,248 65,622
------- ------- ------- --------
Loss from operations.............................. (4,991) (6,855) (7,248) (19,094)
Interest expense.................................. (472) (124) -- (596)
------- ------- ------- --------
Loss before income taxes and extraordinary item... (5,463) (6,979) (7,248) (19,690)
Income tax expense (benefit)...................... (2,140) -- 2,140(H) --
------- ------- ------- --------
Loss before extraordinary item.................... (3,323) (6,979) (9,388) (19,690)
Accretion and dividends on Redeemable Convertible
Preferred Stock................................. (540) (329) 329(I) (540)
------- ------- ------- --------
Loss before extraordinary item attributable to
common stockholders............................. $(3,863) $(7,308) $(9,059) $(20,230)
======= ======= ======= ========
Loss per share -- basic and diluted............... $ (0.27) $ (1.12)
======= ========
Weighted-average shares outstanding -- basic and
diluted......................................... 14,447 3,638(E) 18,085
======= ======= ========
</TABLE>

See accompanying notes and management's assumptions to pro forma information.

98
<PAGE> 106

NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

DESCRIPTION OF MERGER AND PURCHASE PRICE

Below is a table of the estimated acquisition consideration, purchase price
allocation and annual amortization of the intangible assets and goodwill that
will be acquired in TCS' proposed acquisition of XYPOINT.

<TABLE>
<CAPTION>
AMORTIZATION ANNUAL AMORTIZATION
LIFE OF INTANGIBLES
------------ -------------------
<S> <C> <C> <C>
Estimated acquisition consideration:
Value of securities issued:
Common stock.............................. $57,305
Stock options and warrants................ 7,867
Acquisition costs............................ 2,400
-------
Total estimated consideration........ $67,572
=======
Purchase price allocation:
Tangible net assets acquired................. $9,152
Intangible assets acquired:
In-process research and development....... 10,100
Developed technology...................... 5,000 5 years 1,000
Goodwill.................................. 43,320 5 years 8,664
-------
Total................................ $67,572
=======
</TABLE>

The allocation of the XYPOINT purchase price among the identifiable
tangible and intangible assets and purchased in-process research and development
is based primarily on preliminary estimates of the fair market value of those
assets. Final determination of the allocation of the purchase price will be
based on independent appraisals that TCS expects to have completed in December
2000.

The useful lives of the various intangible assets identified are based on
management's preliminary estimates. Under the caption of developed technology,
lives are based on assumptions regarding the time expected for the indicated
technology or product to become obsolete, which is driven primarily by planned
future development work designed to replace existing technology or product. The
useful life assigned to goodwill is based upon its estimated useful life.

TCS anticipates issuing 3,638,438 shares of Class A Common Stock, valued at
$15.75 per share, the average market price per share of TCS' Class A Common
Stock in a range of two trading days before and after November 15, 2000, the
announcement date of the acquisition. In addition, TCS anticipates issuing an
additional 661,562 options and warrants to purchase shares of its Class A Common
Stock in exchange for all options and warrants to purchase shares of XYPOINT
common stock or convertible preferred stock. The value of the options and
warrants to be issued by TCS was determined by estimating their fair

99
<PAGE> 107

value as of November 15, 2000 using the Black-Scholes option pricing model with
the following weighted-average assumptions:

- risk free interest rate of 5.80%;

- dividend yield of 0%;

- expected life of 1-2 years for vested options and warrants; and

- volatility factor for the expected market price of TCS' common stock of
60%.

Tangible assets of XYPOINT include cash and cash equivalents, accounts
receivable, fixed assets and other assets. Liabilities of XYPOINT that will be
assumed by TCS primarily consist of accounts payable, accrued liabilities, and
capital lease obligations.

The value allocated to projects identified as in-process research and
development of XYPOINT's product suite will be charged to expense by TCS
immediately following the completion of the XYPOINT acquisition. The in-process
research and development attributable to the purchase of XYPOINT of $10,100 has
been included in accumulated deficit in the unaudited pro forma balance sheet,
but has been excluded from the unaudited pro forma statement of operations
because the charge is non-recurring.

This write-off will be necessary because the acquired in-process research
and development has not yet reached technological feasibility and has no future
alternative uses, and the related products under development may not achieve
commercial viability. The nature of the efforts required to develop the
purchased in-process research and development into commercially viable products
principally relate to the completion of all planning, designing, prototyping,
verification and testing activities that are necessary to establish that the
product can be produced to meet its design specifications, including functions,
features and technical performance requirements.

The value of developed technology was determined by taking into account
risks related to the characteristics and applications of the developed
technology, existing and future markets, and assessments of the stage of the
developed technology's life cycle. The analysis resulted in a valuation for
developed technology that had reached technological feasibility and therefore
was capitalizable. The developed technology is being amortized on a
straight-line basis over five years.

Goodwill is determined based on the residual difference between the amount
of consideration to be paid and the values assigned to identifiable tangible and
intangible assets. The goodwill will be amortized on a straight-line basis over
five years.

UNAUDITED PRO FORMA NET LOSS PER SHARE

Unaudited pro forma and diluted net loss per share are based on the
weighted-average number of shares of TCS common stock outstanding during the
period and the number of shares of TCS Class A Common Stock to be issued in
connection with the XYPOINT acquisition. The following options have not been
included in the computation of

100
<PAGE> 108

unaudited pro forma diluted net loss per common share because their effect would
be antidilutive.

<TABLE>
<CAPTION>
POTENTIAL COMMON SECURITIES DECEMBER 31, 1999 SEPTEMBER 30, 2000
--------------------------- ----------------- ------------------
(IN THOUSANDS)
<S> <C> <C>
TCS options outstanding............................. 5,612 3,342
Options and warrants issued in connection with the
XYPOINT acquisition............................... 662 662
----- -----
Total..................................... 6,274 4,004
===== =====
</TABLE>

PRO FORMA ADJUSTMENTS

The adjustments to the unaudited pro forma balance sheet as of September
30, 2000 and unaudited pro forma statements of operations for the year ended
December 31, 1999 and the nine months ended September 30, 2000 are as follows:

(A) To record goodwill ($43,320) and acquired developed technology
($5,000).

(B) To record the accrual for TCS' estimated direct acquisition costs of
$2,400 to be incurred in connection with the acquisition of XYPOINT.

(D) To eliminate XYPOINT's accumulated deficit and record $10,100 for
in-process research and development charges.

(E) To record the issuance of 3,638,438 shares of Class A Common Stock ($36
par and $57,269 additional paid-in capital).

(F) To record amortization of $5,000 of developed technology acquired from
XYPOINT over its five year estimated life.

(G) To record amortization of $43,320 of goodwill recorded upon the
acquisition of XYPOINT over its five year estimated life.

(H) To record pro forma income taxes as if (i) TCS had terminated its S
Corporation tax status and was subject to federal and state income
taxes as of January 1, 1999 and (ii) to record the pro forma effects of
the acquisition of XYPOINT. On a pro forma basis, no income tax benefit
would be recorded, despite the combined net operating loss. On a
consolidated pro forma basis, the deferred tax benefit arising from
these loses is offset by a full valuation reserve as it is more likely
than not that the benefit will not be realized.

(I) To eliminate accretion on XYPOINT's preferred stock.

(J) To eliminate a restructuring charge which is a non-recurring charge.

101
<PAGE> 109

BUSINESS OF TELECOMMUNICATION SYSTEMS, INC.

COMPANY OVERVIEW

TCS provides wireless network application software and services and
communications engineering services. TCS was founded in 1987 as a provider of
communications engineering services. TCS' communications engineering services
include network design, installation and operation, network engineering and
analysis, and complex program management. Through its experience, TCS recognized
the demand for network application software that provides for the delivery of
Internet content, short messages and enhanced data communications services to
wireless devices, including phones, two-way pagers and personal digital
assistants. As a result, TCS has expanded its business over the past several
years to focus on the development of this software.

As part of its focus on network application software, TCS developed its
Wireless Internet Gateway software, which allows wireless carriers and
enterprises to provide their customers and employees with real-time, wireless
access to Internet content, corporate intranets and e-mail. TCS also developed
Short Message Service Center software, which allows wireless device users to
send and receive text or data messages. When the Wireless Internet Gateway and
Short Message Service Center software are used together, TCS is able to provide
additional features such as confirming and prioritizing message delivery,
securing messages and data, and tracking the location of wireless devices. TCS
can perform these functions because its software was designed to access
information stored inside wireless networks, such as device on/off status and
billing and transaction records. As of November 30, 2000, TCS' software was
installed in 19 U.S. and international wireless carrier networks.

To simplify the delivery of Internet content over wireless networks, TCS
recently published an Application Programming Interface. The Application
Programming Interface provides Internet software developers and providers of
content, such as news and entertainment, with the ability to write programs that
can communicate through TCS' Message Distribution Center with approximately 70
different wireless carriers. In addition, TCS recently introduced several new
software applications, including instant messaging and two-way text messaging,
which are currently in trial with major wireless carriers. TCS' instant
messaging application provides immediate notification to a pre-selected group
when a user activates his or her handset. TCS' Mobile Originated Chat
application allows two-way group text messaging between the Internet and
wireless devices. In addition, TCS designs and develops custom network software
for telecommunications and information management.

In 1996, TCS entered into a development agreement with Lucent Technologies,
Inc. under which TCS developed and shares ownership rights in certain network
application software, including the Short Message Service Center. TCS shares
revenue with Lucent from sales of this software. TCS has received substantially
all of its network application software license revenue from sales to wireless
carriers by Lucent and will continue to be substantially dependent upon Lucent
for future sales of its network application software licenses. TCS is growing
its direct sales force and developing additional marketing relationships with
communication infrastructure providers in order to expand its sales channels for
its network application software products and services.

102
<PAGE> 110

THE MARKET OPPORTUNITY

TCS believes the increasing reliance on mobile communications by
individuals and businesses creates significant market demand for software
applications that enable data delivery to wireless devices. If this market
demand does not materialize, TCS' results of operations may be materially
adversely affected. The following trends are driving demand for wireless content
and services:

GROWTH IN WIRELESS COMMUNICATIONS

The use of wireless communications has increased significantly in recent
years driven by expanded wireless network coverage, more affordable wireless
communications service plans, and higher quality and less expensive wireless
devices. According to International Data Corporation, the number of wireless
phone subscribers globally should increase at a compound annual growth rate of
29%, from 303 million at the end of 1998, to 1.08 billion at the end of 2003.
Wireless carriers can increase revenue per unit, differentiate their service
offerings from competitors, improve customer loyalty and increase minutes of use
by offering services that connect wireless users to the Internet and corporate
intranets.

GROWTH IN WIRELESS DEVICE FUNCTIONALITY

The proliferation of wireless networks and technologies has made it
possible for individuals and enterprises to "wireless enable" many services that
previously required a wireline connection or that were performed manually. For
example, electric utilities are increasingly using wireless technology to read
meters, and wireless carriers are recognizing the potential for their networks
to enable mobile commerce transactions. In response, wireless device
manufacturers continue to increase the functionality of products such as phones,
personal digital assistants and two-way pagers. The introduction of higher
capacity wireless networks in Europe and the United States over the next several
years should further this trend.

GROWTH OF THE INTERNET AND CORPORATE INTRANETS

The Internet and internal corporate data networks, or intranets, have
emerged as global communications channels that allow users to share information
and conduct business transactions electronically. According to International
Data Corporation, the number of Web users worldwide is projected to increase
from approximately 144 million at the end of 1998 to over 602.4 million by the
end of 2003.

PROLIFERATION OF E-MAIL AND SHORT MESSAGING SERVICES

E-mail and short messaging services are increasingly important means of
communication, with both the number of users and messages per individual
projected to increase significantly. In Western Europe, where short messaging
services are widely available, International Data Corporation estimates that the
number of short messaging services users will increase from 30.2 million at the
end of 1999 to 135.8 million at the end of 2004. TCS believes that short
messaging services will also be increasingly used by wireless subscribers in the
United States.

103
<PAGE> 111

EVOLUTION OF TARGETED ADVERTISING AND CONTENT

One of the principal drivers of wireless communications growth is the
ability to create value through the delivery of timely, highly specialized,
interactive and location-specific advertising content. Advertisers, content
providers and other businesses benefit from the ability to communicate and
transact business in more direct and efficient ways on the Internet. By
extending targeted advertising and content via wireless devices, TCS believes
that advertisers, content providers and other businesses can expand the market
for their products and content.

GROWTH IN MOBILE PROFESSIONALS

The workforce is becoming increasingly mobile. Enterprises can enhance the
productivity of their mobile employees by allowing wireless access to corporate
intranets and local area networks (LANs). International Data Corporation
projected that in 1999, 40% of computer users worldwide employed by mid-sized
and large enterprises would remotely access corporate LANs. This dramatic growth
is expected to create significant demand for wireless network applications.

INCREASED OUTSOURCING TRENDS

As information technology systems become more complex, companies are
increasingly outsourcing many of their information technology requirements.
Wireless carriers and enterprises are choosing to focus on their core businesses
and seeking to reduce costs associated with maintaining information technology
networks and software applications. Wireless carriers and enterprises with
limited data experience frequently outsource the development and integration of
wireless data applications and services.

THE TCS SOLUTION

Wireless carriers and enterprises face many technology challenges in the
rapidly evolving wireless data market. These challenges and TCS' related
solutions include:

- INABILITY TO ACCESS INFORMATION STORED INSIDE WIRELESS NETWORKS. There is
a significant amount of information stored within wireless networks.
Wireless intelligent networks manage mobility features, including call
routing, roaming, and short messaging, and collect information such as
user location, device on/off status and billing and transaction records.
This information is transmitted within wireless networks through complex
call control technology, known as Signaling System 7. However, this
information is not readily accessible to most software developers.

TCS has extensive knowledge of the Signaling System 7 technology. TCS
uses this knowledge to develop network application software that is able
to access the information stored inside wireless networks to provide
enhanced data services and features. For example, its products can use
device on/off status information and hold messages until a device has
been turned on in order to ensure delivery of a message, to deliver only
the most recently updated version of repeated messages, such as weather
or stock quotes, and to notify members of a chat group of current
participant availability.

- INCOMPATIBLE INDUSTRY STANDARDS. Enterprises seeking to communicate with
mobile employees and customers encounter a wide variety of wireless
carriers, networks

104
<PAGE> 112

and devices. Enterprises must be able to identify their end users'
wireless carriers and device types and deliver information through each
carrier's specific message delivery system to these devices. Furthermore,
wireless carriers use different types of wireless network technology,
each of which require different messaging formats.

TCS' products enable enterprises to deliver information to a wide variety
of wireless devices and carrier networks. TCS designs products to be
compatible with major types of wireless networks, including Time Division
Multiple Access (TDMA), Code Division Multiple Access (CDMA), Global
Standard for Mobile Communications (GSM) and Integrated Digital Enhanced
Network (iDEN). TCS is a member of the Wireless Application Protocol
(WAP) Forum, Ltd. and TCS designs products to be compliant with the
Wireless Application Protocol Forum's standards.

- LIMITED NETWORK CAPACITY. Wireless networks are optimized for voice
rather than data transmission. As a result, there is limited network
capacity available for data delivery. The proliferation of wireless data
traffic, including e-mail, news, stock quotes, traffic alerts and other
Internet content, can congest wireless networks. As a result, carriers
seek technical solutions to manage network capacity.

TCS' software applications are designed to manage network capacity by
prioritizing messages, blocking unwanted messages and recognizing when
wireless devices are turned off or are out of range. These applications
also delay the distribution of messages until the devices become
available. These features improve carrier service quality by reducing the
likelihood that unwanted, low priority or undeliverable messages will
congest the network.

- SECURITY AND RELIABILITY. Enterprises are increasingly reliant on
wireless devices to communicate with their mobile employees and
customers. As a result, wireless carriers seek to provide secure and
reliable messaging services.

TCS applies its communications engineering experience with the U.S.
military and uses encryption mechanisms to provide secure messaging
services. In addition, its products provide carriers and enterprises with
the ability to confirm message delivery and receipt.

- DEPLOYMENT CHALLENGES FOR NEW SOFTWARE AND SERVICES. Wireless carriers
seek to cost-effectively introduce new data and voice services to meet
customer demand. Each new software introduction requires compatibility
with existing systems and extensive technical training for users, which
can delay product launches and increase product costs.

TCS designs its software to be compatible with carrier network systems
and existing software applications. In addition, its software enables
carriers to easily accommodate additional capacity requirements. As a
result, its software provides for the cost-effective and rapid
introduction of new services and the expansion of existing services.

BUSINESS STRATEGY

TCS plans to continue to focus on developing and selling network
application software that provides for the delivery of Internet content, short
messages and other

105
<PAGE> 113

enhanced data communication services to wireless devices. The key elements of
its strategy are to:

- LEVERAGE ITS EXPERTISE IN ACCESSING INFORMATION STORED INSIDE WIRELESS
NETWORKS. TCS will continue to leverage its knowledge of complex call
control technology, known as Signaling System 7, to unlock valuable
information such as user location, device on/off status and billing and
transaction records that resides inside wireless networks and is
difficult to retrieve and utilize. Using this information, TCS intends to
expand its integrated package of products and services for wireless
carriers and enterprises.

- GROW ITS WIRELESS CARRIER BASE. Nineteen wireless carrier networks in
eight countries currently use one or more of its applications. TCS
intends to expand its domestic and international carrier base by
capitalizing on its relationship with Lucent and by expanding its own
sales and marketing initiatives. TCS will continue to develop network
application software for wireless carriers that operate on all major
types of networks. TCS believes the trend towards globalization of
communication standards like the Global Standard for Mobile
Communications (GSM) represents a significant opportunity for TCS to
increase its wireless carrier base and TCS began installing its software
in GSM-based networks in 2000.

- DEVELOP ITS CORPORATE ENTERPRISE CUSTOMER BASE. TCS plans to develop its
enterprise customer base through its direct sales force and by pursuing
relationships with wireless carriers, Web development companies and
content providers. As part of this strategy, TCS has developed an
Application Programming Interface that can be used by Web developers to
"wireless-enable" software applications for enterprises. Additionally,
TCS believes its knowledge of complex call control technology, or
Signaling System 7, and its extensive communications engineering
experience with enterprises will help TCS tailor wireless software
applications and services for these customers. TCS intends to develop
recurring revenue from enterprise customers by offering wireless
communication services on a per-user or subscription basis.

- EXPAND ITS SALES AND MARKETING CAPABILITIES. TCS has historically
leveraged its strategic relationship with Lucent to market its network
application software products to wireless carriers. TCS is developing
relationships with communication infrastructure providers in order to
expand its sales channels for its network application software products
and services. For example, TCS has recently entered into an agreement
with Compaq Computer Corporation that provides for the joint marketing of
its network application software products and Compaq's wireless computer
hardware and software products. TCS is also growing its direct sales
force and increasing its sales and marketing expenditures. Its increased
marketing efforts will also include advertising, public relations,
speaking engagements and conference sponsorship.

- DEVELOP AND ENHANCE ITS TECHNOLOGY. TCS will continue to invest in its
underlying technology and to capitalize on its communications engineering
expertise to meet the growing demand for sophisticated wireless
applications. Its product development staff includes 154 engineers who
specialize in network application software development and communications
engineering. TCS also has

106
<PAGE> 114

research and development relationships with wireless handset
manufacturers, wireless carriers, and content and electronic commerce
providers.

- PURSUE SELECT ACQUISITIONS. TCS intends to selectively pursue
acquisitions of companies and technologies in order to increase the scale
and scope of its operations, market presence, products and services and
customer base.

PRODUCT AND SERVICE OFFERINGS

TCS develops network application software products for wireless carriers
and corporate and government enterprises and provides related implementation,
operation and maintenance services. TCS also provides communication engineering
services, which include the design, development and deployment of complex
information processing and communications systems.

COMMUNICATIONS ENGINEERING SERVICES

TCS provides communications engineering services including the design and
installation of complex information processing and communication systems for
corporate and government enterprises. For the year ended December 31, 1999 and
the nine months ended September 30, 2000, TCS derived over 60% of its total
revenue from providing communications engineering services. TCS uses a
cooperative team approach designed to leverage its diverse technical skills in
communications engineering, information systems, software engineering and
telephony. TCS believes its 12 years of experience successfully providing
communications engineering solutions for enterprises differentiates TCS from
other providers of wireless network application software. TCS' communications
engineering services primarily include the following types of projects:

- NETWORK DESIGN, INSTALLATION AND OPERATION. TCS designs, installs and
operates networks that integrate computing and communications, including
systems that provide communications via both satellite and terrestrial
links. TCS can provide complete network installation services from
cabling infrastructure to complex communications system components. TCS
also provides ongoing network operation and management support services.

- NETWORK ENGINEERING AND ANALYSIS. TCS is also engaged by customers to
design systems that meet complex network communications requirements.
These systems solutions are often applicable to multiple customers. For
example, TCS developed a portable and secure local area network
specifically for the U.S. Department of Defense, which TCS later resold
to the U.S. Department of State. TCS believes this product also has
commercial applications.

- COMPLEX PROGRAM MANAGEMENT. TCS manages large scale, time sensitive
systems engineering projects primarily for government customers. TCS is
experienced in scheduling, cost containment and hiring and managing
subcontractors.

Examples of recent communications engineering projects that are
representative of the work TCS performs include:

- AT&T SOLUTIONS. TCS has an agreement with AT&T Solutions Inc., a
subsidiary of AT&T Corp., under which TCS provides network engineering
services to its clients. AT&T Solutions may order services over an
initial five-year term. TCS' engagement has included designing,
installing and operating a global satellite communications

107
<PAGE> 115

contingency network for a multinational bank. This network includes locations in
Europe, the Middle East, Africa and throughout the Asia Pacific region.

- SPECIAL OPERATIONS FORCES. TCS created a Command and Control Switching
System for the Special Operations Forces of the U.S. Department of
Defense that integrates secure and non-secure radio frequency, satellite
and wireline networks for data and voice communications. The Command and
Control Switching System enables automated support of teleconferencing
across dissimilar networks in real time while providing a centralized
network operations and management capability for the field commander. TCS
has delivered similar systems to other U.S. Department of Defense
agencies.

- QWEST COMMUNICATIONS INTERNATIONAL INC. (FORMERLY U S WEST, INC.). This
wireless carrier needed a connection between their existing Octel
voicemail systems and the Lucent Advantage system. TCS designed and
installed a new connection between these systems. TCS has applied its
experience to solve similar problems for AirTouch Communications, Inc.,
Bell Atlantic Mobile and other wireless carriers.

- CITY OF BALTIMORE. Since 1998, the City of Baltimore has engaged TCS to
provide information systems and network management. This engagement began
with third-party software maintenance, network engineering services and
helpdesk support for the budget and financial management department and
has since expanded to include support of other city departments.

NETWORK APPLICATIONS

TCS designs and develops network application software for wireless carriers
that provides the delivery of secure and personalized content, services and
transactions to various wireless devices. In addition, TCS designs and develops
custom network software for a variety of telecommunications and information
management systems. TCS' software uses universal industry standards. TCS
specifically designs its software for easy implementation, customization and
integration with existing networks in order to accommodate future expansion.

Network application software that TCS currently offers includes Wireless
Internet Gateway, Wireless Intelligent Network Suite (WIN Suite(TM)), Message
Distribution Center and custom software applications. TCS also provides
implementation, operation and maintenance services to support these
applications.

WIRELESS INTERNET GATEWAY

TCS' Wireless Internet Gateway provides two-way data communication between
the Internet and wireless networks. The Wireless Internet Gateway allows end
users to customize the services they receive on wireless devices by setting up a
user profile through a single Internet-based procedure. Wireless carriers can
access these user profiles and usage data to gain a better understanding of
customer behavior. The Wireless Internet Gateway allows additional wireless
applications to be added as desired.

TCS has developed the following applications for use with the Wireless
Internet Gateway:

- WEB CALENDAR. The Web Calendar software allows users to schedule events
on a personalized Web calendar and to receive notifications via their
wireless devices.

108
<PAGE> 116

- CUSTOM USER PAGE. The Custom User Page software allows users to create
personalized Web pages that others can access using the Internet to enter
text messages for delivery to the user's wireless device.

- PERSONALIZED PAGING. The Personalized Paging software enables users to
create customized public and private address lists. These preset lists
allow users to select the contact name, enter a short text message and
select "send" for delivery to the contact's wireless device.

- INSTANT MESSAGING. The Instant Messaging software provides notification
to a pre-selected group when a user activates his or her handset. This
enables others to instantly call or send messages to that handset.

- MOBILE ORIGINATED CHAT. The Mobile Originated Chat (MO Chat(TM))
software enables two-way group text messaging between Internet and
wireless device users. Users can participate in a "chat group" or "work
group" by sending and receiving text messages to and from the other
individuals in the group. MO Chat also contains an instant awareness
function that allows a user automatically to join predetermined chat
groups and notifies other on-line chat group members when the user
activates his or her wireless device.

- QUERYNET(R). The QueryNet software searches multiple sources on the
Internet and intranets that the user selects in advance. QueryNet then
formats and sends the search results to user-specified destinations at
user-specified times.

- MOBILE ORIGINATED MENUS. The Mobile Originated Menus (MO Menus(TM))
software allows the rapid creation of customized menus of available
services on wireless devices. Using the QueryNet software, MO Menus will
allow users to request standard content sources from the Internet on
demand. The software does not require a special Internet browser for
wireless devices.

- MOBILE ORIGINATED MAIL. The Mobile Originated Mail (MO Mail(TM))
software provides users with mobile access to their various e-mail
accounts and allows them to move easily between multiple accounts, view
message headers, retrieve specific messages, delete messages, reply to
messages or send new messages from two-way wireless devices.

WIRELESS INTELLIGENT NETWORK SUITE (WINSUITE(TM))

TCS has also developed WINSuite, a package of software products that
operate on Lucent's intelligent network and that were specifically designed for
wireless carriers. Wireless intelligent networks manage mobility features
including call routing, roaming and short messaging, and also collect
information such as user location, device on/off status, and billing and
transaction records. Wireless intelligent networks use complex call control
technology known as Signaling System 7. Its in-depth knowledge of Signaling
System 7 and its capabilities, together with its extensive experience with
Internet programming, provide TCS with a strong foundation upon which TCS builds
WINSuite products.

WINSuite software products currently include the Short Message Service
Center and Prepaid Wireless. TCS developed the Short Message Service Center and
Prepaid Wireless software pursuant to a development agreement with Lucent. TCS
shares ownership rights in the Short Message Service Center and Prepaid Wireless
software with Lucent and shares the revenue from their sale. Additionally, TCS
recently agreed with Lucent to

109
<PAGE> 117

develop an enhanced Over-The-Air software application and TCS will share revenue
from the sale of this software once it is developed. TCS also recently agreed to
refrain from selling Prepaid Wireless applications to specified Lucent wireless
carrier customers through March 31, 2001, in exchange for a share of the revenue
from sales of Lucent's new prepaid wireless software application for the next
four years. WINSuite software products are described below:

- SHORT MESSAGE SERVICE CENTER. The Short Message Service Center software
enables users to send and receive text or data messages to and from
wireless devices. The Short Message Service Center provides wireless
carriers efficient two-way data delivery and supports major industry
standards for wireless communications. The Short Message Service Center
also allows the handset to function as a pager and provides single touch
callback capabilities. The Short Message Service Center can be combined
with other software in the WINSuite package, reducing integration costs
for wireless carriers. Additionally, the Short Message Service Center can
be combined with TCS' Wireless Internet Gateway software to enable
transmission of short messages between the Internet and wireless devices.

- PREPAID WIRELESS. The Prepaid Wireless software enables wireless carrier
subscribers to pre-pay for wireless phone service. This software
contributes to a lower per-subscriber cost for wireless carriers by
eliminating the credit and billing process, reducing fraud and allowing
wireless carriers to reduce hardware. Additional features of the Prepaid
Wireless software include the ability to offer customers flexible rate
plans, roaming support, direct dial connection, zero balance disconnect
and various options for prepaid account replenishment. The Prepaid
Wireless software currently operates on Lucent's wireless intelligent
network and supports all major analog and digital wireless networks. TCS
intends to develop prepaid wireless software applications to operate on
additional wireless intelligent networks.

- OVER-THE-AIR. The Over-The-Air software provides two distinct
capabilities that together allow wireless carriers to reduce costs:
Over-The-Air Activation and Over-The-Air Provisioning. Over-The-Air
Activation allows wireless carriers to sell wireless handsets through
unaffiliated retail stores by enabling remote handset activation.
Over-The-Air Provisioning allows wireless carriers to expand their
roaming coverage by remotely reprogramming existing handsets to recognize
new roaming partners. TCS is developing enhanced features for these
Over-The-Air applications.

- MOBILE LOCATION REGISTER. The Mobile Location Register software tracks
the location of active wireless devices. When the Mobile Location
Register determines a wireless device's location, a wireless carrier or
enterprise can deliver location-specific advertising and content to the
device using the Short Message Service Center and Wireless Internet
Gateway software.

110
<PAGE> 118

INTEGRATED PRODUCT CAPABILITIES

One of TCS' competitive advantages is that the products described above
provide additional functionality when used together. The following are examples
of enhanced functionality achievable by combining two or more of these products:

<TABLE>
<CAPTION>
INTEGRATED PRODUCTS
-----------------------------------------------
WIRELESS INTERNET WIRELESS INTELLIGENT
ENHANCED FUNCTIONALITY GATEWAY NETWORK SUITE
---------------------- ------------------------- --------------------
<S> <C> <C>

CURRENT

PERSONALIZATION. Users can customize their Wireless Internet Gateway Short Message
services through a single Internet-based Custom User Page Service Center
procedure. The resulting profile is stored on
wireless carrier or enterprise networks and
can be accessed from multiple wireless
devices.

NOTIFICATIONS AND ALERTS. Users can be Wireless Internet Gateway Short Message
notified immediately of specific events such Web Calendar Service Center
as stock price movements. QueryNet

INTERACTIVE SERVICES. Users can access Wireless Internet Gateway Short Message
Internet content and communicate by two-way Personalized Paging Service Center
short messaging and menu-driven browsing. Mobile Originated Menus

TARGETED MARKETING. Wireless carriers can Wireless Internet Gateway Short Message
better understand their customers' interests Service Center
using data generated from personalized
customer profiles.

ADVANCED DISTRIBUTION CHANNELS. Wireless Short Message
carriers can distribute wireless handsets on Service Center
a secure basis via retail stores instead of Prepaid Wireless
carrier-owned stores and can activate the Over-The-Air
handset over the air.

MOBILE ELECTRONIC COMMERCE. Users can Wireless Internet Gateway Short Message
conduct mobile electronic commerce. For Web Calendar Service Center
example, the user could be alerted of an
upcoming birthday followed by an
advertisement to buy flowers.

UNDER DEVELOPMENT

LOCATION-BASED SERVICES. Allows wireless Wireless Internet Gateway Short Message
carriers and enterprises to identify the QueryNet Service Center
location of wireless devices, allowing them Mobile Location
to deliver personalized content, advertising Registry
or mobile commerce.

E-MAIL AND PERSONAL INFORMATION. Users can Wireless Internet Gateway Short Message
access multiple e-mail accounts through a Mobile Originated Mail Service Center
wireless device.
</TABLE>

MESSAGE DISTRIBUTION CENTER

TCS' Message Distribution Center acts as a clearinghouse that formats and
delivers messages to approximately 70 different carrier networks and multiple
device types. Its recently published Application Programming Interface provides
Internet software developers and providers of content, such as news and
entertainment, with a simple command set

111
<PAGE> 119

to "wireless enable" their software applications. Once integrated into existing
software applications, the Application Programming Interface delivers message
traffic to TCS' Message Distribution Center.

The Message Distribution Center offers important advantages for enterprises
and wireless carriers. The Message Distribution Center includes support for all
of the features and services available on TCS' Wireless Internet Gateway product
and the software programs that can be run on it. The Message Distribution Center
allows enterprises to deliver information to a wide variety of wireless devices
and carrier networks being used by their employees and customers. Further, the
Message Distribution Center's "store and forward" capability allows wireless
carriers to prioritize message delivery and optimize the capacity available on
their networks.

[Flow Chart Graphic]
DESCRIPTION OF GRAPHIC:

The graphic is divided into three vertical sections, which will be referred to
as the left, middle, and right sections. Each section has a title that is placed
in large bold print towards the top of the section. The left section is titled
"Content Sources." The middle section is titled "Wireless Carrier Networks." The
right section is titled "Wireless Devices."

In the middle of the graphic there is a cloud-like structure used to represent
a network. The title of this structure, "Wireless Carrier Networks," appears
above the cloud in large bold print. Within the cloud there are two boxes, the
left box and the right box, which are centered within the cloud and placed next
to each other on approximately the same horizontal axis. The left box is
labeled, "TCS Wireless Internet Gateway" in large bold centered text placed
towards the top of the box. Under that text in the same box, is a left-justified
bulleted list which contains the following elements in a plain font: "Chat and
e-mail," "Instant messaging," "Event alerts," "Group messaging," "Internet
query," and "Custom menus." The right box is labeled "TCS Short Message Service
Center" using large bold text placed towards the top of the box. Under that text
in the same box, is a left-justified bulleted list which contains the following
elements in a plain font: "Device location," "Device availability," "Text
messages," "Reliable delivery," and "Encryption."

In between the middle and the left sections of the graphic, below the cloud is
a box captioned the "TCS Message Distribution Center." At the top of this box is
the following text formatted in a large bold font: "TCS Message Distribution
Center." Below that text in the same box is a left-justified bulleted list that
contains the following elements in a plain font: "Clearinghouse for controlled
messaging via multiple wireless carriers," and "Application interface for
Internet content and corporate data." The "TCS Message Distribution Center" box
is connected to the "Wireless Carrier Networks" cloud by a straight line. This
box is also connected to certain elements that appear on the left side of the
graphic. These connections will be described below as the elements are
introduced.

On the right side of the graphic there are four pictorial depictions of
wireless devices that are arranged vertically. Each wireless device graphic is
connected to the "Wireless Carrier Networks" cloud by a straight line. Just
below the large bold "Wireless Devices" text described above is the first
wireless device graphic, which is a picture of a cellular phone. Almost directly
below this is a second wireless device graphic, which is a picture of a wireless
personal digital assistant. Directly below this is the third wireless device
graphic, which is a picture of another cellular phone. Below the third wireless
device graphic is the fourth wireless device graphic which is a picture of a
pager.

On the left side of the graphic there are three boxes of approximately the
same size arranged in a vertical line. The top box contains the words "Wireless
Devices" in a large bold centered font. Below this text, but in the same box, is
the following text drawn in a large plain font: "Text messages," and
"Information requests and responses." Each of these text items appears on a
different line within the same box. The top box is connected to the "Wireless
Carrier Networks" cloud by a straight line. Below the top box, is the second box
that contains the words "Internet" in a large bold centered font. Below this
text, but in the same box, is the following text drawn in a large plain font:
"News," "Stocks," "Games," and "Weather." Each of these text items appears on a
different line within the same box. The "Internet" box is connected to the
"Wireless Carrier Networks" cloud by a straight line. This box is also connected
to the box labeled "TCS Message Distribution Center" by a straight line. Below
this box is a third box, which contains the word "Corporate" in a large bold
centered font. Below this text, but in the same box, is the following text drawn
in a large plain font: "Databases," "E-mail," "User directory," and "Vertical
markets." Each of these text items appears on a separate line. The "Corporate"
box is connected to the "TCS Message Distribution Center" box by a straight
line.

CUSTOM SOFTWARE APPLICATIONS

TCS also develops custom software applications to support specific customer
requirements. Many of these applications combine large, distributed billing data
centers that support audit and reconciliation tasks. For example, TCS currently
maintains and continues to modify telecommunication billing software used by the
U.S. Defense Telecommunications Service. TCS has historically developed custom
applications primarily for government agencies. TCS intends to develop
additional custom software applications for enterprises.

112
<PAGE> 120

IMPLEMENTATION, OPERATION AND MAINTENANCE SERVICES

TCS provides implementation, operation and maintenance services in support
of its network application software. TCS' engineers install software packages
into existing networks. This typically involves the staging of equipment,
redesign of network connections, modification of software code and on-site
installation and testing support. TCS also provides ongoing operational support,
including administration of system components, system optimization and
configuration management. Maintenance services include tracking customer support
issues, trouble shooting and developing and installing maintenance releases. TCS
typically provides maintenance services for an annual fee paid in advance.

THE LUCENT TECHNOLOGIES RELATIONSHIP

In April 1996, TCS entered into a non-exclusive development agreement with
Lucent Technologies, Inc. under which TCS develops network application software
that Lucent sells to its wireless carrier customers. Under the agreement, TCS
developed the Short Message Service Center, a software application which allows
wireless device users to send and receive text or data messages, in late 1996,
the Prepaid Wireless application, a software application that allows wireless
subscribers to pre-pay for wireless phone services, in mid-1998, and agreed in
April 2000 to develop an enhanced Over-the-Air software application to enable
the activation of wireless devices from remote locations. TCS shares ownership
rights in these applications with Lucent, subject to each party's prior
underlying ownership rights in intellectual property and confidential
information contributed to the applications. TCS has the right to receive
revenue from Lucent's sales of such software applications to its wireless
carrier customers. The agreement may be terminated by mutual consent, or by
either party if the other party commits any material breach of its obligations
and fails to cure within 30 days' written notice of such breach.

TCS' Lucent relationship provides TCS with several competitive advantages,
including access to Lucent's sales and marketing resources, lab facilities and
proprietary hardware and software. TCS has extensive direct contact with
prospective customers during the sales process, as well as during installation
and maintenance. TCS is also able to test new products and features Lucent
develops for compatibility with its software applications before those new
products and features become publicly available. Lucent's practice has been to
utilize its software to establish interoperability while developing and testing
new wireless devices. This practice increases the likelihood that its products
will be compatible with new wireless devices coming to market.

Under the original development agreement, TCS agreed to share revenue
equally with Lucent from the sale of the Short Message Service Center and
Prepaid Wireless software applications. The development agreement provides that,
by mutual agreement, Lucent may buy out TCS' right to receive future revenue
from the sale of these software applications in exchange for a negotiated
lump-sum payment from Lucent to TCS. TCS' revenue from the sale of the Short
Message Service Center software application may decline considerably if TCS
agrees to sell its rights in the Short Message Service Center to Lucent. See
"Risk Factors -- Because Lucent can buy out its right to receive revenue from
certain network application software products for a negotiated lump-sum payment,
TCS' ability to derive revenue from those products in the future is uncertain."

113
<PAGE> 121

On April 21, 2000, TCS signed an amendment to the development agreement
pursuant to which Lucent will cease to market the Prepaid Wireless software
application that TCS developed under the development agreement and instead will
begin to market and sell a new prepaid wireless application that it is
separately developing. Under this amendment, TCS has granted Lucent the right to
incorporate software and other intellectual property developed by TCS into
Lucent's new prepaid wireless software application. Sales of the Prepaid
Wireless software application accounted for approximately 5% of its network
applications revenue for the year ended December 31, 1999 and approximately 2%
of its network applications revenue for the nine months ended September 30,
2000. Lucent has agreed to share revenue with TCS from the sale of its new
Converged Prepaid Wireless software application for the next four years. TCS
will receive 50% of the revenue from Lucent's sales of this application for the
twelve months ended March 31, 2001; 25% of such revenue for the twelve months
ended March 31, 2002; and 20% of such revenue for the 24 months ended March 31,
2004. TCS cannot predict the amount of revenue TCS will ultimately receive from
the sale of this new prepaid wireless software application. If TCS sells the
Prepaid Wireless software application developed under the development agreement
or any work primarily based upon it, TCS will split all revenue from such sales
with Lucent. Additionally, TCS has agreed to refrain from marketing prepaid
wireless software to specified Lucent wireless carrier customers through March
31, 2001.

On April 11, 2000, pursuant to the terms of the development agreement, TCS
agreed to an Application Development Plan with Lucent to develop an enhanced
Over-The-Air software application. TCS will share ownership rights in the
enhanced Over-The-Air software application as described above. Lucent will pay
TCS 40% of revenue generated from sales of the Over-The-Air software application
to wireless carriers through the first year after development is complete and
50% of such revenue thereafter. Upon mutual agreement, Lucent may buy out its
rights to receive future revenue from the sale of this software application in
exchange for a lump-sum payment from Lucent to TCS. Its revenue from the sale of
this software application would decline considerably if TCS agrees to sell its
rights in the Over-The-Air application to Lucent.

TCS performs maintenance for its network application software sold by
Lucent and also provides a limited 90-day warranty on those applications.
Maintenance revenue for these software applications is generally equal to 15% of
the original sale amount. In April, 2000, TCS modified the maintenance provision
of the development agreement. In exchange for providing additional maintenance
and training support, including a toll free support line, a toll free facsimile
line, an Internet address and training for Lucent employees on software
developed under the agreement, TCS will receive fees based on a percentage of
total sales or the collected maintenance fees. TCS will receive approximately
83% of the total maintenance fees collected.

In November 1998, in connection with the introduction of its Wireless
Internet Gateway software, TCS entered into a second agreement with Lucent under
which TCS pays Lucent up to a 25% fee for each sale of its products and services
to a customer Lucent refers to TCS. The agreement is effective until April 5,
2002 unless the parties mutually agree to extend the term or to terminate the
agreement pursuant to its terms and conditions. Lucent has historically sold
TCS' Wireless Internet Gateway software in conjunction with the Short Message
Service Center software. TCS negotiates the initial license fees paid to TCS by
Lucent for Wireless Internet Gateway sales on a case by case basis. Generally,
Lucent has paid TCS fees ranging between 75% and 90% of the sale value.

114
<PAGE> 122

In March 1998, Lucent paid TCS approximately $800,000 to accelerate
research and development efforts and to provide additional technical sales
support. The research and development efforts involved modification of the Short
Message Service Center software to support a broader set of Lucent's network
systems.

CUSTOMERS

NETWORK APPLICATIONS. TCS has historically provided the Short Message
Service Center, Wireless Internet Gateway and Prepaid Wireless software products
to Lucent's wireless carrier customers through a revenue sharing agreement with
Lucent. Lucent markets and sells these software products to its wireless carrier
customers as part of its own product and service offerings. As of November 30,
2000, one or more of these software products had been installed by 19 wireless
carrier networks, including Verizon Wireless, Telefonica International and Qwest
Communications International Inc. For the nine months ended September 30, 2000
and the years ended December 31, 1999 and 1998, TCS received substantially all
of its network applications software license revenue from Lucent under the
development agreement. Lucent accounted for approximately 60% of its network
applications revenue and approximately 22% of its total revenue for the nine
months ended September 30, 2000, approximately 45% of its network applications
revenue and approximately 11% of its total revenue for the year ended December
31, 1999 and approximately 47% of its network applications revenue and
approximately 15% of its total revenue for the year ended December 31, 1998.
TCS' revenue from Lucent was derived from sales to its wireless carrier
customers, including Verizon Wireless, which accounted for approximately 35% of
its network applications revenue and 13% of its total revenue for the nine
months ended September 30, 2000, approximately 11% of its network applications
revenue and less than 5% of its total revenue for the year ended December 31,
1999, and approximately 13% of its network applications revenue and less than 5%
of its total revenue for the year ended December 31, 1998. In addition, sales
through Lucent to each of Telefonica International and Qwest accounted for less
than 10% of its network applications revenue and less than 3% of its total
revenue for the nine months ended September 30, 2000. Sales through Lucent to
Telefonica International and Qwest accounted for over 10% of its network
applications revenue for the year ended December 31, 1999 and 1998,
respectively, and each accounted for less than 5% of its total revenue for the
same periods.

TCS also has two agreements with the General Services Administration
pursuant to which TCS provides network applications and communications
engineering services to various federal government agencies. For the nine months
ended September 30, 2000, network applications revenue paid under the General
Services Administration agreements by the U.S. Defense Department
Telecommunications Service accounted for approximately 19% of its network
applications revenue and less than 8% of its total revenue. Network applications
revenue paid by other federal government agencies accounted for approximately
14% of its network applications revenue and less than 5% of its total revenue
during this period. For the year ended December 31, 1999, network applications
revenue paid under the General Services Administration agreements by the U.S.
Defense Department Telecommunications Service accounted for approximately 27% of
its network applications revenue and less than 10% of its total revenue. Network
applications revenue paid by other federal government agencies accounted for
approximately 19% of its network applications revenue and less than 10% of its
total revenue during this period. For

115
<PAGE> 123

the year ended December 31, 1998, network applications revenue paid under the
General Services Administration agreements by the U.S. Defense Department
Telecommunications Service accounted for approximately 26% of its network
applications revenue and less than 10% of its total revenue. Network
applications revenue paid by other federal government agencies accounted for
approximately 21% of its network applications revenue and less than 10% of its
total revenue during this period. The loss of any of these customers could have
a material adverse effect on its business.

TCS also develops custom network application software products and provides
related ongoing operational support and maintenance. TCS has historically
provided government agencies including the City of Baltimore, U.S. Defense
Telecommunications Service and General Services Administration with these
products and services.

COMMUNICATIONS ENGINEERING SERVICES. TCS' major communications engineering
customers include the U.S. Department of Defense, the General Services
Administration, the State of Maryland, the City of Baltimore, AT&T Solutions,
Inc., Computer Sciences Corporation, and Litton-PRC. TCS' communications
engineering projects typically run from one to twelve months and involve three
to ten personnel.

For the nine months ended September 30, 2000, communications engineering
services revenue paid under the General Services Administration agreements by
the Naval Surface Warfare Center accounted for approximately 16% of its
communications engineering services revenue and approximately 10% of its total
revenue. Communications engineering services revenue paid by other federal
government agencies accounted for approximately 30% of its communications
engineering services revenue and approximately 19% of its total revenue during
this period. For the year ended December 31, 1999, communications engineering
services revenue paid under the General Services Administration agreements by
the U.S. Special Operations Command, the Space and Naval Warfare Center and the
Naval Surface Warfare Center accounted for approximately 11%, 11% and 23%,
respectively, of its communications engineering services revenue and less than
10%, less than 10% and approximately 17%, respectively, of its total revenue.
Communications engineering services revenue paid by other federal government
agencies accounted for approximately 25% of its communications engineering
services revenue and approximately 19% of its total revenue during this period.
For the year ended December 31, 1998, communications engineering services
revenue paid under the General Services Administration agreements by the Joint
Communication Services Command accounted for approximately 17% of its
communications engineering services revenue and approximately 12% of its total
revenue. Communications engineering services revenue paid by other federal
government agencies accounted for approximately 59% of its communications
engineering services revenue and approximately 40% of its total revenue during
this period. The loss of any of these customers could have a material adverse
effect on TCS' business.

BACKLOG. As of September 30, 2000, TCS had unfilled orders, or backlog, of
approximately $28.3 million. TCS expects to fill substantially all of these
orders during the course of 2000 and 2001. The 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 its
backlog is also subject to cancellation for causes such as late delivery, poor
performance and other factors. Accordingly, a comparison of backlogs from period
to period is not necessarily meaningful and may not be indicative of eventual
actual shipments or future revenue.

116
<PAGE> 124

As a result of the consummation of its initial public offering, contracts
awarded to TCS as a minority-owned business enterprise under Section 8(a) of the
U.S. Small Business Act could have terminated under the U.S. Small Business Act.
However, TCS filed and was granted a waiver of the termination of the Section
8(a) contracts with the Small Business Administration, which has allowed TCS to
continue to perform those contracts since its initial public offering. TCS had
$0.8 million of backlog under such contracts in its network applications
business and $8.1 million of backlog in its communications engineering services
business as of September 30, 2000.

SALES AND MARKETING

SALES OF NETWORK APPLICATIONS. TCS sells its network applications products
and services through both direct and indirect channels. Its direct sales force
consists of 15 professionals. TCS intends to grow this number significantly over
the next 12 months. In addition, its senior executives, including its chief
executive officer and its chief technology officer, are involved in closing
sales. TCS has historically leveraged its strategic relationship with Lucent to
market its network application software products to its wireless carrier
customers. To date, all of the wireless carriers who have installed these
products were obtained through this relationship. TCS has extensive direct
contact with prospective carrier customers during the sales process, as well as
during installation and maintenance.

TCS will continue to leverage its relationships with industry leaders and
to expand and diversify its own sales and marketing initiatives to increase its
sales to wireless carriers. TCS also intends to develop its corporate enterprise
customer base through relationships with Web development companies that
corporate enterprises retain as consultants. TCS will actively seek corporate
enterprise customers through both direct and cooperative marketing efforts.
Increasingly, its marketing efforts will also include advertising, public
relations, speaking engagements and attending and sponsoring industry
conferences.

SALES OF COMMUNICATIONS ENGINEERING SERVICES. TCS sells its communications
engineering services primarily through its internal sales professionals. As of
September 30, 2000, TCS had ten sales and marketing professionals devoted to
sales of communications engineering services. TCS is pre-qualified as an
approved vendor for federal, state and local government contracts.

COMPETITION

The market for its products and services is becoming increasingly
competitive. The adoption of industry standards may make it easier for new
market entrants to compete with TCS. TCS expects that it will compete primarily
on the basis of the functionality, price, breadth, time to market, ease of
integration and quality of its products and services. Its market and its
competitive conditions are relatively new and continually developing. Its
network application products compete with many similar products provided by
other companies. TCS is not aware of competitors who offer the same range of
products and services as TCS does. It is difficult to present a meaningful
comparison between TCS and its competitors because there is a large variation in
revenue generated by different customers, different products and services, as
well as the different combinations of products and services offered by its
competitors. TCS cannot, therefore, quantify its

117
<PAGE> 125

relative competitive position. With time and capital, it would be possible for
its competitors to replicate its products and services.

TCS' current and potential competitors include companies such as:

- SOFTWARE DEVELOPERS. Aether Systems Incorporated; Boston Communications
Group, Inc.; Centigram Communications Corporation; Corsair
Communications, Inc.; Glenayre Technologies, Inc.; InterVoice-Brite,
Inc.; Logica-Aldiscon; Openwave Systems, Inc.; RTS Wireless, Inc.; Sema
Group; and Tech Now, Inc.

- TELECOMMUNICATIONS EQUIPMENT VENDORS. ADC Telecommunications, Inc.; CMG
plc; Comverse Network Systems; Ericsson, Inc.; Lucent Technologies, Inc.;
Motorola, Inc.; and Nortel Networks Corporation.

- INFORMATION TECHNOLOGY CONSULTANTS. American Management Systems,
Incorporated; Andersen Consulting; BTG, Inc.; Computer Sciences
Corporation; Electronic Data Systems Corporation; Keane, Inc.; and Litton
PRC.

Many of its existing and potential competitors have substantially greater
financial, technical, marketing and distribution resources than TCS does.
Additionally, many of these companies have greater name recognition and more
established relationships with their target customers. Furthermore, these
competitors may be able to adopt more aggressive pricing policies and offer
customers more attractive terms than TCS can.

RESEARCH AND DEVELOPMENT

TCS' success depends on a number of factors, which include its ability to
identify and respond to emerging technological trends in its target markets, to
develop and maintain competitive products, to enhance its existing products by
adding features and functionality that differentiate the products from those of
its competitors and to bring products to market on a timely basis and at
competitive prices. Its staff includes 154 engineers who specialize in network
application development and communications engineering. Since 1996, TCS has made
substantial investments in research and development, substantially all of which
has been devoted to the development of network application software products.
TCS' research and development expenditures, including capitalized software
development costs, for the years ended December 31, 1997, 1998, and 1999 were
approximately $1.8 million, $3.0 million and $5.8 million, respectively. For the
nine months ended September 30, 2000, research and development expenditures,
including capitalized software costs were $4.4 million. TCS expects to
significantly increase research and development expenditures in the future, as
it is a key component of its strategy.

TCS has established a research relationship with Lucent Technologies, Inc.
Through this relationship, Lucent provides TCS with access to its laboratories
where TCS jointly tests its products and identifies product and service
enhancements. TCS' relationship with Lucent also allows TCS to test new Lucent
products and features for compatibility with its software applications before
these new products and features become publicly available. Additionally, Lucent
utilizes its software products to develop and test new wireless devices for
interoperability. This increases the likelihood that its products will be
compatible with new wireless devices coming to market. TCS also has research and
development relationships with wireless handset manufacturers, wireless carriers
and content and electronic commerce providers.

118
<PAGE> 126

TCS actively supports existing telecommunications standards and promotes
new telecommunications standards in order to expand the market for wireless
data. In 1996, TCS co-founded the Intelligent Network Forum, an organization
dedicated to expanding the role of intelligent networks in telecommunications.
As part of its strategy to expand the role of short messaging, TCS co-founded
the Short Message Peer-to-Peer Forum in 1999. Through this organization, TCS is
establishing a de-facto standard for interfaces into short messaging service
centers from the Internet, wireless gateways and Wireless Application Protocol
servers. TCS joined the Wireless Application Protocol Forum, Ltd. in 2000 to
further define and support the interfaces between Wireless Application Protocol
servers and short message service centers and to provide a liaison between the
Short Message Peer-to-Peer Forum and the Wireless Application Protocol Forum.

GOVERNMENT REGULATION

TCS is not currently subject to direct federal, state or local government
regulation, other than regulations that apply to businesses generally. The
wireless carriers that utilize its products and services are subject to
regulation by the FCC and, to a lesser extent, by state and local governmental
agencies. Therefore, changes in FCC regulations, policies or interpretations, or
broad-based state or local actions, could indirectly affect the availability of
wireless services these carriers provide, thereby affecting the products and
services they buy from TCS. TCS could, for example, be adversely affected by
developments in regulations that govern or may in the future govern the
Internet, the allocation of radio frequencies or the placement of wireless
towers.

While TCS is not subject to the Telecommunications Act of 1996, many
wireless carriers that use its products are subject to this act. The act
provided for significant deregulation of the U.S. telecommunications industry
and such legislation remains subject to judicial review and additional FCC
rulemaking. As a result of the act, as well as various initiatives of the FCC to
implement its provisions, TCS cannot predict the effect that legislation or any
state or federal rulemaking or other action may have on its future operations.
Due to the increasing popularity and use of the Internet, there are an
increasing number of laws and regulations being enacted and proposed pertaining
to the Internet. In addition, a number of legislative and regulatory proposals
are under consideration by various agencies and commissions in the United States
and elsewhere. Laws or regulations may be adopted, and in some countries have
already been adopted, with respect to the Internet relating to liability for
information retrieved from or transmitted over the Internet, online content
regulation, user privacy, taxation and quality of products and services.
Moreover, the applicability to the Internet of existing laws governing issues
such as intellectual property ownership and infringement, trade secret,
obscenity, libel, employment and personal privacy is uncertain and developing.
Uncertainty and new regulations could create turmoil in the marketplace that
could reduce demand for its products and services or increase the cost of doing
business and have a material adverse effect on its business, financial condition
or results of operations.

Legislative proposals have been made in the United States that may provide
broader protection to owners of databases of information such as stock quotes
and sports scores. Such legislation, if enacted, could result in an increase in
the price of services that provide data to wireless communications devices and
could create potential liability for unauthorized use of this data. The Advisory
Commission on Electronic Commerce, which was created by the 1998 Internet Tax
Freedom Act, issued a report to Congress on

119
<PAGE> 127

Internet taxation. Congress currently is considering various aspects of the
report. Congressional action in response to the Commission's report may
influence the direction of Internet taxes and could have a materially adverse
impact on its business. Additionally, the Organization for Economic Co-operation
and Development's Technical Advisory Group on Treaty Characterization of
E-Commerce Payments has recently issued a draft report on the characterization
of various typical e-commerce transactions with respect to international tax
treaties. U.S. treaties are often interpreted using the Organization for
Economic Co-operation and Development's Commentaries. A major issue in the
report is the characterization of e-commerce transactions concerns whether
income derived from such transactions is classified as "business profits" or
"royalties." Any new legislation or regulations, or the application of laws or
regulations from jurisdictions whose laws do not currently apply to its
business, could have a material adverse effect on its business.

INTELLECTUAL PROPERTY RIGHTS

TCS relies on a combination of patent, copyright, trademark, service mark,
trade secret laws and restrictions to establish and protect certain proprietary
rights in its products and services.

TCS has filed eleven U.S. patent applications and one international patent
application for certain apparatus and processes TCS believes it has invented to
enable key features of the Short Message Service Center, Prepaid Wireless and
Mobile Originated Chat network application software. TCS currently holds no
issued patents. TCS has received a notice of allowance from the U.S. Patent and
Trademark Office on one of the patent applications relating to certain Short
Message Service Center apparatus and processes. There is no assurance that this
patent application or any other patent application will result in a patent being
issued by the U.S. Patent and Trademark Office or other patent offices, nor is
there any guarantee that any issued patent will be valid and enforceable. TCS
has agreed with Lucent that TCS and Lucent will each have an equal title
interest in patent applications relating to joint inventions for the Prepaid
Wireless software. Additionally, foreign patent rights may or may not be
available or pursued in any technology area for which U.S. patent applications
have been filed.

TCS currently holds two registered trademarks, "QueryNet(R)" and "Enabling
Convergent Technologies(R)." TCS has filed applications to register the marks
"WINSuite(TM)," "MO Menus(TM)," "MO Buddies(TM)," "MO Chat(TM)," "MO Mail(TM),"
"MobiChat(TM)," "InfoCafe(TM)," "MobileChat(TM)," and "Gabriel(TM)" on the
Principal Register of the United States Patent and Trademark Office. This
prospectus also includes trade names, service marks and trademarks of other
companies. All other brand names or trademarks appearing in this prospectus are
the property of their respective holders.

Under its development agreement with Lucent, TCS developed the Short
Message Service Center software in late 1996 and Prepaid Wireless software in
mid-1998 and in April 2000 agreed to develop an enhanced Over-The-Air software
application. Under the development agreement, TCS shares ownership rights in
these software applications with Lucent. The scope of each party's ownership
interest in these software applications is subject to each party's various
underlying ownership rights in intellectual property and also to confidential
information contributed to the applications, and could be subject to challenge
by either party.

120
<PAGE> 128

The steps TCS has taken to protect its intellectual property may not prove
sufficient to prevent misappropriation of its technology or to deter independent
third-party development of similar technologies. The laws of certain foreign
countries may not protect its services or intellectual property rights to the
same extent as do the laws of the United States. TCS also relies on certain
technologies that TCS licenses from third parties including data feeds and
related software. These third-party technology licenses may not continue to be
available to TCS on commercially attractive terms. The loss of the ability to
use such technology could require TCS to obtain the rights to use substitute
technology, which could be more expensive or offer lower quality or performance,
and therefore have a material adverse effect on its business, financial
condition or results of operations.

Third parties could claim infringement by TCS with respect to current or
future services. As the number of entrants into its market increases, the
possibility of an infringement claim against TCS grows. TCS may be inadvertently
infringing a patent of which TCS is unaware. In addition, because patent
applications can take many years to issue, there may be a patent application now
pending of which TCS is unaware, which will cause TCS to be infringing when it
issues in the future. Any infringement claim, whether meritorious or not, could
be time-consuming, result in costly litigation, cause service installation
delays or require TCS to enter into royalty or licensing agreements. Royalty or
licensing agreements might not be available on terms acceptable to TCS or at
all. As a result, any claim could have a material adverse effect upon its
business, financial condition or results of operations.

As a member of the Wireless Application Protocol Forum, TCS has agreed to
license its intellectual property to other members on fair and reasonable terms
to the extent that the license is required to develop non-infringing products
under the specifications promulgated by the Wireless Application Protocol Forum.
Each other member has entered into a reciprocal agreement.

EMPLOYEES

As of November 30, 2000, TCS had 339 full-time employees and 38 part-time
employees, of which 154 were engineers who specialize in network applications
development and communications engineering. TCS believes its relations with its
employees to be good. None of its employees are represented by a union.

PROPERTIES

TCS' principal executive office is located in Annapolis, Maryland in a
34,482 square foot facility under a lease expiring in September 2002. TCS
recently expanded its Annapolis, Maryland office space by entering into a lease
of an additional 31,371 square foot facility. This lease began on May 1, 2000
and will expire in April 2005. TCS' Southeast Regional office is located in
Tampa, Florida in a 7,376 square foot facility under a lease expiring in
December 2005.

LEGAL PROCEEDINGS

TCS is not currently subject to any material legal proceedings. However,
TCS may from time to time become a party to various legal proceedings arising in
the ordinary course of its business.

121
<PAGE> 129

SELECTED FINANCIAL DATA
TELECOMMUNICATION SYSTEMS, INC.

The table that follows presents portions of TCS' financial statements and
is not complete. You should read the following selected financial data together
with TCS' financial statements and related notes and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the more complete financial information included elsewhere in this proxy
statement/prospectus. TCS has derived the statement of operations data for the
years ended December 31, 1997, 1998 and 1999 and the balance sheet data as of
December 31, 1998 and 1999 from TCS' financial statements which have been
audited by Ernst & Young LLP, independent auditors, and which are included in
this proxy statement/prospectus beginning on page F-2. TCS has derived the
statement of operations data for the years ended December 31, 1995 and 1996 and
the balance sheet data as of December 31, 1995, 1996 and 1997, from its audited
financial statements which are not included in this proxy statement/prospectus.
TCS has derived the statement of operations data for the nine months ended
September 31, 1999 and 2000 from its unaudited financial statements included in
this proxy statement/prospectus beginning on page F-2 which include, in TCS'
opinion, all adjustments, consisting only of normal recurring adjustments, that
its management considers necessary for the fair presentation of TCS' financial
position and results of operations for those periods. The historical results
presented below for the nine months ended September 30, 2000 are not necessarily
indicative of the results to be expected for any future period.

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- -----------------
1995(1) 1996(1) 1997 1998 1999 1999 2000(2)
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUE:
Network applications:
Software licenses........................ $ -- $ 47 $ 1,373 $ 2,104 $ 3,975 $ 2,933 $ 6,368
Services................................. 2,280 3,829 3,815 5,806 7,345 5,178 8,376
------- ------- ------- ------- ------- ------- -------
Network applications................... 2,280 3,876 5,188 7,910 11,320 8,111 14,744
Communications engineering services........ 18,656 24,932 22,636 17,078 34,440 23,963 26,231
------- ------- ------- ------- ------- ------- -------
Total revenue.......................... 20,936 28,808 27,824 24,988 45,760 32,074 40,975
OPERATING COSTS AND EXPENSES:
Direct cost of network applications
services............................... 1,467 2,616 2,918 4,252 4,993 3,539 6,545
Direct cost of communications engineering
services............................... 13,029 18,812 17,847 12,358 26,889 18,661 19,914
Sales and marketing...................... 700 735 1,045 1,455 2,285 1,621 4,433
Research and development................. -- -- 204 354 1,098 791 2,711
General and administrative............... 5,098 5,739 3,091 4,001 5,329 3,783 7,592
Non-cash stock compensation expense...... -- -- -- -- -- -- 841
Depreciation and amortization of property
and equipment.......................... 168 321 294 424 916 515 1,762
Amortization of software development
costs.................................. -- 71 220 593 1,401 1,050 2,168
------- ------- ------- ------- ------- ------- -------
Total operating costs and expenses....... 20,452 28,294 25,619 23,437 42,911 29,960 45,966
------- ------- ------- ------- ------- ------- -------
INCOME (LOSS) FROM OPERATIONS.............. 484 514 2,205 1,551 2,849 2,114 (4,991)
Interest expense and other financing
costs.................................... 471 803 1,263 1,550 1,741 1,203 472
------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing operations
before income taxes...................... 13 (289) 942 1 1,108 911 (5,463)
Income tax expense (benefit)............... -- -- -- -- $ 2,408 -- $(2,140)
------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing operations
before extraordinary item................ $ 13 $ (289) $ 942 $ 1 $(1,300) $ 911 $(3,323)
======= ======= ======= ======= ======= ======= =======
</TABLE>

122
<PAGE> 130

<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------
1995 1996 1997 1998 1999 AS OF SEPTEMBER 30, 2000
------ ------- ------- ------- ------- ------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Unrestricted cash...................... $ 471 $ 23 $ 864 $ 440 $ 3,257 $67,874
Working capital (deficit).............. (523) (4,572) (2,149) (360) 4,229 76,587
Total assets........................... 8,544 8,653 10,764 14,649 27,672 99,240
Long-term debt and capital leases...... 146 -- 2,975 6,621 6,672 1,257
Total liabilities...................... 8,177 11,640 12,269 15,994 22,351 13,633
Series A preferred stock............... -- -- -- -- 9,520 --
Total stockholders' equity (deficit)... 367 (2,987) (1,736) (1,345) (4,199) $85,607
</TABLE>

------------------------------
(1) In 1995, TCS recorded a loss from discontinued operations of $0.7 million
and a loss on disposal of $0.2 million related to the disposition of its
network services division. This division consisted of an Internet service
provider and long distance resale business. Also in 1995, TCS recorded
income from discontinued operations of $0.6 million related to its applied
technologies division. This division consisted of a small complex cable
components plant. Total loss per common share from discontinued operations
was $(0.02) in 1995. In 1996, TCS recorded a loss from discontinued
operations of $1.8 million and a loss on disposal of $1.5 million related to
the disposition of its applied technologies division, or a total loss per
common share of $(0.31).

(2) For the nine month period ended September 30, 2000, TCS recorded an
extraordinary loss on early extinguishment of debt of $(0.2) million, net of
a tax benefit. Approximately $9.3 million of TCS' initial public offering
proceeds were used to extinguish debt.

123
<PAGE> 131

TELECOMMUNICATION SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion of TCS' financial condition and results of
operations and should be read together with the financial statements and the
related notes which are deemed to be incorporated in this section.

COMPANY BACKGROUND

In 1990, TCS began engagements to design and develop custom network
application software. In 1996, TCS entered into a development agreement with
Lucent Technologies, Inc. to develop software and to share revenue from and
ownership rights in this software. In 1997, under this agreement, TCS released
the Short Message Service Center, a software application which allows wireless
device users to send and receive text or data messages. In 1998, TCS developed
Prepaid Wireless, a software application that allows wireless subscribers to
pre-pay for wireless phone service. In the same year, TCS developed and
installed its Wireless Internet Gateway, a software application for wireless
carriers which enables two-way data communication between the Internet and
wireless networks. During 1999, TCS instituted an aggressive program to develop
additional software for wireless connectivity to the Internet.

As the demand for software applications that provide data delivery to
wireless devices grows, TCS expects its future revenue to continue to be
increasingly derived from network application software licenses and related
services. TCS has incurred net losses in three of the past five years and had
nominal income in each of the other two years. TCS may incur further net losses
in the future. TCS expects its operating expenses to grow significantly,
particularly as a result of the expansion of its sales and marketing efforts and
research and development activities.

OVERVIEW

TCS manages its business in two segments, network applications and
communications engineering services. Its network applications segment consists
of the development and licensing of software products and the provision of
related services. Its communications engineering services segment includes the
design, development and deployment of complex

124
<PAGE> 132

information processing and communication systems and the provision of related
services. The following table sets forth information on each of its segments:

<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------- -----------------
1997 1998 1999 1999 2000
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenue:
Network applications................... $ 5,188 $ 7,910 $11,320 $ 8,111 $14,744
Communications engineering services.... 22,636 17,078 34,440 23,963 26,231
------- ------- ------- ------- -------
Total revenue..................... $27,824 $24,988 $45,760 $32,074 $40,975
======= ======= ======= ======= =======
Segment profit (loss):
Network applications................... $ 1,241 $ 1,576 $ 1,016 $ 787 $(5,296)
Communications engineering services.... 964 (25) 1,833 1,327 305
------- ------- ------- ------- -------
Total segment profit (loss)....... $ 2,205 $ 1,551 $ 2,849 $ 2,114 $(4,991)
======= ======= ======= ======= =======
</TABLE>

For the nine months ended September 30, 2000, TCS' aggregate revenue from
U.S. government agencies was $17.0 million and its aggregate revenue from Lucent
was $8.9 million. For the year ended December 31, 1999, its aggregate revenue
from U.S. government agencies was $29.5 million and its aggregate revenue from
Lucent was $5.1 million. For the year ended December 31, 1998, its aggregate
revenue from U.S. government agencies was $16.7 million and its aggregate
revenue from Lucent was $3.7 million. For the year ended December 31, 1997, its
aggregate revenue from U.S. government agencies was $24.6 million and its
aggregate revenue from Lucent was $1.5 million.

Total company backlog at September 30, 2000 was $28.3 million. The 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. Accordingly, a comparison of backlogs from period to period is not
necessarily meaningful and may not be indicative of eventual actual shipments or
future revenue. From 1989 to June 1998, TCS participated as a minority-owned
business enterprise for federal government contracting purposes under Section
8(a) of the U.S. Small Business Act. TCS continues to perform under contracts
awarded to it under this program, and has recently filed and received a waiver
of the termination of the Section 8(a) contracts with the Small Business
Administration. TCS had $8.9 million of backlog under such contracts as of
September 30, 2000. TCS expects to fill substantially all of these orders during
the course of 2000 and 2001.

Network Applications Revenue

TCS generates network applications revenue from two sources, licensing of
its software products and provision of related services. The Short Message
Service Center, Prepaid Wireless and Wireless Internet Gateway products have
been the principal generators of software license fees. Lucent pays TCS initial
license fees generally equal to 50% of the revenue it generates from sales of
the Short Message Service Center and Prepaid Wireless applications that TCS
developed under the development agreement it entered into with Lucent. For sales
of TCS' Wireless Internet Gateway, Lucent pays TCS initial fees which it
negotiates on a case by case

125
<PAGE> 133

basis and which have generally ranged between 75% and 90% of the sale value.
During the third quarter 2000, TCS entered into a marketing agreement with
Compaq Computer Corporation to package its Wireless Internet Gateway application
suite and Prepaid Wireless products on the Compaq CN-Series platform. Initial
licensing fees are a function of the number of subscribers in the network where
TCS' software is deployed. As a carrier's subscriber base increases, the carrier
must purchase additional capacity under its license agreement with Lucent and
TCS receives additional revenue. TCS recognizes license fee revenue when each of
the following have occurred: (1) evidence of an arrangement is in place; (2) TCS
has delivered software; (3) the fee is fixed or determinable; and (4) collection
of the fee is probable. Software license fees billed and not recognized as
revenue are included in deferred revenue.

In April 2000, Lucent indicated that it would cease to market the Prepaid
Wireless software TCS developed under its development agreement with Lucent and
would instead market and sell a new prepaid wireless software application that
Lucent is currently developing. Under an amendment to TCS' development agreement
with Lucent, TCS has granted Lucent the right to incorporate software and other
intellectual property developed by TCS into Lucent's new prepaid wireless
software application. Lucent has agreed to share revenue with TCS from the sale
of this new prepaid wireless software for the next four years. TCS will receive
50% of the revenue from Lucent's sales of this software for the twelve months
ended March 31, 2001; 25% of this revenue for the twelve months ended March 31,
2002; and 20% of this revenue for the 24 months ended March 31, 2004. TCS cannot
predict the amount of revenue it will ultimately receive from the sale of this
new prepaid wireless software application. If TCS sells the Prepaid Wireless
software application developed under the development agreement with Lucent or
any software primarily based upon it, TCS will split all revenue from these
sales with Lucent. Additionally, TCS has agreed to refrain from marketing
Prepaid Wireless software to specified Lucent wireless carrier customers through
March 31, 2001. TCS' license and related service revenue from the Prepaid
Wireless software were approximately 5% of its network applications revenue for
the year ended December 31, 1999 and approximately 2% of its network
applications revenue for the nine months ended September 30, 2000. Also in April
2000, TCS agreed with Lucent to develop Over-The-Air, a software application
which enables the activation of wireless devices from remote locations. After
this software is developed and available for sale, Lucent will pay TCS initial
license fees equal to 40% of the revenue for the first year and 50% of the
revenue thereafter.

During the third quarter 2000, TCS entered into a marketing agreement with
Compaq Computer Corporation to package its Wireless Internet Gateway application
suite and Prepaid Wireless products on the Compaq CN-Series platform. TCS'
network applications service revenue arises from annual maintenance fees for its
packaged software products and fees from development, implementation and
maintenance of custom software. Maintenance fees on packaged software are
collected in advance and recognized ratably over the annual maintenance period.
Unrecognized maintenance fees are included in deferred revenue. Custom software
development, implementation and maintenance services may be provided under time
and materials or fixed-fee contracts. TCS recognizes fixed-fee contract revenue
using the percentage-of-completion method. TCS measures progress to completion
using costs incurred compared to estimated total costs. TCS recognizes estimated
losses under long-term contracts in their entirety upon discovery.

126
<PAGE> 134

Communications Engineering Services Revenue

TCS generates communications engineering services revenue from the design,
development and deployment of complex information processing and communication
systems for corporate and government enterprises. Examples of recent
representative communications engineering services projects include work
performed under its agreements with AT&T Solutions Inc., special operations
units of the U.S. Department of Defense, Qwest Communications International Inc.
and the City of Baltimore. Under its agreement with AT&T Solutions, Inc., TCS
designed, installed and operate a global satellite communications network for a
multinational bank. Under its agreement with the Special Operations Forces of
the U.S. Department of Defense, TCS created a system which integrates secure and
non-secure radio frequency, satellite and wireline networks for data and voice
communications. Qwest Communications International Inc. needed a connection
between their existing Octel voicemail systems and the Lucent Advantage system.
Under its agreement with Qwest Communications International Inc., TCS designed
and installed a new connection between these systems. Under its agreement with
the City of Baltimore, TCS provides maintenance for its third-party software,
network engineering services and help desk support.

TCS generally provides communications engineering services under long-term
contracts. TCS recognizes revenue under long-term contracts as billable costs
are incurred and for fixed-price contracts using the percentage-of-completion
method, measured by total costs incurred compared to total estimated costs. TCS
recognizes estimated losses on contracts in their entirety upon discovery. Under
its 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. TCS records revenue under these contracts at estimated net
realizable amounts.

Cost of Network Applications Revenue

TCS' cost of network applications revenue includes the costs of developing
software and the direct costs of providing services. TCS capitalizes software
development costs after it establishes technological feasibility, and TCS
amortizes those costs over the estimated useful life of the software beginning
on the date when the software is first available for general release. TCS
calculates amortization of software development costs on a product-by-product
basis using the straight-line method over the remaining estimated economic life
of the product, which is never greater than four years. TCS also computes
amortization using the ratio that current revenue for the product bears to the
total of current and anticipated future revenue for that product. If this
revenue curve method results in amortization greater than the amount computed
using the straight-line method, TCS records amortization at that greater amount.
Amortization as a percentage of software license fees is generally a higher
percentage in the early stages of a product's life cycle. TCS' cost of network
application services consists primarily of compensation, benefits and travel
expenses incurred when providing its services.

Cost of Communications Engineering Services Revenue

TCS' cost of communications engineering services revenue consists primarily
of compensation, benefits, travel and the costs of third-party contractors that
it engages. TCS' costs of providing services under long-term contracts include
an allocation of indirect costs at rates that comply with federal contractor
cost accounting regulations.

127
<PAGE> 135

Sales and Marketing Expense

TCS' sales and marketing expenses include compensation and benefits, and
trade show, travel, advertising and public relations costs which are expensed as
incurred. TCS has historically sold its network application software products
through its relationship with Lucent. This sales process typically includes
participation of TCS engineers along with Lucent in presenting TCS' products to
prospective customers. TCS also markets its network applications and
communications engineering products and services by responding to requests for
proposals and through its direct sales force. During 1999 and the first nine
months of 2000, TCS hired additional personnel to market its products directly
to wireless carriers and enterprises. TCS intends to hire a significant number
of new employees in the future to expand its sales force.

Research and Development Expense

TCS' research and development expense consists of the costs of developing
software products incurred prior to completion of a detailed program design
confirming technological feasibility. TCS incurs these costs to enhance existing
packaged software products as well as to create new software products. These
costs primarily include compensation and benefits as well as costs associated
with using third party laboratory and testing resources. TCS expenses research
and development costs as they are incurred.

General and Administrative Expense

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

Depreciation and Amortization Expense

Depreciation and amortization expense (other than amortization of software
development costs) represents the period costs associated with TCS' investment
in computers, software, furniture and fixtures, and leasehold improvements. TCS
computes depreciation and amortization using the straight-line method over the
estimated useful life of the assets.

Non-Cash Stock-Based Compensation Expense

Since April 2000, TCS has granted options to purchase 867,619 shares of
Class A Common Stock to employees and directors at an exercise price less than
the fair market value of TCS Class A Common Stock at the date of grant. TCS will
record future additional stock compensation expense of approximately $8.7
million as a result of these option grants that will be recognized ratably over
the remaining investing period.

RESULTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999

Revenue. Total revenue increased $8.9 million, or 28%, to $41.0 million in
the first nine months of 2000 from $32.1 million during the same period in 1999.

Total network application revenue increased $6.6 million, or 81%, to $14.7
million in the first nine months of 2000 from $8.1 million during the same
period in 1999. Network application software license revenue grew approximately
$3.5 million, or 121%, to $6.4 million in the first

128
<PAGE> 136

nine months of 2000 from $2.9 million during the same period in 1999. This
increase resulted from additional sales of the Short Message Service Center and
Wireless Internet Gateway applications. Network application services revenue
increased $3.2 million, or 62%, to $8.4 million in the first nine months of 2000
from $5.2 million during the same period in 1999. This increase resulted from
increased maintenance revenue related to packaged software products, an increase
in sales of custom software applications, and hardware revenue associated with
the Wireless Internet Gateway applications.

Communications engineering services revenue increased $2.2 million, or 9%
to $26.2 million in the first nine months of 2000 from $24.0 million during the
same period in 1999. The increase resulted from a network engineering project
that began in July 1999, and the commencement of several new projects during the
third quarter 2000.

Cost of Revenue. Total cost of revenue increased $5.3 million, or 23%, to
$28.6 million in the nine months of 2000 from $23.3 million during the same
period in 1999. As a percentage of revenue, cost of revenue decreased to 70% in
the first nine months of 2000 from 72% for the same period in 1999.

Cost of network applications revenue increased $4.1 million or 89%, to $8.7
million in the first nine months of 2000 from $4.6 million during the same
period in 1999. Amortization of software development costs increased $1.1
million or 100%, to $2.2 million in the first nine months of 2000 from $1.1
million during the same period in 1999. This increase was the result of the
general release of enhancements to our software products that have increased our
capitalized software development costs subject to amortization. Cost of network
application services revenue increased $3.0 million, or 86% to $6.5 million in
the first nine months of 2000 from $3.5 million during the same period in 1999.
The increase in cost of network application services revenue resulted from
higher personnel, increased hardware requirements with Wireless Internet Gateway
sales, and other related costs necessary to support the increase in revenue as
noted above.

Cost of communications engineering services revenue increased $1.2 million,
or 6% to $19.9 million in the first nine months of 2000 from $18.7 million
during the same period in 1999. The increase resulted from hardware requirements
associated with new projects. As a percentage of related revenue, cost of
communications engineering services revenue decreased to 76% in the first nine
months of 2000 from 78% for the same period in 1999. The higher gross margin
resulted from a reduced proportion of contracts with subcontractor components,
which typically have lower profit margins than contracts that predominately use
employee labor.

Sales and Marketing Expense. Sales and marketing expense increased $2.8
million, or 175%, to $4.4 million in the first nine months of 2000 from $1.6
million during the same period in 1999. The increase was primarily a result of
an increased number of personnel hired for sales and marketing efforts.

Research and Development Expense. Research and development expense
increased $1.9 million, or 238%, to $2.7 million in the first nine months of
2000 from $0.8 million during the same period in 1999. The increase was
primarily from additional expenditures for development of Wireless Internet
Gateway, Mobile Location Register, and Prepaid Wireless applications. TCS will
use a portion of the proceeds from its initial public offering to focus on
research and development, including enhancements to existing software products.

General and Administrative Expense. General and administrative expense
increased $3.8 million, or 100%, to $7.6 million in the first nine months of
2000 from $3.8 million during

129
<PAGE> 137

the same period in 1999. The increase in general and administrative expense
resulted from adding facilities and support resources for expanding product
development and service offerings.

Depreciation and Amortization Expense. Depreciation and amortization
expense increased $1.3 million or 260%, to $1.8 million in the first nine months
of 2000 from $0.5 million during the same period in 1999. Depreciation and
amortization of TCS' property and equipment increased as a result of continued
growth of its infrastructure to support the volume of sales and development
activity.

Non-Cash Stock Compensation Expense. Non-cash stock compensation expense
was $0.8 million in the first nine months of 2000. This is the result of
granting options to purchase 867,619 shares of Class A Common Stock to employees
at an exercise price below the fair value of its Class A Common Stock. TCS will
record future compensation expense related to these grants of approximately $8.7
million that will be recognized ratably over the remaining vesting period of the
options.

Interest Expense and Other Financing Costs. Net interest expense and other
financing costs decreased $0.7 million or 58% to $0.5 million of net interest
expense in the first nine months of 2000 from $1.2 million of net interest
expense during the same period in 1999. This decrease is the result of the
initial public offering proceeds being used to extinguish long-term debt and the
income from the investment of a portion of the remaining proceeds.

Extraordinary Item -- Loss on Early Extinguishment of Debt. TCS used
approximately $9.3 million of proceeds from the initial public offering to
extinguish debt. In conjunction with the extinguishment, $219,000 of unamortized
debt discount and deferred financing costs, net of a tax benefit, were expensed.

Income Taxes. From January 1, 1993 through December 14, 1999, TCS elected
to be treated as an S corporation for federal income tax purposes under
Subchapter S of the Internal Revenue Code of 1986 and accordingly, TCS was not
subject to federal and state income taxes during that period. TCS terminated its
S corporation status on December 14, 1999, and upon termination determined the
differences between the financial reporting and income tax bases of our assets
and liabilities. These differences were recorded as deferred tax assets or
liabilities, and the net difference was reported as income tax expense in 1999.
TCS recorded a $2.3 million tax benefit in the nine months ended September 30,
2000. This benefit resulted from TCS' ability to reduce its deferred tax
liabilities by the tax effect of its net operating loss for the period.

Net Income (Loss). TCS incurred a net loss of $3.5 million for the first
nine months of 2000 compared to net income of $0.9 million in the same period in
1999 due to the factors described above.

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

Revenue. Total revenue increased $20.8 million, or 83%, to $45.8 million
in 1999 from $25.0 million in 1998, exceeding our expectations.

Total network applications revenue increased $3.4 million, or 43%, to $11.3
million in 1999 from $7.9 million in 1998. Network application software license
revenue increased $1.9 million, or 89%, to $4.0 million in 1999 from $2.1
million in 1998. The increase in software license revenue primarily resulted
from a series of successful installations of its products, and included a $1.0
million increase in sales of its Wireless Internet Gateway and initial sales of
the Prepaid

130
<PAGE> 138

Wireless application. Network application service revenue increased $1.5
million, or 27%, to $7.3 million in 1999 from $5.8 million in 1998. This
increase included $0.4 million of increased maintenance revenue related to
packaged software products. The remaining increase related to sales of custom
software applications and services.

Communications engineering services revenue increased $17.4 million, or
102%, to $34.4 million in 1999 from $17.1 million in 1998. Approximately $10.0
million of this increase related to performance under a large complex program
management project that is expected to wind down during the course of 2000. This
growth also included revenue from a long-term contract to design, furnish,
install and operate a satellite data communications network for a global
financial institution, and growth in its data and voice network design,
installation and management services.

Cost of Revenue. Total cost of revenue increased $16.1 million, or 94%, to
$33.3 million in 1999 from $17.2 million in 1998. As a percentage of revenue,
cost of revenue increased to 73% in 1999 from 69% in 1998.

Cost of network applications revenue increased $1.5 million, or 32%, to
$6.4 million in 1999 from $4.8 million in 1998. Amortization of software
development costs increased to $1.4 million in 1999 from $0.6 million in 1998
because TCS commenced the amortization of its Prepaid Wireless product and
released enhancements to the Short Message Service Center and Wireless Internet
Gateway products. Amortization expense as a percentage of software license fees
increased to 35% in 1999 from 28% in 1998 as a result of new product
introductions. Cost of network application services revenue increased $0.7
million, or 17%, to $5.0 million in 1999 from $4.3 million in 1998. As a
percentage of related revenue, cost of network application services revenue
decreased to 68% in 1999 from 73% in 1998 as a result of a more favorable mix of
custom network application software contracts.

Cost of communications engineering services revenue increased $14.5
million, or 118%, to $26.9 million in 1999 from $12.4 million in 1998. The
increase was a direct result of growth in overall business volume. As a
percentage of related revenue, cost of communications engineering services
revenue increased to 78% in 1999 from 72% in 1998 due to a higher mix of
contracts involving more subcontractor labor and purchased system components.

Sales and Marketing Expense. Sales and marketing expense increased $0.8
million, or 57%, to $2.3 million in 1999 from $1.5 million in 1998. The increase
was primarily the result of the addition of six full time personnel supporting
the sales of packaged software to wireless carriers, as well as adding personnel
to market and sell communications engineering services.

Research and Development Expense. Research and development expense
increased $0.7 million, or 210%, to $1.1 million in 1999 from $0.4 million in
1998. The increase was the result of devoting additional resources to the
development of packaged software products, primarily wireless data products.

General and Administrative Expense. General and administrative expense
increased $1.3 million, or 33%, to $5.3 million in 1999 from $4.0 million in
1998. The increase in general and administrative expense primarily reflects
expansion of our facilities, and employment of additional staff to support the
increased volume of software development and other business activity. General
and administrative expense declined as a percentage of total revenue as fixed
costs were spread over an increased revenue base.

Depreciation and Amortization Expense. Depreciation and amortization of
property and equipment increased $0.5 million, or 116%, to $0.9 million in 1999
from $0.4 million in 1998.

131
<PAGE> 139

Increased depreciation and amortization of TCS' property and equipment resulted
from growth of our infrastructure to support the volume of activity and
equipment upgrades.

Interest Expense and Other Financing Costs. Interest expense and other
financing costs increased $0.2 million, or 12%, to $1.8 million in 1999 from
$1.6 million in 1998 due to increased average outstanding borrowings. Other
financing costs consisted of amortization of debt discounts and deferred
financing costs and represented approximately $0.3 million in both 1999 and
1998.

Net Income (Loss). TCS incurred a net loss of $1.3 million in 1999, as
compared to nominal net income in 1998. TCS incurred a net loss in 1999 due to
recognizing $2.4 million of tax expense as a result of the change in its tax
status from a Subchapter S to a C corporation.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

Revenue. Total revenue decreased $2.8 million, or 10%, to $25.0 million in
1998 from $27.8 million in 1997.

Total network applications revenue increased $2.7 million, or 52%, to $7.9
million in 1998 from $5.2 million in 1997. Network applications software license
revenue increased $0.7 million, or 53%, to $2.1 million in 1998, from $1.4
million in 1997. Substantially all of this license revenue was from sales of
Short Message Service Center software. Network applications service revenue
increased $2.0 million, or 52%, to $5.8 million in 1998 from $3.8 million in
1997. This increase included $0.8 million paid to TCS by Lucent to accelerate
our research and development efforts and to assist with technical support, and
also included $0.5 million from the installation of database application
software.

Communications engineering services revenue decreased $5.6 million, or 25%,
to $17.1 million in 1998 from $22.6 million in 1997. TCS completed several
service projects in early 1998, and did not generate replacement revenue because
it reduced sales and marketing expenditures in 1997 during a period of tight
liquidity.

Cost of Revenue. Total cost of revenue decreased $3.8 million, or 18%, to
$17.2 million in 1998 from $21.0 million in 1997. As a percentage of revenue,
cost of revenue decreased to 69% in 1999 from 75% in 1998.

Total cost of network applications revenue increased $1.7 million, or 54%,
to $4.8 million in 1998 from $3.1 million in 1997. Amortization of software
development costs increased $0.4 million, or 170%, to $0.6 million in 1998 from
$0.2 million in 1997. Amortization expense as a percentage of software license
fees increased to 28% in 1998 from 16% in 1997 as a result of new product
introductions. Cost of network application services revenue increased $1.3
million, or 46%, to $4.3 million in 1998 from $2.9 million in 1997 as a result
of higher contract volume and correspondingly increased direct costs. As a
percentage of related revenue, cost of network application services revenue
decreased to 73% in 1998 from 76% in 1997 due to a lower average margin on
custom network application software contracts.

Cost of communications engineering services revenue decreased $5.5 million,
or 31%, to $12.4 million in 1998 from $17.8 million in 1997 as a direct result
of declines in overall business volume and corresponding decreases in direct
project costs. As a percentage of related revenue, cost of communications
engineering services revenue decreased to 72% in 1998 from 79% in 1997 as a
result of project activity involving lower labor and benefit costs than in 1997.

Sales and Marketing Expense. Sales and marketing expense increased $0.4
million, or 39%, to $1.5 million in 1998 from $1.0 million in 1997. The increase
was primarily the result of hiring

132
<PAGE> 140

additional full time personnel to support the sale of packaged software to
carriers and increased participation in trade shows.

Research and Development Expense. Research and development expense
increased $0.2 million, or 100%, to $0.4 million in 1998 from $0.2 million in
1997. The increase was primarily the result of our initial research in the
technology to support Prepaid Wireless products.

General and Administrative Expense. General and administrative expense
increased $0.9 million, or 29%, to $4.0 million in 1998 from $3.1 million in
1997. The increase in general and administrative expense primarily reflects
increased costs for leasing additional facilities and the hiring of additional
staff to support an anticipated increase in volume of business activity.

Depreciation and Amortization Expense. Depreciation and amortization
expense increased $0.1 million, or 33%, to $0.4 million in 1998 from $0.3
million in 1997. Increased depreciation and amortization of TCS' property and
equipment resulted from investment in infrastructure to support the volume of
business activity, particularly product development.

Interest Expense and Other Financing Costs. Interest expense and other
financing costs increased $0.3 million, or 23%, to $1.6 million in 1998 from
$1.3 million in 1997 due to increased average outstanding borrowings, including
a $5.0 million term note obtained in the third quarter of 1997. Other financing
costs consisted of amortization of debt discounts and deferred financing costs,
which represented approximately $0.3 million in 1998 and $0.2 million in 1997.

Net Income (Loss). Net income decreased $0.9 million in 1998 from $0.9
million in 1997 due to the factors described above.

INCOME TAXES

From January 1, 1993 through December 14, 1999, TCS elected to be treated
as an S corporation for federal income tax purposes under Subchapter S of the
Code and accordingly, TCS was not subject to federal and state income taxes
during that period. TCS terminated its S corporation status on December 14,
1999, and upon termination determined the differences between the financial
reporting and income tax bases of its assets and liabilities. These differences
were recorded as deferred tax assets or liabilities, and the net difference was
reported as income tax expense in 1999. TCS recorded $2.4 million of income tax
expense for the period from December 14, 1999 through December 31, 1999,
primarily representing deferred taxes incurred as a result of deducting software
development costs for tax purposes when incurred, rather than capitalizing and
amortizing such costs in accordance with generally accepted accounting
principles for financial reporting purposes. TCS recorded a $2.3 million tax
benefit in the nine months ended September 30, 2000. This benefit resulted from
TCS' ability to reduce its deferred tax liabilities by the tax effect of its net
operating loss for the period.

LIQUIDITY AND CAPITAL RESOURCES

In August 2000, TCS completed its initial public offering and raised net
proceeds (after expenses of the offering) of approximately $83.1 million. As of
September 30, 2000 TCS had unrestricted cash of $67.9 million and working
capital of $76.6 million. Prior to its initial public offering, TCS financed its
operations and capital expenditures through various lending arrangements,
revenue from its operations and, more recently in December 1999, through the
sale of redeemable convertible preferred stock. TCS' lending arrangements have
provided funding through a line of credit, term notes and capital lease
obligations.

TCS' net cash provided by operating activities was $0.5 million in 1997,
$0.5 million in 1998 and $1.2 million in 1999. TCS used $5.2 million of cash for
operations for the nine months

133
<PAGE> 141

ended September 30, 2000, an increase of $4.3 million compared to the $0.9
million utilized in the same period in 1999. The $1.2 million of net cash
generated by operating activities for the year ended December 31, 1999 reflects
the net loss of $1.3 million offset by non-cash expenses of $5.0 million and net
changes in working capital of $2.6 million, primarily related to the timing of
accounts receivable collections and payment on accounts payable. Earnings before
non-cash charges declined from $2.7 million for the nine months ended September
30, 1999 to $(0.5) million for the nine months ended September 30, 2000.

Working capital as of September 30, 2000 was $76.6 million compared to $4.2
million as of December 31, 1999. The increase in working capital is a direct
result of the completion of TCS' initial public offering during the third
quarter.

Cash used in investing activities was $2.2 million in 1997, $2.7 million in
1998, $5.2 million in 1999 and $3.0 million for the nine months ended September
30, 2000. Cash used in investing activities primarily reflects the investments
made for the development of its network application software products in each
period. These expenditures consisted of direct labor, related overhead and other
direct costs. TCS expects that its expenditures related to software development
will continue to increase in the future.

Cash provided by financing activities was $2.5 million in 1997, $1.8
million in 1998 and $6.9 million in 1999. Cash provided by financing activities
was $72.8 million in the first nine months of 2000, mainly due to its initial
public offering completed in the third quarter of 2000. TCS used a portion of
its $83.1 million of proceeds from its initial public offering to reduce its
debt by $9.3 million. The cash flows for the nine months ended September 30,
2000 reflect payments under capital leases and long-term debt.

TCS has an $8.0 million revolving line of credit facility with a lending
institution that bears interest at a rate of prime plus 1.5% (11% as of
September 30, 2000). It is secured by assigned accounts receivable and is
cancelable by the lender upon 60 days' written notice. As of September 30, 2000,
no borrowings were outstanding under the line of credit and approximately $8.0
million was available for borrowing.

As of September 30, 2000, TCS' most significant commitments consisted of
obligations under noncancelable operating leases for office space and equipment.
TCS has commitments of approximately $7.1 million that are payable through 2005,
$1.3 million of which are payable in 2000.

TCS expects its operating expenses to grow significantly, particularly as a
result of the expansion of our sales and marketing operations, increased
research and development activities and further development of our network
infrastructure. The amounts and timing of these expenditures will vary depending
upon the pace at which TCS expands, the amount of cash generated by its
operations and competitive and technological developments.

TCS is using the net remaining proceeds from its initial public offering
for working capital and general corporate purposes, including expansion of its
sales and marketing operations, including significantly increasing its direct
sales force; and research and development, including enhancements of its
existing software products.

TCS believes that its cash and cash equivalents, and the funds anticipated
to be generated from operations will be sufficient to finance its operations for
at least the next twelve months. Although, TCS currently believes that it has
sufficient capital resources to meet its anticipated working capital and capital
expenditures requirements beyond the next twelve months, unanticipated events
and opportunities may make it necessary for TCS to return to the public

134
<PAGE> 142

markets or establish new credit facilities or raise capital in private
transactions in order to meet its capital requirements.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 1999, the SEC staff issued Staff Accounting Bulleting 101,
Revenue Recognition in Financial Statements ("SAB 101"). SAB 101 explains how
the SEC believes existing rules for revenue recognition should be applied to
transactions not specifically addressed by existing rules. In October 2000, the
SEC staff issued a Frequently Asked Questions Document ("FAQ") on SAB 101 to
assist with implementation questions. TCS will be required to adopt SAB 101 in
the fourth quarter of 2000, and based upon a preliminary review of the SAB and
the FAQ, management believes the adoption of SAB 101 will have no effect on TCS'
reported operating results.

In December 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
98-9, or SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, with
Respect to Certain Transactions. SOP 98-9 requires recognition of revenue using
the residual method for multiple element software arrangements. TCS adopted SOP
98-9 in 2000, and there was no effect on its results of operations.

In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting Derivative Instruments and Hedging Activities. The Statement,
which TCS will be required to adopt in January 2001, provides a comprehensive
and consistent standard for the recognition and measurement of derivatives and
hedging activities. Management believes that the adoption of Statement 133 will
have no effect on TCS' financial statements as TCS currently does not conduct
hedging activities or purchase derivative financial instruments.

IMPACT OF YEAR 2000

During 1999, TCS completed its remediation and testing of systems to become
Year 2000 compliant. TCS experienced no significant disruptions in mission
critical information technology and non-information technology systems and
believes these systems successfully responded to the Year 2000 date change. TCS
is not aware of any material problems resulting from Year 2000 issues, either
with its products, internal systems, or the products and services of third
parties. TCS will continue to monitor its mission critical computer systems and
those of its suppliers and vendors throughout the year 2000 to ensure that any
latent Year 2000 matters that may arise are addressed promptly.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

TCS has limited exposure to financial market risks, including changes in
interest rates. The interest rate on TCS' revolving line of credit facility
varies depending on the lender's prime rate. A hypothetical 100 basis point
increase in the lender's prime rate would have an immaterial annual impact on
TCS' results of operations. TCS' capital leases have fixed interest rates;
therefore, changes in interest rates will not materially impact TCS' results of
operations. TCS has invested the net proceeds of its initial public offering in
cash equivalents which are interest-rate sensitive. However, these investments
have short maturities mitigating their sensitivity to interest rates. TCS
believes that the effect, if any, on reasonably possible near-term changes in
interest rates on its financial position, results of operations and cash flows
is not material.

135
<PAGE> 143

BUSINESS OF XYPOINT CORPORATION

OVERVIEW

XYPOINT hosts an operating platform for wireless location, commerce and
other value added services, and is a leading provider of enhanced 911 (E-911)
services to wireless carriers. XYPOINT's scalable platform incorporates a
wireless application development toolkit that can provide access to a wireless
subscriber's location information with the permission of the wireless carrier.
XYPOINT also designed its technology to enable the extension of web based
activities, including e-commerce, to the mobile environment and to assist in the
development and provision of additional location-based services and
applications. XYPOINT launched commercial E-911 services in 1998 and currently
has agreements to provide such services to over 15 wireless carriers located in
the United States. E-911 services have represented substantially all of
XYPOINT's revenue to date.

Accurate location information is a fundamental element needed to deliver
relevant, time sensitive services to mobile device users. XYPOINT's proprietary
operating platform, which transmits (rather than determines) location
information, enables wireless carriers to deliver location relevant applications
and content to mobile devices. XYPOINT's platform also enables content
providers, merchants and corporations to allow their customers and employees to
access and act upon relevant information using a variety of wireless devices.

XYPOINT offers the following proprietary services that rely on its
operating platform:

- E-911 service -- provides location determination infrastructure compliant
with the Federal Communications Commission's E-911 mandate; and

- WebWirelessNow, a group of services that include Nomad and
Infolinks -- enables wireless users to receive and interact with data
originating on the Internet or corporate intranets.

In addition, XYPOINT has a variety of commercial location and non-location
related services and applications under development that are designed to
leverage XYPOINT's existing operating platform.

XYPOINT originally developed its technology platform to enable wireless
carriers to comply with the FCC's E-911 call routing and location information
delivery requirements. XYPOINT designed its platform to interact simultaneously
with telephony networks, the Internet, and with a full range of voice and data
user-interface mediums. The platform leverages the wireless network control
channel; standard protocols such as XML and http to translate Internet content;
and voice and data user-interface mediums, including voice recognition,
text-to-speech, wireless applications protocol (WAP), short messaging services
(SMS) and paging, to deliver messages and content to mobile devices. The
technology platform, which is compatible with a wide variety of wireless
standards, networks and equipment, provides access to applications through a
messaging gateway and speech-recognition engines. A wide variety of applications
can operate over XYPOINT's platform, allowing wireless carriers to offer
customers a broad range of customized services, and to brand the services with
the carrier's specific user interface.

INDUSTRY OVERVIEW AND BACKGROUND

In 1996, the FCC mandated that by April 1, 1998, wireless carriers must be
able to report the callback number and originating cell sector of a 911 call
upon the request of an authorized

136
<PAGE> 144

public safety organization (Phase I compliance). Additionally, by October 1,
2001, the FCC will require wireless carriers to provide the location of 911
callers within a 125 meter accuracy in 67% of cases (Phase II compliance). The
European Union is currently investigating similar directives for a European
emergency system. Although Phase I compliance is not widespread, the FCC mandate
provided the impetus for industry participants to develop and test location
determination technologies and commercial applications for wireless location
based services.

MARKET OPPORTUNITY

The use of wireless communications services has grown rapidly due to many
factors, including declining prices of wireless handsets and services, expanding
network coverage, the availability of extended service features such as voice
and text messaging, and the proliferation of wireless devices with enhanced
capabilities. Faced with intense competition, wireless carriers are searching
for ways to increase revenue and profit margins, and to reduce customer churn by
offering customers differentiated services. Wireless carriers, content providers
and merchants can offer targeted, timely and relevant services to their
customers by appropriately leveraging wireless device location information. The
Strategis Group estimates that total revenues for wireless location services in
the United States will exceed $6.9 billion in 2004.

To comply with the FCC's mandate, wireless carriers are required to offer
Phase II E-911 service by October 2001. XYPOINT believes that wireless carriers
will demand that vendors' solutions meet stringent carrier grade requirements
for reliability and scalability across a variety of network standards and
configurations.

XYPOINT'S SOLUTION

XYPOINT provides an operating platform and related software applications
that allow wireless carriers to provide value-added voice and data services. The
key benefits of XYPOINT's solution are as follows:

COMPATIBILITY. XYPOINT designed its technology platform to operate on
different wireless networks and air interfaces, as well as to integrate with a
variety of wireless location determination technologies and wireless Internet
protocols.

SCALABILITY AND EXTENDIBILITY. XYPOINT's platform and applications are
highly scalable and meet high carrier grade standards. In addition, XYPOINT's
platform can be extended to reach multiple mobile device types, including
numeric and two-way pagers, personal digital assistants (PDAs), and handheld
computers.

FLEXIBILITY. XYPOINT's applications and services can be deployed as an
application suite or individually, depending on the wireless carrier's or other
service provider's needs. XYPOINT's operating platform may be used independently
of the applications and services XYPOINT provides and may be combined with
applications of third party-providers. XYPOINT's platform enables wireless
carriers to offer a broad range of customized services, and to brand the
services with the carrier's specific user interface.

XYPOINT'S PRODUCTS

LOCATION BASED SERVICES

XYPOINT's location based initiatives are described below:

- E-911. XYPOINT's E-911 service works with wireless carriers and local
emergency services in compliance with the FCC's mandate. When a wireless
subscriber covered by

137
<PAGE> 145

this service makes an E-911 call from his or her wireless phone, XYPOINT
(1) identifies the call as an emergency call, (2) accesses the handset's
location information from the wireless network, (3) routes the call to
the appropriate 911 jurisdiction, (4) translates the information into a
user friendly format, and (5) transmits the data to the local emergency
service call center. XYPOINT's E-911 service operates on a platform that
resides at XYPOINT's two fully redundant data centers in Seattle,
Washington and Phoenix, Arizona. XYPOINT currently provides E-911
services to more than 15 wireless carriers, including Verizon and US
Cellular, and serves more than 5 million of these carriers' wireless
subscribers.

- OTHER LOCATION SERVICES. XYPOINT is adapting its location platform and
wireless gateway, currently used to provide E-911 services, to perform
location aggregation, processing, and transmission for commercial
location services. Practical applications for commercial location
services include localized yellow pages, driving directions and roadside
assistance. Such services may use either cell sector or precise location
determination, and may be enhanced using other XYPOINT intelligent
messaging capabilities, including SMS messaging and voice recognition
technology. XYPOINT expects to initiate a first trial of commercial
location services with a national U.S. wireless carrier in the first
quarter of 2001. Other key components of XYPOINT's commercial location
services offerings are under development, including privacy and presence
management.

WEBWIRELESSNOW

XYPOINT's WebWirelessNow services are designed to enable end users to
receive and interact with data originating on the Internet or on corporate
intranets. XYPOINT's WebWirelessNow services allow users to send and receive
information using wireless handsets or other mobile devices through technologies
including text messaging (SMS or WAP), text-to-voice, voice recognition and
voice-to-audio files. Unlike other solutions dependent upon WAP-enabled wireless
phones or migration to a Generalized Packet Radio Service, XYPOINT's
WebWirelessNow solution is designed to support both existing and future
signaling protocols. XYPOINT's service platform is carrier-, network equipment-
and handset- independent. XYPOINT's initial WebWirelessNow service offerings are
described below:

- NOMAD. The Nomad service is designed to enable end users to receive and
respond to e-mail messages using any digital wireless handset. When
leaving the desktop environment, users direct Nomad through a desktop
agent to alert the user when they receive an e-mail message in their main
inbox. Nomad will send a text message directly to any SMS capable
wireless device. Upon receiving an alert, the end user can chose to (i)
listen to the entire message using XYPOINT's text-to-voice capability,
and (ii) respond to the message by creating an audio recording that Nomad
sends (as an audio file) in an e-mail response message. To listen to the
response, the original e-mail's sender clicks on the message link and
hears (via streaming audio, wave files or MP3) the Nomad user's voice
message. This service is currently available using an easily downloaded
agent either directly from the WebWirelessNow Website or through selected
distributors. XYPOINT is currently negotiating a distribution agreement
with a major provider of hosted web e-mail services to offer the Nomad
service.

- INFOLINKS. XYPOINT designed Infolinks to familiarize consumers and web
content providers with XYPOINT's technological capabilities and launched
the service at the Internet World show on April 4, 2000. A free service,
Infolinks is designed to enable
138
<PAGE> 146

users to pull content such as stock quotes, traffic and weather reports,
flight schedules, and sports scores from selected websites to their
wireless device on demand. This content is transmitted to the wireless
device using text messaging. To promote the use of this service, XYPOINT
provides web content providers with a downloadable application
programming interface that enables wireless access to content on their
web sites through Infolinks.

CUSTOMERS

WIRELESS CARRIERS

XYPOINT's existing customers are wireless carriers that contracted for
E-911 services in compliance with the FCC's Phase I mandate. XYPOINT intends to
license applications, such as the WebWirelessNow Nomad and Infolinks services,
to wireless carriers for distribution and resale to wireless subscribers.
XYPOINT has existing wireless carrier relationships through its E-911 business
and intends to cross-sell commercial location based wireless services and other
value added applications to these, and other carriers. Wireless carriers
represent a favorable distribution channel due to their large customer bases,
strong marketing infrastructures, and pre-existing billing capabilities. XYPOINT
uses its direct salesforce to sell services to wireless carriers.

Three individual wireless carriers that are now part of Verizon Wireless
accounted for approximately 63% of revenues for the year ended December 31, 1999
and 70% of revenues for the nine months ended September 30, 2000. Taking into
account Verizon Wireless' announced acquisition of Price Communications
Corporation's wireless business, Verizon accounted for 77% of revenues for the
nine months ended September 30, 2000. In addition, CellularOne (Indiana), a
subsidiary of BellSouth Corporation, and Centennial Cellular Corp. accounted for
15% and 14%, respectively, of XYPOINT's 1999 revenue.

ENTERPRISES

XYPOINT's target enterprise customers include companies that could utilize
XYPOINT's services to provide their customers and employees with a secure and
easy means to interact with Internet content or corporate intranets via a
wireless device. The platform can be easily extended to reach multiple mobile
device types, including numeric and two-way pagers, PDAs, and handheld
computers. Enterprise customers, including e-commerce companies, Internet
content providers, software application developers and merchants, are expected
to become significant targets of XYPOINT's sales and marketing efforts. XYPOINT
plans to leverage such customers' user bases to deploy location based services
and other value-added applications on a mass-market basis. XYPOINT expects to
sell to enterprise customers primarily through third party distributors. XYPOINT
has numerous relationships with content providers and location technology
companies that it expects will help to facilitate the provision of commercial
wireless services by XYPOINT.

XYPOINT has not generated any revenue to date from the provision of
services or applications to enterprise customers.

SALES AND MARKETING

XYPOINT markets and sells its operating platform, services and applications
to wireless carriers primarily through its direct sales force. XYPOINT markets
and sells to enterprise customers primarily through third party resellers. For
example, XYPOINT recently entered into

139
<PAGE> 147

a distribution agreement for its WebWirelessNow Nomad service with Multiple
Zones, a major national distributor of personal computers. XYPOINT is also
negotiating a distribution agreement with a major provider of hosted web e-mail
services, to provide Nomad service to that company's e-mail users.

TECHNOLOGY

XYPOINT believes that one of its principal strengths is its proprietary,
internally developed technology. XYPOINT designed its operating platform and
applications to provide a network- and device-independent platform for the
creation and delivery of location based services for wireless users. XYPOINT's
applications can be deployed on a variety of computer hardware and operating
systems to satisfy the requirements of wireless carrier customers. XYPOINT
designed each component of its applications and services to work within wireless
carrier's networks and satisfy telecommunications industry standards. In
addition, XYPOINT licenses certain speech recognition technology and
text-to-speech technology for use in its services.

RESEARCH AND DEVELOPMENT

XYPOINT's research and development group has considerable experience in
software development and familiarity with location determination technologies.
As of September 30, 2000, XYPOINT had 30 employees engaged in research and
product development activities. XYPOINT's research and development expenditures
were approximately $2.9 million for the nine months ended September 30, 2000,
$1.8 million for the year ended December 31, 1999, and approximately $1.9
million for the year ended December 31, 1998.

INTELLECTUAL PROPERTY

XYPOINT relies on a combination of trade secrets, non-disclosure and other
contractual arrangements, as well as patent, copyright and trademark laws to
protect its proprietary rights. XYPOINT currently has rights under two issued
United States patents. In addition, XYPOINT has filed five United States patent
applications. XYPOINT has obtained three registered trademark registrations on
its product names from the United States Patent and Trademark Office and has
several such registrations pending.

COMPETITION

The markets for XYPOINT's services and applications are becoming
increasingly competitive. XYPOINT expects that it will compete primarily on the
basis of the functionality, price, breadth, time to market, ease of integration
and quality of its products and services. XYPOINT competes with a variety of
companies that operate in the E-911 business, in commercial location services
business, and that provide data and voice applications for wireless devices.
With sufficient time and capital, XYPOINT believes it would be possible for its
competitors to replicate its products and services. It is also possible that
XYPOINT may compete against current or future partners to the extent that such
partners also offer wireless location services and applications, which could
result in the termination of XYPOINT's relationships with these industry
partners.

Many of XYPOINT's existing and potential competitors have substantially
greater financial, technical, marketing and distribution resources than XYPOINT
does. Additionally, many of these companies have greater name recognition and
more established relationships with target

140
<PAGE> 148

customers. Furthermore, these competitors may be able to adopt more aggressive
pricing policies and offer customers more attractive terms than XYPOINT can.

In the E-911 business, XYPOINT competes primarily with third party
providers, including SCC Corporation, and with local exchange carriers that
provide the service principally to their wireless affiliates. XYPOINT uses its
own location platform to provide E-911 services. Several third party providers
use SignalSoft Corporation's location platform to offer E-911 services. XYPOINT
expects to partner with vendors of precise location technology to provide Phase
II compliant E-911 services. Certain of XYPOINT's partners may attempt to
compete with XYPOINT's operating platform by developing their own transmission
platform or by purchasing another mobile location platform.

The markets for commercial location and other mobile wireless applications
are relatively new and continually developing. The convergence of wireless
technologies and the Internet is creating a multitude of initiatives to bring
data and transaction capabilities to wireless devices. There is a wide array of
potential competitors in this market, including providers of competing location
management platforms, competing e-mail products, and other competing
applications for wireless devices. Companies sponsoring WAP based services and
handset and infrastructure providers have devoted significant resources to
creating a market for WAP enabled devices as the superior method for
facilitating wireless/Internet connectivity. XYPOINT's applications and
services, although compatible with WAP, are not dependent on it. In addition,
certain of these companies have announced their intention to develop a mobile
location manager that could compete with XYPOINT's infrastructure.

EMPLOYEES

As of November 30, 2000, XYPOINT had 93 full-time employees. XYPOINT
believes its relations with its employees to be good. None of its employees are
represented by a union.

PROPERTIES

XYPOINT's principal executive office is located in Seattle, Washington in a
22,406 square foot facility under a lease that expires in April 2004. XYPOINT
also has a hosting facility in Phoenix, Arizona in a 1,387 square foot office
under a lease that expires in February 2004.

141
<PAGE> 149

SELECTED FINANCIAL DATA
XYPOINT CORPORATION

The table that follows presents portions of XYPOINT's financial statements
and is not complete. You should read the following selected financial data
together with XYPOINT's financial statements and related notes and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the more complete financial information included elsewhere in
this proxy statement/prospectus. XYPOINT has derived the statement of operations
data for the years ended December 31, 1997, 1998 and 1999 and the balance sheet
data as of December 31, 1998 and 1999 from XYPOINT's financial statements which
have been audited, and are included in this prospectus beginning on page F-24.
XYPOINT has derived the statement of operations data for the years ended
December 31, 1995 and 1996 and the balance sheet data as of December 31, 1995,
1996 and 1997 from its audited financial statements which are not included in
this proxy statement/prospectus. XYPOINT has derived the statement of operations
data for the nine months ended September 31, 1999 and 2000 from its unaudited
financial statements included in this proxy statement/prospectus beginning on
page F-24 which include, in XYPOINT's opinion, all adjustments, consisting only
of normal recurring adjustments, that its management considers necessary for the
fair presentation of XYPOINT's financial position and results of operations for
those periods. The historical results presented below for the nine months ended
September 30, 2000 are not necessarily indicative of the results to be expected
for any future period.

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------- -----------------
1995 1996 1997 1998 1999 1999 2000
----- ------- ------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue................................... $ -- $ -- $ -- $ 239 $ 2,207 $ 1,332 $ 5,553
OPERATING EXPENSES:
Operations................................ -- -- -- 2,250 2,813 2,024 2,863
Field marketing and deployment............ -- -- -- 1,609 1,209 1,014 748
Sales and marketing....................... 51 280 1,404 1,253 639 539 1,575
Research and development.................. 50 584 2,862 1,871 1,794 1,229 2,912
General and administrative................ 380 1,388 1,802 1,705 1,970 1,388 1,896
Stock option and warrant compensation... 280 108 328 75 370 93 1,153
Restructuring charge...................... -- -- -- -- 181 166 --
Depreciation and amortization............. 7 197 758 1,271 1,710 1,282 1,261
----- ------- ------- -------- ------- ------- -------
Total other operating expenses.......... 768 2,557 7,154 10,034 10,686 7,735 12,408
----- ------- ------- -------- ------- ------- -------
LOSS FROM OPERATIONS........................ (768) (2,557) (7,154) (9,795) (8,479) (6,403) (6,855)
Interest, net and other expenses............ (12) (48) (144) 156 (59) (29) (124)
----- ------- ------- -------- ------- ------- -------
Net loss.................................... $(780) $(2,605) $(7,298) $ (9,639) $(8,538) $(6,432) $(6,979)
===== ======= ======= ======== ======= ======= =======
ACCRETION OF PREFERRED STOCK................ -- -- (81) (274) (431) (324) (330)
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS.............................. $(780) $(2,605) $(7,379) $ (9,913) $(8,969) $(6,756) $(7,309)
===== ======= ======= ======== ======= ======= =======
LOSS PER COMMON SHARE:
Basic and diluted........................... $ -- $ -- $ -- $(892.74) $(57.10) $(66.82) $(15.65)
Basic and diluted shares used in
computation............................... -- -- -- 11,104 157,084 101,099 467,067
</TABLE>

142
<PAGE> 150

<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
---------------------------------------------- SEPTEMBER 30,
1995 1996 1997 1998 1999 2000
---- ------- ------- -------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................... $ 80 $ 1,342 $ 5,091 $ 10,780 $ 3,949 $ 7,333
Working capital (deficit)....................... (14) 1,500 4,250 9,384 3,524 6,197
Total assets.................................... 390 3,577 7,410 14,828 9,343 13,237
Long-term capital lease obligations............. 10 538 782 1,167 1,004 610
Total liabilities............................... 469 1,307 1,820 3,329 3,428 4,085
Redeemable convertible preferred stock.......... -- -- 10,372 26,092 26,523 36,589
Convertible preferred stock..................... -- 4,706 5,970 5,951 7,424 7,427
Total shareholders' equity (deficit)............ (79) 2,270 (4,781) (14,592) (20,608) (27,438)
</TABLE>

143
<PAGE> 151

XYPOINT CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

XYPOINT commenced operations on August 12, 1993 as Sentinel Corporation, a
Washington corporation, as a Subchapter S corporation. In April 1995, XYPOINT
terminated its S Corporation status and became subject to corporate level
federal income taxes and certain additional state income taxes. In February
1996, its name was changed to XYPOINT Corporation.

From inception, XYPOINT has been engaged in research and development on
location related technologies. Beginning in 1996, XYPOINT began to devote
substantial resources to build a service platform and test the market
opportunity for providing E-911 services to wireless carriers. Prior to 1998,
XYPOINT was a pre-revenue, development stage enterprise and had not yet
completed the development of the technical aspects of its service platform. In
1998, XYPOINT entered into several significant E-911 agreements with wireless
carriers and launched the service on a commercial basis. In 1998, when
deployment began, XYPOINT began to incur expenditures related to the commercial
provision of E-911 services. Such costs are reflected under "Operations Expense"
and "Field Marketing and Deployment" in XYPOINT's statements of operations.
During 1999, XYPOINT initiated research activities to extend its service
platform, through the use of messaging and voice technology, to include wireless
connectivity to digital data originating on the Internet and on corporate
networks.

XYPOINT generated total revenue of approximately $239,000 in 1998, $2.2
million in 1999 and $5.6 million for the nine months ended September 30, 2000.
XYPOINT had no revenue in 1997. Substantially all revenue to date has been from
the provision of E-911 services. XYPOINT incurred net losses of approximately
$7.3 million in 1997, $9.6 million in 1998, $8.5 million in 1999 and $7.0
million for the nine months ended September 30, 2000. As of September 30, 2000,
XYPOINT had an accumulated deficit of $37.1 million.

REVENUE

XYPOINT's revenue to date has substantially been derived from the provision
of E-911 services. E-911 revenues are earned on a monthly recurring basis and
commence when XYPOINT activates E-911 service in a particular area. The amount
of revenue

144
<PAGE> 152

received is generally related to the number of subscribers a particular wireless
carrier serves in activated areas.

OPERATIONS EXPENSE

Operations expense consists of costs of personnel and related expenses,
data communications costs, and hardware and software maintenance costs, in each
case incurred in connection with operating XYPOINT's platform. Operations
expense does not include depreciation of equipment.

FIELD MARKETING AND DEPLOYMENT

Field marketing and deployment consists of costs of personnel and related
expenses, such as travel, related to marketing and advising public safety
organizations regarding its customers' E-911 service, in addition to actual
deployment of the E-911 solution.

RESEARCH AND DEVELOPMENT

Research and development expenses include costs of personnel and related
expenses associated with the research, design, experimentation, development,
testing and quality control of XYPOINT's products. As a service bureau, certain
of XYPOINT's research and development activities are subject to capitalization
under SOP 98-1 ("Software Developed for Internal Use"). XYPOINT's activities to
date have been experimental in nature and related to unproven commercial
markets. As such, no research and development expenses have been capitalized.

GENERAL AND ADMINISTRATIVE

General and administrative expenses generally consist of costs of personnel
and related expenses associated with administrative functions, as well as
expenses associated with professional services, internal telecommunications,
facilities expense and human resources. These costs include compensation and
benefits, rent, utilities and other facilities costs which are expensed as
incurred.

SALES AND MARKETING

Sales and marketing expenses consist of costs of personnel and related
expenses for personnel in sales and marketing functions; and expenses associated
with promotional activities, advertising and trade shows.

STOCK OPTION AND WARRANT COMPENSATION

Stock option and warrant compensation expense consists of expenses
associated with stock options granted to employees at less than deemed fair
market value and warrants issued to consultants and commercial partners related
to commercial service arrangements.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization consists of depreciation and amortization
expenses related to property, plant and equipment, including purchased computer
software. Depreciation and amortization is computed using the straight-line
method over the useful lives of the assets.

145
<PAGE> 153

RESULTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1999

REVENUE. Revenue increased approximately 317% from $1.3 million for the
nine months ended September 30, 1999 to $5.6 million for the nine months ended
September 30, 2000. The increase in revenue during 2000 resulted primarily from
an increase in commercial deployment of XYPOINT's E9-1-1 service. At September
30, 2000, XYPOINT had completed commercial deployments in fifteen states and was
generating monthly recurring revenue based on deployments completed of
approximately $900,000 per month.

OPERATIONS EXPENSE AND FIELD MARKETING AND DEPLOYMENT EXPENSE. Operations
expense increased approximately 41% from $2.0 million for the nine months ended
September 30, 1999 to $2.9 million for the nine months ended September 30, 2000.
This amount reflects the increase in expenditures required to support the
greater number of active E-911 deployments and the increase in transactions
processed on XYPOINT's service platform. Field marketing and deployment expense
decreased approximately 26% from $1.0 million for the nine months ended
September 30, 1999 to $748,000 for the nine months ended September 30, 2000,
primarily as a result of a reduction in field deployment personnel in the second
quarter of 1999. On a combined basis these expense categories increased
$573,000, or approximately 19%, from 1999 to 2000 compared to the 317% increase
in revenue in the same period, reflecting increasing operational leverage as
E-911 volume increases.

RESEARCH AND DEVELOPMENT. Research and development expense increased
approximately 137% from $1.2 million for the nine months ended September 30,
1999 to $2.9 million for the nine months ended September 30, 2000. The increase
in research and development expenses primarily resulted from research and
development efforts associated with XYPOINT's WebWirelessNow services.

GENERAL AND ADMINISTRATIVE. General and administrative expense increased
approximately 37% from $1.4 million for the nine months ended September 30, 1999
to $1.9 million for the nine months ended September 30, 2000. The increase was
primarily the result of internal information systems enhancements.

SALES AND MARKETING. Sales and marketing expense increased approximately
192% from $539,000 for the nine months ended September 30, 1999 to $1.6 million
for the nine months ended September 30, 2000. This is primarily the result of
XYPOINT building up its sales force, developing sales channels, and increasing
its marketing activities significantly as it prepares for the introduction of
new services.

STOCK OPTION AND WARRANT COMPENSATION. Stock option and warrant
compensation expense increased from $93,000 for the nine months ended September
30, 1999 to $1.2 million for the nine months ended September 30, 2000 due to
accelerated amortization of warrants issued in connection with a commercial
service agreement which expired unexercised.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization remained
constant at $1.3 million for the nine months ended September 30, 1999 and
September 30, 2000. This resulted from capital expenditures related to the E-911
business being approximately equal to assets becoming fully depreciated.

146
<PAGE> 154

OTHER INCOME (EXPENSE). Other income (expense) increased from an expense
of $29,000 for the nine months ended September 30, 1999 to an expense of
$124,000 for the nine months ended September 30, 2000. This resulted from lower
interest income as invested balances declined.

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

REVENUE. Revenue increased to $2.2 million in 1999 from $239,000 in 1998.
This increase was primarily the result of increased deployment of XYPOINT's
E-911 services. As of December 31, 1999, XYPOINT had monthly recurring revenue
of $355,000 and its wireless E-911 services were deployed in eleven states. At
December 31, 1998, XYPOINT had completed commercial deployment in two states and
was generating monthly recurring revenue based on deployments completed of
approximately $80,000.

OPERATIONS EXPENSE AND FIELD MARKETING AND DEPLOYMENT EXPENSE. Operations
expense increased approximately 25% from $2.3 million for 1998 to $2.8 million
for 1999. The increase was primarily the result of the higher volume of
recurring service provided. Field marketing and deployment expense decreased
approximately 25% from $1.6 million for 1998 to $1.2 million for 1999, primarily
as a result of XYPOINT adjusting its level of activity to correspond with the
then available market opportunity in the wireless E-911 area.

RESEARCH AND DEVELOPMENT. Research and development expense decreased
approximately 4% from $1.9 million for 1998 to $1.8 million 1999. The decrease
in research and development expenses primarily resulted from XYPOINT shifting
its principal focus from development to deployment and operations.

GENERAL AND ADMINISTRATIVE. General and administrative expense increased
approximately 16% from $1.7 million for 1998 to $2.0 million for 1999. The
increase was due to a general increase in overhead activities associated with a
growing company.

SALES AND MARKETING. Sales and marketing expense decreased approximately
49% from $1.3 million for 1998 to $639,000 for 1999. This decrease is primarily
the result of adjusting activity to available market opportunity for wireless
E-911 service.

STOCK OPTION AND WARRANT COMPENSATION. Stock option and warrant
compensation expense increased from $75,000 for 1998 to $370,000 for 1999 due to
warrants granted to consultants and corporate partners.

RESTRUCTURING CHARGE. A $180,000 restructuring charge was incurred in
1999. This consisted of severance expense related to a reduction in force due to
slower deployment of E-911 service. All such costs were fully paid by December
31, 1999.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased approximately 35% from $1.3 million for 1998 to $1.7 million for 1999.
This increase primarily resulted from an increase in capital equipment
associated with opening two new data centers and a new headquarters facility.

OTHER INCOME (EXPENSE). Other income (expense) declined from income of
$156,000 for 1998 to an expense of $59,000 for 1999. This resulted from lower
interest income as invested balances declined and higher interest expense due to
greater amounts financed under capital leases.

147
<PAGE> 155

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

REVENUE. Revenue increased to $239,000 in 1998 from no revenue in 1997.
This increase was the result of the initiation of commercial E-911 service in
limited geographic areas.

OPERATIONS EXPENSE AND FIELD MARKETING AND DEPLOYMENT EXPENSE. Operations
expense of $2.3 million and field marketing and deployment expense of $1.6
million were incurred in 1998 compared to no such expenses in 1997. These
expenses were incurred in connection with the initiation of commercial E-911
services in 1998.

RESEARCH AND DEVELOPMENT. Research and development expense decreased
approximately 35% from $2.9 million for 1997 to $1.9 million for 1998. The
decrease in research and development expenses primarily resulted from XYPOINT
shifting its principal focus from development to deployment and operations.

GENERAL AND ADMINISTRATIVE. General and administrative expense decreased
approximately 5% from $1.8 million for 1997 to $1.7 million for 1998. The
decrease was the result of normal fluctuations in administrative activities.

SALES AND MARKETING. Sales and marketing expense decreased approximately
11% from $1.4 million for 1997 to $1.3 million for 1998. This decrease is
primarily the result of reduced carrier sales activities in the fourth quarter
of 1998 as most carriers had decided on a wireless E-911 provider.

STOCK OPTION AND WARRANT COMPENSATION. Stock option and warrant
compensation expense decreased from $328,000 for 1997 to $75,000 for 1998 due to
lower amortization of expense related to stock options granted at less than fair
market value.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
approximately 68% from $758,000 for 1997 to $1.3 million for 1998. This increase
primarily reflects an increase in capital assets in XYPOINT's data center and
network operations center.

OTHER INCOME (EXPENSE). Other income (expense) increased from an expense
of $144,000 for 1997 to income of $156,000 for 1998. This resulted from
additional interest income as invested balances increased.

INCOME TAXES

XYPOINT has incurred taxable operating losses since inception and has never
paid federal or state income taxes. Therefore, XYPOINT has provided reserves
against the full amount of deferred tax assets generated. As of December 31,
1999, XYPOINT had net operating loss carryforwards of approximately $27.4
million which begin to expire in 2007. The utilization of these carryforwards is
subject to substantial limitations.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, XYPOINT has financed its operations primarily through
private offerings of convertible preferred stock. The aggregate proceeds of such
offerings through September 30, 2000, were approximately $42.0 million, net of
issuance costs. In addition, XYPOINT has financed operations through capitalized
leases. As of September 30, 2000, the principal amounts outstanding under these
obligations totaled $1.6 million.

148
<PAGE> 156

For 1999, 1998, and 1997 XYPOINT used cash for operations of $6.1 million,
$8.4 million, and $5.6 million, respectively. In addition, XYPOINT used cash for
the purchase of fixed assets of $1.0 million, $441,000, and $500,000,
respectively, during the same periods and used cash of $1.26 million, $744,000,
and $440,000, respectively, for the payment of capital lease obligations during
the same periods. For 1999, 1998 and 1997, XYPOINT financed operations through
sales of convertible preferred stock as follows: $1.5 million for 1999, $15.4
million for 1998 and $10.3 million for 1997. In addition, XYPOINT acquired
assets by capital lease in the amount of $900,000 for 1999, $1.8 million for
1998 and $1.0 million for 1997. Through December 31, 1999, XYPOINT had $29.8
million of accumulated losses. At December 31, 1999, XYPOINT had cash of $3.9
million and working capital of $3.5 million.

During the nine months ended September 30, 2000, XYPOINT raised $10.0
million of net proceeds from the sale of its Series E convertible preferred
stock in August 2000 and $500,000 from capital leases. For the nine months ended
September 30, 2000, XYPOINT used cash of $4.8 million for operations, $939,000
for capital asset purchases, and $894,000 for the payment of capital lease
obligations. At September 30, 2000, XYPOINT had cash balances of $7.3 million
and working capital of $6.2 million. XYPOINT believes the sale of additional
equity securities or other funding sources will be necessary before June 30,
2001.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 1999, the SEC staff issued Staff Accounting Bulleting 101,
Revenue Recognition in Financial Statements ("SAB 101"). SAB 101 explains how
the SEC believes existing rules for revenue recognition should be applied to
transactions not specifically addressed by existing rules. In October 2000, the
SEC staff issued a Frequently Asked Questions Document ("FAQ") on SAB 101 to
assist with implementation questions. XYPOINT will be required to adopt SAB 101
in the fourth quarter of 2000, and based upon a preliminary review of the SAB
and the FAQ, management believes the adoption of SAB 101 will have no effect on
XYPOINT's reported operating results.

In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting Derivative Instruments and Hedging Activities. The Statement,
which XYPOINT will be required to adopt in January 2001, provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. Management believes that the adoption of
Statement 133 will have no effect on XYPOINT's financial statements as the
Company currently does not conduct hedging activities or purchase derivative
financial instruments.

IMPACT OF YEAR 2000

During 1999, XYPOINT completed testing of its systems to become Year 2000
compliant, including the installation of Year 2000 software "patches" made
available by third party technology providers. XYPOINT did not experience any
significant disruptions in mission critical information technology related to
its operating technology platform or internal systems and believes these systems
successfully responded to the Year 2000 date change. XYPOINT is not aware of any
material problems resulting from Year 2000 issues, either with its products,
internal systems, or the products and services of third parties. XYPOINT will
continue to monitor its mission critical computer systems and those of its

149
<PAGE> 157

suppliers and vendors throughout the year 2000 to ensure that any latent Year
2000 matters that may arise are addressed promptly.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

XYPOINT has limited exposure to financial market risks, including changes
in interest rates. XYPOINT has historically invested its excess cash reserves in
overnight repurchase agreements and its interest income is therefore dependent
on current rates of interest offered. XYPOINT's long-term debt consists
primarily of capital leases which have fixed interest rates; therefore, changes
in interest rates will not materially impact its results of operations.

150
<PAGE> 158

MANAGEMENT OF TELECOMMUNICATION SYSTEMS, INC.

DIRECTORS AND EXECUTIVE OFFICERS

The names and ages of TCS' directors and executive officers as of November
30, 2000 were as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Maurice B. Tose..................... 43 President, Chief Executive Officer and Chairman
of the Board
Richard A. Young.................... 53 Executive Vice President and Chief Operating
Officer
Thomas M. Brandt, Jr................ 49 Senior Vice President and Chief Financial
Officer
Drew A. Morin....................... 39 Senior Vice President and Chief Technical
Officer
Timothy J. Lorello.................. 43 Senior Vice President Network Intelligence
Donald C. Hubbard, Jr............... 43 Senior Vice President of Corporate Development
William J. Todd..................... 50 Senior Vice President of Business Development
and Corporate Affairs
Clyde A. Heintzelman................ 62 Director
Andrew C. Barrett................... 59 Director
Richard A. Kozak.................... 54 Director
Weldon H. Latham.................... 53 Director
Byron F. Marchant................... 43 Director
Timothy P. Bradley.................. 39 Director
Daniel Tseung....................... 29 Director
</TABLE>

MAURICE B. TOSE has served as TCS' Chief Executive Officer and Chairman of
the Board since December 1999. He has been its President since he founded the
company in 1987. From 1986 to 1987, Mr. Tose was Director of U.S. Department of
Defense Programs for Techmatics, Inc., a systems integration company. Mr. Tose
was a member of the United States Navy for eight years. Currently, he is a
Commander in the U.S. Naval Reserves. During his military career, Mr. Tose held
various technical management positions on ships at sea as well as staff
positions at the U.S. Naval Academy and the U.S. Secretary of Defense. Mr. Tose
holds a B.S. degree in Operations Analysis from the U.S. Naval Academy.

RICHARD A. YOUNG has served as TCS' Executive Vice President and Chief
Operating Officer since 1998 and has served TCS in various other capacities
since 1992. From 1989 to 1992, Mr. Young was a Senior Manager for ICF
Information Technology, Inc., a custom application software company. From 1986
to 1989, Mr. Young served as a member of the United States Navy where he
obtained the position of Director of the Information Systems Department for the
Naval Recruiting Command. Mr. Young holds a B.S. degree in Engineering from the
U.S. Naval Academy and holds a M.S. degree in Information Technology from the
Naval Postgraduate School.

THOMAS M. BRANDT, JR. has served as TCS' Senior Vice President and Chief
Financial Officer since joining us in April 1997. Prior to joining TCS, Mr.
Brandt was Senior Vice President and the Chief Financial Officer of DIGEX, Inc.,
an Internet service provider. From 1993 to 1996, Mr. Brandt worked for Price
Waterhouse as a director. He currently is on the board of directors of
AmericasBank Corp. and Optelecom, Inc. Mr. Brandt is a

151
<PAGE> 159

certified public accountant. He holds a B.A. in Management Science and Economics
from Duke University and an M.B.A. from the Wharton School of Business of the
University of Pennsylvania.

DREW A. MORIN has served as TCS' Senior Vice President and Chief Technology
Officer since 1995 and has served TCS in various other capacities since 1988.
For five years prior to joining TCS, Mr. Morin worked at BDM Corporation, a
systems integration company where he designed, developed and implemented
communication systems. Mr. Morin holds a B.S. degree in Systems Engineering from
the University of Virginia and a M.S. degree in Systems Engineering from George
Mason University.

TIMOTHY J. LORELLO has served as TCS' Senior Vice President -- Network
Intelligence since 1999. He served as TCS' Vice President -- Network
Intelligence from 1998 to 1999. Previously, he served as TCS' Director of
Network Intelligence from 1995 to 1998. From 1983 to 1995, Mr. Lorello worked
for AT&T/Bell Labs Network Systems, now known as Lucent Technologies, Inc.,
where he provided marketing and services to the cellular, PCS, independent and
broadband intelligent network industry segments. Mr. Lorello holds a B.S. degree
in Physics from the University of Chicago and a M.S. degree in Electrical
Engineering from Northwestern University.

DONALD C. HUBBARD, JR. has served as TCS' Senior Vice President of
Corporate Development since August 2000. Prior to joining TCS, Mr. Hubbard was
the Chief Financial Officer and Head of Corporate Development of Digiplex, S.A.,
a unified communications exchange company. From 1999 to 2000, Mr. Hubbard was an
investment banker and co-head of the Technology Group at Morgan Stanley. From
1998 to 1999, Mr. Hubbard worked for UBS Warburg as an investment banker and
head of the Internet and Software group. From 1992 to 1998, Mr. Hubbard worked
for Alex. Brown & Sons as an investment banker in the Merger and Acquisitions
and Private Equity Group. Earlier he was a corporate finance attorney with
Wilmer, Cutler & Pickering, and an officer in the U.S. Navy's SEAL Teams. Mr.
Hubbard holds a B.S. degree from the U.S. Naval Academy and a J.D. degree from
the University of Maryland School of Law.

WILLIAM J. TODD has served as TCS' Senior Vice President of Business
Development and Corporate Affairs since September 2000. Prior to joining TCS,
Mr. Todd worked in numerous management positions for Bell Atlantic from 1972 to
2000. Mr. Todd also served with Bell Atlantic as a loaned executive to the
Rainbow/PUSH Wall Street Project. Mr. Todd holds an A.S. in Electrical
Engineering from Temple University.

CLYDE A. HEINTZELMAN joined TCS' Board of Directors in December 1999. Mr.
Heintzelman has been the President of Net2000 Communications Corporation since
November 1999. Prior to joining Net2000 Communications Corporation, Mr.
Heintzelman was the President and Chief Executive Officer of SAVVIS
Communications Corporation, a networking and Internet solutions company. From
1995 to 1998, Mr. Heintzelman was also the President and Chief Operating Officer
of DIGEX, Inc. Prior to joining DIGEX, Inc., Mr. Heintzelman was a General
Manager for Bell Atlantic Directory Services. Mr. Heintzelman also serves on the
Board of Directors of Net2000 Communications Corporation, Optelecom, Inc. and
SAVVIS Communications Corporation. Mr. Heintzelman holds a B.A. degree in
Marketing from the University of Delaware.

ANDREW C. BARRETT joined TCS' Board of Directors in May 2000. Mr. Barrett
has been the Managing Director of The Barrett Group, Inc., a communications
consulting company, since 1997. From 1989 to 1996, Mr. Barrett served as a
Commissioner of the Federal

152
<PAGE> 160

Communications Commission. From 1980 to 1989, Mr. Barrett served as a
Commissioner of the Illinois Commerce Commission. Mr. Barrett holds a B.A.
degree from Roosevelt University of Chicago, a M.A. degree from Loyola
University of Chicago and a J.D. degree from DePaul University.

RICHARD A. KOZAK joined TCS' Board of Directors in December 1999. Mr. Kozak
founded and has been the Chief Executive Officer and Chairman of the Board of
Directors of 1eEurope, Ltd., formerly Galileo Communications, Ltd., a portfolio
of companies focused on providing integrated data, information technology
network connectivity and electronic commerce services to mid and large-size
companies throughout Europe since 1998. From 1993 to 1997, Mr. Kozak was the
President and Chief Executive Officer and member of the Board of Directors of
American Communications Services, Inc., now known as e.spire Communications,
Inc., which he founded in 1993. Prior to forming American Communications
Services, Inc., Mr. Kozak was the President of the Southern Division of MFS
Communications, which was acquired by MCI WorldCom. From 1986 through 1989, Mr.
Kozak was Vice President and General Manager of Global Messaging Services for
GTE Telenet, now part of Sprint International. He holds a B.S. degree in
Engineering from Brown University and a M.B.A. in Finance from The George
Washington University School of Government and Business Administration.

WELDON H. LATHAM joined TCS' Board of Directors in December 1999. Mr.
Latham has been a senior partner at the law firm of Holland & Knight since July
2000. From 1992 to 2000, Mr. Latham was a partner at the law firm of Shaw
Pittman Potts & Trowbridge. From 1986 to 1992, Mr. Latham was a managing partner
at the law firm Reed, Smith, Shaw and McClay. From 1981 to 1986, Mr. Latham was
the Vice President and General Counsel of Sterling Systems Inc., a software
company which was acquired by Planning Research Corporation (PRC). Mr. Latham
continued his employment at PRC as the Executive Assistant and Counsel to the
Chief Executive Officer and Chairman of the Board. From 1979 to 1981, Mr. Latham
was employed as the General Deputy Assistant Secretary at the Department of
Housing and Urban Development. Mr. Latham holds a B.A. degree in Business
Administration from Howard University and a J.D. degree from Georgetown
University Law Center.

BYRON F. MARCHANT joined TCS' Board of Directors in December 1999. Mr.
Marchant has been the Executive Vice President and Chief Administration Officer
of BET Holdings, Inc. since 1997. Prior to joining BET, Mr. Marchant was a
partner in the law firm Patton Boggs, LLP. From 1995 to 1996, Mr. Marchant was
TCS' Senior Vice President and General Counsel. Mr. Marchant holds a B.S. degree
from the U.S. Naval Academy and a J.D. degree from the University of Virginia
Law School.

TIMOTHY P. BRADLEY joined TCS' Board of Directors in December 1999. Mr.
Bradley co-founded and has been Managing Partner of Signal Equity Partners,
L.P., a private equity fund focused on the telecommunication and information
technology industries, since 1996. Mr. Bradley also co-founded Signal Partners,
LLC, a financial advisory firm. Mr. Bradley was a general partner at the Exeter
Group from 1993 to 1996 where he managed a private equity and mezzanine
portfolio. Prior to working in the private equity industry, Mr. Bradley
practiced law in New York City. Mr. Bradley also currently serves on the Board
of Directors of FiberNet Telecom Group, Inc. Mr. Bradley holds a B.A. degree
from Yale University, a J.D. degree from New York University School of Law and a
M.B.A. degree from Columbia Business School.

153
<PAGE> 161

DANIEL TSEUNG joined TCS' Board of Directors in December 1999. Mr. Tseung
recently joined SUNeVision, a technology company based in Hong Kong. From March
1998 to April 2000, Mr. Tseung was employed as a Director in the Technology and
Communications Group of GE Capital Equity Investments, Inc., a private equity
investment entity owned by General Electric. From June 1997 to February 1998,
Mr. Tseung was an associate at GE Capital. Mr. Tseung holds a B.A. degree from
Princeton University and an M.A. degree from Harvard University.

BOARD COMPOSITION

TCS' Board of Directors consists of eight individuals. Each director is
elected for a one-year term at TCS' annual meeting of stockholders and serves
until the next annual meeting or until his successor is duly elected and
qualified. The executive officers are appointed by and serve at the discretion
of the Board of Directors. There are no family relationships between any of TCS'
directors or officers.

COMPENSATION COMMITTEE

TCS' compensation committee currently consists of Messrs. Clyde A.
Heintzelman, Weldon H. Latham and Timothy P. Bradley. The compensation committee
recommends, reviews and oversees the salaries of TCS' executive officers as well
as the benefits and stock options for all TCS' employees, directors and other
individuals compensated by TCS. The compensation committee also administers TCS'
incentive compensation and benefit plans.

AUDIT COMMITTEE

TCS' audit committee currently consists of Messrs. Richard A. Kozak, Byron
F. Marchant and Clyde A. Heintzelman. The audit committee reviews, acts on and
reports to the Board of Directors with respect to various auditing and
accounting matters, including the recommendation of TCS' independent public
accountants, the results and scope of the audits and other services provided by
TCS' independent public accountants, the performance of and the fees to be paid
to TCS' independent public accountants, TCS' accounting procedures and the
adequacy of TCS' internal controls.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

None of TCS' executive officers has served as a member of the compensation
committee, or other committee serving an equivalent function, of any other
entity, whose executive officers served as a director of or a member of TCS'
compensation committee.

DIRECTOR COMPENSATION

TCS does not have any established compensation arrangements with its
directors. Directors are paid $500 per board or committee meeting attended and
are reimbursed for their reasonable expenses incurred in connection with the
attendance at board and committee meetings. In the future, TCS may adopt new
compensation arrangements for TCS' directors. Directors are eligible to receive
options to purchase common stock under TCS' option plans.

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE. The following table shows all compensation
earned in each of the last three years by TCS' Chief Executive Officer and TCS'
four other most highly paid executive officers whose annual salary and bonus
exceeded $100,000 in the

154
<PAGE> 162

fiscal year ended December 31, 1999. The following table includes payments made
to each of these executive officers in lieu of accrued vacation in the column
captioned "Other Annual Compensation" and matching contributions made by TCS
under its 401(k) plan and health and life insurance premiums paid by TCS' in the
"All Other Compensation" column. Mr. Brandt joined TCS in April 1997.

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------
--------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
--------------------------- ---- -------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Maurice B. Tose.............. 1999 $300,000 $53,500 $29,447 -- $15,942
President, Chief Executive 1998 344,776 -- 25,913 -- 15,152
Officer and Chairman 1997 313,717 -- 24,231 -- 8,629
of the Board
Richard A. Young............. 1999 195,000 5,150 15,001 -- 12,013
Executive Vice President and 1998 193,406 -- 14,604 113,678 11,111
Chief Operating Officer 1997 182,250 -- 14,020 173,995 5,944
Thomas M. Brandt, Jr......... 1999 159,406 2,000 2,956 137,672 12,222
Senior Vice President and 1998 150,000 -- -- 78,592 11,620
Chief Financial Officer 1997 48,750 -- -- 65,244 2,465
Drew A. Morin................ 1999 151,968 2,000 11,058 -- 11,366
Senior Vice President and 1998 148,751 -- 8,413 -- 13,012
Chief Technical Officer 1997 134,584 -- 5,538 869,973 5,654
Timothy J. Lorello........... 1999 151,968 3,375 14,423 -- 7,222
Senior Vice President -- 1998 150,000 -- 9,014 143,258 6,371
Network Intelligence 1997 121,354 -- 4,632 521,984 5,944
</TABLE>

OPTIONS GRANTS DURING 1999

The following table sets forth information regarding options granted to
TCS' named executive officers during the fiscal year ended December 31, 1999.
TCS granted these incentive stock options under its Amended and Restated 1997
Stock Incentive Plan. The options have ten-year terms, subject to earlier
termination upon death, disability or termination of employment, and vest 30% on
July 29, 1999, 20% on July 29, 2000, 20% on July 29, 2001, 20% on July 29, 2002
and 10% on July 29, 2003. TCS recommends caution in interpreting the financial
significance of the figures in the following table representing the potential
realizable value of the stock options. They are calculated by multiplying the
number of options granted by the difference between a future hypothetical stock
price and the option exercise price and are shown pursuant to rules of the
Securities and Exchange Commission. They are not intended to forecast possible
future appreciation, if any, of TCS stock price or to establish a present value
of options. Actual gains, if any, on

155
<PAGE> 163

stock option exercises will depend on the future performance of TCS Class A
common stock.

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------------------- VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF
NUMBER OF TOTAL OPTIONS STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM
OPTION IN FISCAL PRICE PER EXPIRATION -----------------------
NAME GRANTED YEAR(1) SHARE DATE 5%($) 10%($)
---- ---------- ------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Maurice B. Tose........ -- -- -- -- -- --
Richard A. Young....... -- -- -- -- -- --
Thomas M. Brandt,
Jr. ................. 137,672 10.7% $1.28 4/01/09 $3,676,150 $5,656,562
Drew A. Morin.......... -- -- -- -- -- --
Timothy J. Lorello..... -- -- -- -- -- --
</TABLE>

------------------------------

(1) Based upon options to purchase an aggregate of 1,290,894 shares of TCS'
Class A common stock granted to employees in 1999.

YEAR-END OPTION VALUES

The following table provides information about options held by the named
executive officers as of December 31, 1999. No options were exercised by any
named executive officer or director during 1999. The value of unexercised
in-the-money options at year-end is based on the initial public offering price
of $17.00 per share, less the exercise price per share, multiplied by the number
of shares underlying the options.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1999 DECEMBER 31, 1999
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Maurice B. Tose............................. -- -- -- --
Richard A. Young............................ 149,868 137,805 $ 2,528,273 $2,324,770
Thomas M. Brandt, Jr........................ 97,500 184,008 1,588,275 2,997,490
Drew A. Morin............................... 869,973 -- 14,772,142 --
Timothy J. Lorello.......................... 370,493 294,749 6,268,742 4,987,153
</TABLE>

BENEFIT PLANS

STOCK INCENTIVE PLAN

In 1997, TCS adopted a stock incentive plan to promote its long-term growth
and profitability by providing its employees, directors and consultants with
incentives to improve stockholder value and to contribute to our growth and
financial success. The plan was amended and restated in April, 2000. TCS
believes the plan will assist it in attracting, retaining and rewarding the best
available people. Unless terminated earlier or amended by TCS' Board of
Directors, the plan will terminate on April 11, 2010. A total of 8,904,110
shares of TCS Class A common stock have been reserved for issuance under the
plan. Options to purchase 3,285,088 shares of TCS Class A common stock are
outstanding at a weighted average exercise price of $4.01 per share, 3,408,804
shares have been issued upon exercise of outstanding options and 2,210,218
shares remained available for future grant. No more than an aggregate of
8,904,110 shares of TCS Class A common stock, plus the number of any shares
surrendered to us in connection with any award, may be issued under stock
incentive plan awards. These share amounts may be adjusted for future stock
dividends, spin-offs, split-ups, recapitalizations, mergers, consolidations,
business combinations, exchanges of shares and the like. TCS' Board of Directors
has the authority to amend or terminate the plan at anytime.

156
<PAGE> 164

The compensation committee of TCS' Board of Directors has been given broad
authority to administer the plan and determine the size and terms of all awards
under the plan, including the number of shares subject to the option, exercise
price, term and exercisability. The compensation committee may grant the
following types of awards under TCS' plan to its employees, officers, directors
and consultants:

- incentive and nonstatutory stock options;

- stock appreciation rights;

- restricted and unrestricted stock awards;

- phantom stock awards;

- performance awards; and

- other stock-based awards.

The following is a summary of the types of awards that TCS may grant under
its stock incentive plan:

Stock Options. The compensation committee may grant options to purchase
shares of TCS Class A common stock intended to qualify as incentive stock
options under the Internal Revenue Code and options that do not qualify as
incentive stock options. The exercise price of each option will be determined by
the compensation committee, but the exercise price of any incentive stock option
may not be less than the fair market value of TCS Class A common stock on the
date of grant.

The term of each option will be fixed by the compensation committee, but
the term of any incentive stock option may not exceed 10 years from the date of
grant. The compensation committee will determine the vesting of each option and
the period of time, if any, after retirement, death, disability or termination
of employment during which options may be exercised. Options may vest in
installments. The vesting of options may be accelerated by the compensation
committee. No option may be transferred by the optionee other than by will or
the laws of descent or distribution. Each option may be exercised during the
lifetime of the optionee only by the optionee.

To exercise an option, the optionee must pay the exercise price in full
either in cash or cash equivalents or by delivery of shares of common stock
already owned by the optionee. The exercise price may also be delivered by a
broker under irrevocable instructions to the broker from the optionee. As of
November 30, 2000, TCS had incentive stock options to purchase 2,745,009 shares
of TCS Class A common stock outstanding, non-qualified stock options to purchase
540,079 shares of TCS Class A common stock outstanding and 3,408,804 shares of
TCS Class A common stock had been issued upon exercise of stock options granted.

Stock Appreciation Rights. The compensation committee may grant a right to
receive a number of shares, an amount in cash or a combination of shares and
cash, based on the increase in the fair market value of the shares of TCS Class
A common stock underlying the right during a period specified by the
compensation committee. The compensation committee may grant these stock
appreciation rights alone or in connection with stock options. Upon exercise of
a stock appreciation right that is related to a stock option, the holder will
surrender the option for the number of shares as to which the stock appreciation
right is exercised and will receive payment of an amount computed as described
in the stock appreciation right award. A stock appreciation right granted in
connection with a stock option will usually be exercisable at the time or times,
and only to

157
<PAGE> 165

the extent that, the related stock option is exercisable and will not be
transferable except to the extent the related option is transferable. As of
November 30, 2000, the compensation committee had not awarded any stock
appreciation rights.

Restricted and Unrestricted Stock. The compensation committee may also
award shares of TCS Class A common stock to participants. These stock awards may
be conditioned on the achievement of performance goals and/or continued
employment with TCS through a specified restriction period. If the performance
goals and any other restrictions are not attained, the holder will forfeit his
or her restricted shares. The compensation committee may also grant shares of
TCS' Class A common stock that are free from any restrictions under the stock
incentive plan. Unrestricted shares of TCS' Class A common stock may be issued
to participants in recognition of past services or in lieu of cash compensation.
The purchase price, if any, for shares of TCS Class A common stock under stock
awards will be determined by the compensation committee. As of November 30,
2000, the compensation committee had not awarded any restricted or unrestricted
shares of TCS Class A common stock.

Phantom Stock Awards. The compensation committee may also grant phantom
stock awards to participants. These awards are contractual rights that are
equivalent in value to, but not actual shares of, TCS Class A common stock.
Phantom stock awards may be conditioned on the achievement of performance goals
and/or continued employment with TCS through a specified date. The compensation
committee will determine the time or times when a participant will be paid the
value of the phantom stock award, and the payment may be in cash, in shares of
TCS Class A common stock or in a combination of cash and shares of TCS Class A
common stock. Because phantom stock awards are not actual shares of TCS' Class A
common stock, they do not have any voting rights. As of November 30, 2000, the
compensation committee had not granted any phantom stock awards.

Performance Stock Awards. The compensation committee may also grant
performance stock awards to receive shares of TCS Class A common stock upon
achievement of performance goals and other conditions determined by the
compensation committee. As of November 30, 2000, the compensation committee had
not granted any performance stock awards.

Other Stock-Based Awards. The compensation committee is authorized to
grant to participants other awards that may be based on or related to TCS Class
A common stock or other securities. These could include:

- convertible or exchangeable debt securities;

- other rights convertible or exchangeable into shares;

- purchase rights for shares or other securities; and

- incentive awards with value and payment contingent upon performance.

The compensation committee will determine whether other stock-based awards
will be paid in shares of TCS Class A common stock, other securities, cash or in
some combination. As of November 30, 2000, the compensation committee had not
granted any other stock-based awards.

EMPLOYEE STOCK PURCHASE PLAN

In April, 2000, TCS adopted an employee stock purchase plan. The purchase
plan, which became effective upon its adoption by TCS' Board of Directors,
provides for the

158
<PAGE> 166

issuance of up to 684,932 shares of TCS Class A common stock. This plan, which
is intended to qualify under Section 423 of the Internal Revenue Code, provides
TCS' employees with an opportunity to purchase shares of TCS' Class A common
stock through payroll deductions.

The compensation committee of TCS' Board of Directors has been given broad
authority to administer its purchase plan. All of TCS' employees, including
directors who are employees, are eligible to participate in the purchase plan.
Options to purchase TCS Class A common stock will be granted on the first
trading day on or after February 1 of each year, or such other date as
determined by the compensation committee. Each option will terminate on the last
trading day of a period specified by the compensation committee and no option
period will be longer than 27 months in duration. Subsequent option periods of
equal duration will consecutively follow, unless the compensation committee
determines otherwise.

Each option represents a right to purchase shares of TCS Class A common
stock. The compensation committee determines the purchase price of each share of
Class A common stock, provided that the purchase price will never be less than
the lesser of 85% of the fair market value of shares of TCS Class A common stock
at the beginning or end of the option period.

Any employee who immediately after a grant owns 5% or more of the total
combined voting power or value of TCS' capital stock may not be granted an
option to purchase Class A common stock under the purchase plan. Participation
may also be limited where rights to purchase stock under all other purchase
plans accrue at a rate which exceeds $25,000 of the fair market value of TCS
Class A common stock for each calendar year.

401(K) PLAN

TCS has adopted a 401(k) plan in which all eligible employees are entitled
to make pre-tax contributions. This plan is intended to qualify under Section
401 of the Internal Revenue Code of 1986, as amended, so that contributions by
employees or by TCS to the plan, and income earned on plan contributions, are
not taxable to employees until withdrawn from the plan, and so that
contributions by TCS, if any, will be deductible by TCS when made. All full-time
employees become eligible for participation in the plan on the date of their
employment. Eligible participants can elect to make contributions to the plan
and such contribution amounts are subject to certain limitations under the
Internal Revenue Code. On a discretionary basis, TCS may match contributions
made by participating employees under the plan. As of June 15, 2000, TCS has
been making contributions to participants in the plan in an amount equal to 50%
of the amount of the participating employee's contribution, up to a maximum of
15% percent of such employee's salary. At the direction of each employee
participating in TCS' plan, TCS invests the assets of the plan in any of 35
investment options. TCS' contributions under the plan were approximately $0.2
million and $0.4 million in 1998 and 1999, respectively.

EMPLOYMENT AGREEMENTS

TCS currently does not have any employment agreements with its named
executive officers.

159
<PAGE> 167

CERTAIN TRANSACTIONS RELATING TO TELECOMMUNICATION SYSTEMS, INC.

SALES OF TCS SECURITIES

Pursuant to a stock purchase agreement dated December 14, 1999, TCS sold
1,706,000 shares of TCS Series A preferred stock to each of GE Capital Equity
Investments, Inc. (GE Capital) and Signal Equity Partners, L.P. (Signal Equity)
on substantially the same terms and conditions for an aggregate purchase price
of $10.0 million. The outstanding shares of the Series A preferred stock
converted into an aggregate of 3,505,479 shares of TCS Class A common stock, or
TCS Common Stock, immediately upon the completion of its initial public
offering. In connection with the stock purchase agreement, TCS granted GE
Capital and Signal Equity each the right to select in August, 2000 a director
upon the closing of the transaction. Signal Equity's selection is Timothy
Bradley. GE Capital's selection, Daniel Tseung, recently resigned from GE
Capital and GE Capital has chosen not to designate a successor to TCS' Board of
Directors. Daniel Tseung continues to serve on TCS' Board of Directors. The
right of each of GE Capital and Signal Equity to select a director terminated
upon the consummation of TCS' initial public offering.

TRANSACTION WITH TIMOTHY J. LORELLO

In August 1999, TCS loaned Timothy J. Lorello, its Senior Vice
President -- Network Intelligence, $125,000, evidenced by a promissory note
bearing interest at the applicable federal rate per annum. In that connection,
Mr. Lorello executed a Stock Option Cancellation Agreement in which he agreed to
cancel 102,740 of his options to purchase shares of TCS Common Stock. Pursuant
to the agreement, one-third of his loan is forgiven and one-third of his options
are canceled annually over three years. This annual loan forgiveness and
cancellation of options is contingent upon Mr. Lorello's continued employment.
The balance of the loan is immediately due and payable if Mr. Lorello ceases to
be one of TCS' employees.

TRANSACTIONS WITH MAURICE B. TOSE

On December 10, 1999, Maurice B. Tose, TCS' President, Chief Executive
Officer and Chairman of the Board, borrowed approximately $1.4 million from Bank
of America. Concurrently, Mr. Tose loaned TCS approximately $1.4 million
evidenced by a promissory note bearing interest at 7.32% per annum. On December
13, 1999, TCS deposited approximately $1.4 million in a certificate of deposit
at Bank of America as security for its indebtedness to Mr. Tose. The certificate
of deposit will mature on January 31, 2001. Until December 14, 1999, TCS
qualified and had elected to be treated as a Subchapter S corporation for
federal and state income tax purposes. An S corporation's losses may be used by
the corporation's stockholders on their personal tax returns to offset salary
and other taxable income to the extent of the stockholder's "basis" in the
corporation, or the amount the stockholder has "at risk" in the corporation. The
aforementioned loan transaction was conducted to increase Mr. Tose's basis in
TCS and thereby facilitate his ability to offset his salary and other taxable
income with TCS' losses in order to reduce his personal income tax liability.

TCS recently entered into discussions with Annapolis Partners, LLC
regarding the possible relocation of its headquarters in Annapolis, Maryland.
Annapolis Partners is a recently formed limited liability company in which Mr.
Tose has a significant equity interest. Annapolis Partners has been selected by
Anne Arundel County, Maryland to redevelop a 42-acre waterfront site in
Annapolis, Maryland formerly operated by the U.S.

160
<PAGE> 168

Navy. TCS anticipates spending approximately $0.2 million to develop
architectural plans for the new headquarters. Some or all of this amount may be
paid to Annapolis Partners. The parties have agreed that should TCS enter into a
lease for office space at the site, Annapolis Partners will reimburse TCS for
all of these costs either in the form of a cash reimbursement or through a
reduction of future rent.

TRANSACTION WITH ANDREW C. BARRETT

On May 30, 2000, TCS entered into a consulting agreement with The Barrett
Group, Inc., a communications consulting company controlled by Andrew C.
Barrett. Mr. Barrett serves on TCS' Board of Directors. The Barrett Group will
perform consulting services relating to business development opportunities
available to TCS. The agreement has a 12-month term. The agreement requires TCS
to pay The Barrett Group the sum of $6,000 per month.

TRANSACTION WITH DONALD C. HUBBARD, JR.

On December 5, 2000, TCS loaned Donald C. Hubbard, Jr., its Senior Vice
President of Corporate Development, $1,270,000 evidenced by a promissory note
bearing interest at 6.75% per annum. In that connection, Mr. Hubbard executed
and delivered a Stock Pledge Agreement pledging as security for the loan 250,000
of his options to purchase shares of TCS Common Stock and to cancel such shares
if he fails to repay the loan when due. Mr. Hubbard's option is exercisable at a
price of $22.06 per share. The note will be repaid in five annual installments
of 25%, 25%, 20%, 20% and 10%, respectively, beginning on the first anniversary
of the date of execution. The balance of the loan is immediately due and payable
if Mr. Hubbard ceases to be a TCS employee.

REGISTRATION RIGHTS

On December 14, 1999, TCS entered into a Registration Rights Agreement in
which TCS granted certain registration rights to stockholders and warrant
holders, including GE Capital and Signal Equity, holding an aggregate of
3,505,480 shares of TCS Common Stock. Pursuant to the agreement, these
stockholders have the right, subject to certain restrictions set forth in the
agreement and in lock-up agreements that these stockholders have signed relating
to TCS' initial public offering, to require that TCS registers, at its expense,
on no more than two occasions, any or all of the shares of their TCS Common
Stock that were issued upon the conversion of their Series A preferred stock. In
addition to these demand registration rights, and subject to certain
restrictions set forth in the agreement, these stockholders may require TCS to
file an unlimited number of registration statements on Form S-3 under the
Securities Act once that form is available for TCS' use, which is generally one
year after TCS' initial public offering. In each case, the managing underwriter
has the right to limit the number of securities registered in such required
registration.

The agreement also provides that, if at any time TCS proposes to register
any of its securities under the Securities Act for sale to the public (other
than securities issued in connection with acquisitions), the stockholders who
are parties to the agreement will be entitled to notice of the registration and
will have the right to include their shares in the registration provided that
the managing underwriter will have the right to limit the number of securities
included in the registration. TCS must pay for all expenses in connection with
these registrations, other than underwriters' discounts and commissions.

161
<PAGE> 169

PRINCIPAL STOCKHOLDERS OF TELECOMMUNICATION SYSTEMS, INC.

The following table sets forth information regarding beneficial ownership
of TCS Common Stock as of November 30, 2000 by:

- each person who owns beneficially more than 5% of the outstanding shares
of TCS Class A or Class B common stock;

- each director and each executive officer named in the summary
compensation table; and

- all TCS directors and executive officers as a group.

Unless otherwise indicated below, to TCS' knowledge, all persons named in
the table have sole voting and investment power with respect to their shares of
common stock, except to the extent authority is shared by spouses under
applicable law.

Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. The number of shares beneficially owned by a
person includes shares of TCS Class A common stock subject to options held by
that person that are currently exercisable or exercisable within 60 days of
November 30, 2000. The shares issuable pursuant to these options are deemed
outstanding for computing the percentage ownership of the person holding these
options but are not deemed outstanding for the purposes of computing the
percentage ownership of any other person.

<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES PERCENTAGE OF
BENEFICIALLY OWNED SHARES
SHARES BENEFICIALLY PRIOR TO THE BENEFICIALLY OWNED
OWNED MERGER AFTER THE MERGER
NAME AND ADDRESS OF BENEFICIAL ---------------------- ------------------- -------------------
OWNER(1) A SHARES B SHARES A SHARES B SHARES A SHARES B SHARES
------------------------------ --------- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Maurice B. Tose(2).............. 347,990 10,787,671 2.5% 100% 1.9% 100%
Richard A. Young(3)............. 142,196 -- 1.0 -- * --
Thomas M. Brandt, Jr.(4)........ 148,667 -- 1.1 -- * --
Drew A. Morin(5)................ 852,854 -- 6.2 -- 4.7 --
Timothy J. Lorello(6)........... 409,975 -- 3.0 -- 2.3 --
Clyde A. Heintzelman(7)......... 30,514 -- * -- * --
Andrew C. Barrett............... -- -- -- -- -- --
Richard A. Kozak(7)............. 37,449 -- * -- * --
Weldon H. Latham(7)............. 30,514 -- * -- * --
Byron F. Marchant(7)............ 30,514 -- * -- * --
Timothy P. Bradley (8).......... 1,752,740 -- 12.8 -- 9.7 --
Daniel Tseung (7)............... 7,706 -- * -- * --
Signal Equity Partners,
L.P.(9)....................... 1,752,740 -- 12.8 -- 9.7 --
GE Capital Equity Investments,
Inc.(10)...................... 1,752,740 -- 12.8 -- 9.7 --
All directors and executive
officers as a group (12
persons)(11).................. 5,543,859 10,787,671 39.4% 100% 30.2% 100%
</TABLE>

------------------------------
* Less than 1%
(1) Except as set forth herein, the business address of the named beneficial
owner is c/o TeleCommunication Systems, Inc., 275 West Street, Annapolis,
Maryland 21401.
(2) Under the rules of the Securities and Exchange Commission, Mr. Tose is
deemed to beneficially own 173,995 shares of TCS Common Stock owned by
Teresa M.S. Layden, Mr. Tose's wife. Additionally, Mr. Tose is deemed to
beneficially own 173,995 shares of TCS

162
<PAGE> 170

Class A common stock held in a trust for the benefit of Mr. Tose's and Ms.
Layden's extended family. Mr. Tose disclaims beneficial ownership of all of
these shares.
(3) Under the rules of the Securities Exchange Commission, Mr. Young is deemed
to beneficially own 50,000 shares of TCS Common Stock held in a trust for
the benefit of Mr. Young's wife and children. Mr. Young disclaims
beneficial ownership of all of these shares.
(4) Consists of 56,302 shares of TCS Common Stock issuable upon the exercise of
stock options. Under the rules of the Security Exchange Commission, Mr.
Brandt is deemed to beneficially own 51,370, 8,562 and 8,562 shares of TCS
Common Stock, respectively, held in three separate trusts for the benefit
of Mr. Brandt's wife and children. Mr. Brandt disclaims beneficial
ownership of all of these shares.
(5) Under the rules of the Security Exchange Commission, Mr. Morin is deemed to
beneficially own 256,854 shares of TCS Common Stock held in a trust for the
benefit of Mr. Morin's wife and children. Mr. Morin disclaims beneficial
ownership of all of these shares.
(6) Consists of 153,126 shares of TCS Common Stock issuable upon the exercise
of stock options. Under the rules of the Securities Exchange Commission,
Mr. Lorello is deemed to beneficially own 256,849 shares of TCS Common
Stock held in a trust for the benefit of Mr. Lorello's wife and children.
Mr. Lorello disclaims beneficial ownership of all these shares.
(7) Consists of shares of TCS Class A common stock issuable upon the exercise
of stock options.
(8) Consists of shares of TCS Class A common stock owned by Signal Equity
Partners, L.P. (Signal Equity). Mr. Bradley is Signal Equity's
representative on TCS' Board of Directors. Therefore, beneficial ownership
of the shares of our Class A common stock owned by Signal Equity is
attributed to Mr. Bradley. The address of Mr. Bradley and Signal Equity is
10 East 53rd Street, New York, New York 10022.
(9) The address of Signal Equity Partners, L.P. is 10 East 53rd Street, New
York, New York 10022.
(10) The address of GE Capital Equity Investments, Inc. is 260 Long Ridge Road,
Stamford, Connecticut 06927.
(11) Includes an aggregate of 346,125 shares of Class A common stock issuable
upon exercise of options exercisable within 60 days of November 30, 2000.

163
<PAGE> 171

XYPOINT MANAGEMENT

EXECUTIVE OFFICER

Kenneth A. Arneson will serve as the Senior Vice President - Chief Strategy
Officer of TCS after the merger. No XYPOINT officer or director will serve as a
member of the board of directors of TCS after the merger. Mr. Arneson has served
as XYPOINT's President and Chief Executive Officer and as a member of XYPOINT's
board of directors since February 1996. From 1987 until joining XYPOINT, Mr.
Arneson worked for AT&T Wireless Services Inc. (formerly McCaw Cellular
Communications, Inc.) in a variety of positions. From 1993 to 1996, he was Vice
President of Business Development in the Messaging Division. From 1990 to 1992,
he was its Chief Information Officer and from 1991 to 1992 he was also its Chief
Financial Officer. Mr. Arneson graduated from Washington State University with a
B.A. in Accounting in 1980 and is 42 years old.

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE. The following table shows all compensation
earned in 1999 by Mr. Arneson. The amount included in All Other Compensation
consists of health and life insurance premiums paid by XYPOINT on behalf of Mr.
Arneson.

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------
---------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
---- ---- -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth A. Arneson.............. 1999 $135,000 $ -- $ -- -- $7,609
</TABLE>

OPTIONS GRANTS DURING 1999. XYPOINT granted no options to Mr. Arneson in
1999.

YEAR-END OPTION VALUES. The following table provides information about
options held by Mr. Arneson as of December 31, 1999. No options were exercised
by Mr. Arneson during 1999. The value of unexercised in-the-money options at
year-end is based on the price of XYPOINT common stock on December 31, 1999 of
$0.54 per share as determined by the compensation committee of the XYPOINT board
of directors, less the exercise price per share, multiplied by the number of
shares underlying the options.

CERTAIN TRANSACTIONS RELATING TO XYPOINT

XYPOINT and Mr. Arneson are parties to an employment agreement dated
February 5, 1996, later amended on April 15, 1997 and again on August 2, 2000,
that, among other things, provides for one year's severance if Mr. Arneson is
terminated within one year of a change of control for a reason other than for
cause. This agreement expires on June 30, 2002. TCS expects to enter into an
employment agreement with Mr. Arneson in connection with the merger.

164
<PAGE> 172

PRINCIPAL SHAREHOLDERS OF XYPOINT CORPORATION

The following table sets forth information regarding the beneficial
ownership of XYPOINT capital stock as of November 17, 2000 by:

- each person or entity known by XYPOINT to beneficially own more than 5%
of the outstanding shares of XYPOINT common stock, XYPOINT preferred
stock and both classes of XYPOINT capital stock combined;

- each executive officer and director of XYPOINT; and

- all executive officers and directors of XYPOINT as a group.

Unless otherwise indicated below, to XYPOINT's knowledge, all persons named
in the table have sole voting and investment power with respect to their shares
of capital stock, except to the extent authority is shared by spouses under
applicable law. Unless otherwise indicated, the address of each beneficial owner
listed below is c/o XYPOINT Corporation, 2200 Alaskan Way, 2nd Floor, Seattle,
Washington 98121. The table below reflects the shareholdings on an as-converted
basis.

Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Percentage of beneficial ownership is based on
the following number of shares of XYPOINT capital stock outstanding as of
November 17, 2000 on an as-converted basis, including all options and warrants
for XYPOINT stock currently exercisable or exercisable within 60 days after
November 17, 2000 (assuming no acceleration of vesting of options in connection
with the merger), which in aggregate equal 45,032,081 shares of capital stock:

- 5,762,870 shares of common stock;

- 5,000,000 shares of Series A preferred stock;

- 6,660,216 shares of Series B preferred stock;

- 10,341,548 shares of Series C preferred stock;

- 582,952 shares of Series D preferred stock;

- 6,767,014 shares of Series E preferred stock; and

- 9,917,482 shares of Series X Junior preferred stock.

As of November 17, 2000, there were approximately 47 holders of XYPOINT
common stock, 64 holders of XYPOINT's Series A preferred stock, 58 holders of
XYPOINT's Series B preferred stock, 28 holders of XYPOINT's Series C preferred
stock, 10 holders of XYPOINT's Series D preferred stock, 9 holders of XYPOINT's
Series E preferred stock and 110 holders of Series X Junior preferred stock.
Except as indicated in the footnotes to this table, the persons named in the
table have sole voting and investment power with respect

165
<PAGE> 173

to all shares of XYPOINT capital stock shown as beneficially owned by them,
subject to community property laws where applicable.
<TABLE>
<CAPTION>

XYPOINT XYPOINT TOTAL
COMMON STOCK PREFERRED STOCK XYPOINT SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED BENEFICIALLY OWNED
---------------------- ----------------------- -----------------------
NUMBER OF NUMBER OF NUMBER OF
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES PERCENTAGE SHARES PERCENTAGE SHARES PERCENTAGE
------------------------------------ --------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Named executive officers and
directors
Scott Anderson(1)... 57,500 10.7% 116,279 * 173,779 *
Kenneth Arneson(2)... 2,649,500 84.6% -- * 2,649,500 6.5%
Gregg Blodgett(3)... 421,666 46.7% -- * 421,666 1.1%
John Carleton(4)... 15,000 3.0% 1,513,427 4.0% 1,528,427 4.0%
Reuven Carlyle(5)... 375,000 43.8% -- * 375,000 1.0%
John Clark(6)... 412,499 46.2% -- * 412,499 1.1%
Lawrence Corvari(7)... 500,000 51.0% 25,000 * 525,500 1.4%
Richard M. Johnston(8)... 17,500 3.5% -- * 17,500 *
Greg Kleven(9)... 100,000 20.8% 23,740 * 123,740 *
Joseph Manzinger(10)... 57,500 10.7% 9,081,771 24.1% 9,139,271 23.9%
Terry Scott(11)... 77,500 13.9% -- * 77,500 *
Other 5% Shareholders
The Hillman Company Entities(10).. 57,500 10.7% 9,081,771 24.1% 9,139,271 23.9%
1900 Grant Building
319 Grant Street, 19th Floor
Pittsburgh, PA 15219-2300
William Clise(12)... -- * 3,163,501 8.4% 3,163,501 8.3%
1849 N.W. Roundhill Circle
Seattle, WA 98177
Jill Schmidt Crowson(13)... -- * 2,894,001 7.7% 2,894,001 7.6%
8930 N.E. 13th Street
Clyde Hill, WA 98004
TLcom Capital Partners
Limited(14)... -- * 2,435,065 6.5% 2,435,065 6.4%
Klienwort Benson House
P.O. Box 76, West Centre, St.
Helier
JE4 8PQ, Jersey-Channel Islands
Great Britain
Georgica Partners(15)... -- * 2,285,697 6.1% 2,285,697 6.0%
152 West 57th Street, 46th Floor
New York, NY 10019
Critical Path, Inc.(16)... -- * 1,948,051 5.2% 1,948,051 5.1%
320 First Street
San Francisco, CA 94105
Chartwell Capital Investors(17)... -- * 1,955,448 5.2% 1,955,448 5.1%
One Independent Drive, Suite
3120
Jacksonville, FL 32202
All directors and executive officers
as group (11 people)(18)... 4,684,165 92.5% 10,760,217 28.4% 15,444,382 36.0%

<CAPTION>
TCS COMMON STOCK
BENEFICIALLY OWNED
AFTER THE MERGER
-----------------------
NUMBER PERCENTAGE
OF CLASS A OF CLASS A
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES SHARES
------------------------------------ ---------- ----------
<S> <C> <C>
Named executive officers and
directors
Scott Anderson(1)... 21,475 *
Kenneth Arneson(2)... 440,161 2.6%
Gregg Blodgett(3)... 70,051 *
John Carleton(4)... 127,010 *
Reuven Carlyle(5)... 62,299 *
John Clark(6)... 68,528 *
Lawrence Corvari(7)... 84,613 *
Richard M. Johnston(8)... 2,907 *
Greg Kleven(9)... 18,549 *
Joseph Manzinger(10)... 882,215 5.4%
Terry Scott(11)... 12,875 *
Other 5% Shareholders
The Hillman Company Entities(10).. 882,215 5.4%
1900 Grant Building
319 Grant Street, 19th Floor
Pittsburgh, PA 15219-2300
William Clise(12)... 148,286 *
1849 N.W. Roundhill Circle
Seattle, WA 98177
Jill Schmidt Crowson(13)... 135,653 *
8930 N.E. 13th Street
Clyde Hill, WA 98004
TLcom Capital Partners
Limited(14)... 219,723 1.4%
Klienwort Benson House
P.O. Box 76, West Centre, St.
Helier
JE4 8PQ, Jersey-Channel Islands
Great Britain
Georgica Partners(15)... 234,369 1.4%
152 West 57th Street, 46th Floor
New York, NY 10019
Critical Path, Inc.(16)... 175,778 1.1%
320 First Street
San Francisco, CA 94105
Chartwell Capital Investors(17)... 142,598 *
One Independent Drive, Suite
3120
Jacksonville, FL 32202
All directors and executive officers
as group (11 people)(18)... 1,790,684 10.5%
</TABLE>

------------------------------

* Represents beneficial ownership of less than 1% of the outstanding shares of
the specified class of series of XYPOINT or TCS capital stock.
(1) Includes (i) 57,500 shares subject to an option to purchase common stock
held by Mr. Anderson which is presently exercisable and (ii) 116,279 shares
of Series C preferred stock held by Cedar Grove Investments, LLC. Mr.
Anderson is a director of XYPOINT and an affiliate of Cedar Grove
Investments, LLC.
(2) Consists of 2,649,500 shares subject to an option to purchase common stock
which is presently exercisable.
(3) Consists of 421,666 shares subject to an option to purchase common stock, of
which 383,333 are presently exercisable and 38,333 are exercisable within 60
days of November 17, 2000.
(4) Consists of (i) 15,000 shares subject to an option to purchase common stock
which is presently exercisable, (ii) 80,746 shares of preferred stock
(50,000 of which are Series A preferred stock and 30,746 of which are Series
B preferred stock) held by Mr. John

166
<PAGE> 174

Carleton, (iii) 1,146,450 shares of preferred stock (315,000 of which are
Series A preferred stock, 193,700 of which are Series B preferred stock,
581,396 of which are Series C preferred stock, and 56,354 of which are
Series X Junior preferred stock) and warrants to purchase 130,000 shares of
Series X Junior preferred stock held by The Benaroya Capital Company, of
which Mr. Carleton is a Senior Vice President, and (iv) 47,223 shares of
preferred stock (29,242 of which are Series A preferred stock and 17,981 of
which are Series B preferred stock) held by Benaroya Trust No. 1 and 109,008
shares of preferred stock (67,500 of which are Series A preferred stock and
41,508 of which are Series B preferred stock) held by Benaroya Trust No. 2.
Each of these trusts is established for the benefit of the grandchildren of
Jack Benaroya, a principal of Benaroya Capital Company, and are not
otherwise affiliated with Benaroya Capital Company. Mr. Carleton is a
director of XYPOINT.
(5) Consists of 375,000 shares subject to an option to purchase common stock, of
which 297,916 are presently exercisable and 77,084 are exercisable within 60
of November 17, 2000.
(6) Consists of 412,499 shares subject to an option to purchase common stock
which is presently exercisable.
(7) Includes 500,500 shares subject to an option to purchase common stock which
is presently exercisable and 25,000 shares of Series A preferred stock.
(8) Consists of 17,500 shares subject to an option to purchase common stock
which is presently exercisable. Mr. Johnston is a director of XYPOINT.
(9) Includes 14,781 shares of Series B preferred stock, 2,709 shares of Series X
Junior preferred stock and warrants to purchase 6,250 shares of Series X
Junior preferred stock.
(10) Consists of (i) 882,203 shares of preferred stock (290,697 of which are
Series B preferred stock, 406,977 of which are Series C preferred stock,
131,247 of which are Series E preferred stock, and 53,282 of which are
Series X Junior preferred stock) and warrants to purchase 25,974 shares of
Series E preferred held by the Juliet Lea Hillman '68 Trust, (ii) 882,203
shares of preferred stock (290,697 of which are Series B preferred stock,
406,977 of which are Series C preferred stock, 131,247 of which are Series
E preferred stock, and 53,282 of which are Series X Junior preferred stock)
and warrants to purchase 25,974 shares of Series E preferred held by the
Audrey Hillman '68 Trust, (iii) 882,203 shares of preferred stock (290,697
of which are Series B preferred stock, 406,977 of which are Series C
preferred stock, 131,247 of which are Series E preferred stock, and 53,282
of which are Series X Junior preferred) and warrants to purchase 25,974
shares of Series E preferred stock held by the William T. Hillman '68
Trust, (iv) 882,203 shares of preferred stock (290,697 of which are Series
B preferred stock, 406,977 of which are Series C preferred stock, 131,247
of which are Series E preferred stock, and 53,282 of which are Series X
Junior preferred stock) and warrants to purchase 25,974 shares of Series E
preferred stock held by the Henry Lea Hillman '68 Trust, (v) 2,646,609
shares of preferred stock (872,093 of which are Series B preferred stock,
1,220,930 of which are Series C preferred stock, 393,741 of which are
Series E preferred stock, and 159,845 of which are Series X Junior
preferred stock) and warrants to purchase 77,922 shares of Series E
preferred stock held by the Henry L. Hillman '85 Trust, which is the
controlling shareholder of The Hillman Company and (vi) 2,646,610 shares of
preferred stock (872,094 of which are Series B preferred stock, 1,220,930
of which are Series C preferred stock, 393,741 of which are Series E
preferred stock, and 159,845 of which are Series X Junior preferred stock),
57,500 shares subject to an option to purchase common stock which is
presently exercisable, and warrants to purchase 77,922 shares of Series E
preferred stock held by Juliet Challenger, Inc. which is an indirect,
wholly owned subsidiary of The Hillman Company. Mr. Manzinger is a Vice
President and member of the Board of Directors of The Hillman Company and a
director of XYPOINT. Mr. Manzinger disclaims beneficial ownership in all of
The Hillman Company shares.
(11) Consists of 77,500 shares subject to an option to purchase common stock
which is presently exercisable. Mr. Scott is a director of XYPOINT.
(12) Consists of 3,163,501 shares of Series X Junior preferred stock of which
73,333 shares are held by A.M. Clise, 10,000 shares are held by Deborah
Clise, 118,800 shares are held by Eric and Susan Clise, 200,000 shares are
held by Eric Clise as trustee of the William and Amy Clise Family Trust,
15,000 shares are held by Jocelyn Clise, 5,000 shares are held by Mary
Clise, 73,333 shares are held by Richard Clise, 2,460,917 shares are held
by William Clise, 133,784 shares are held by William and Amy Clise, and
73,334 shares are held by Joyce M. Clise Living Trust.
(13) Consists of 2,894,001 shares of Series X Junior preferred stock, of which
2,694,001 shares are held by Ms. Crowson, 100,000 shares are held by Jan
Kirkwood Waszak as trustee of the Laura Mary Crowson Trust, and 100,000
shares are held by Jan Kirkwood Waszak as trustee of the Nicholas Peter
Crowson Trust.
(14) Consists of 2,403,065 shares of Series E preferred stock.
(15) Consists of (i) 205,581 shares of Series C preferred stock held by Brown
University, (ii) 290,698 shares of Series C preferred stock held by The
Georgica International Fund, (iii) 225,174 shares of Series C preferred
stock held by Oak Foundation U.S.A., and (iv) 290,698 shares of Series C
preferred stock held by South Fork Partners.
(16) Consists of 1,948,051 shares of Series E preferred stock.
(17) Consists of (i) 1,000,000 shares of Series A preferred stock, (ii) 413,889
shares of Series B preferred stock, (iii) 290,698 shares of Series C
preferred stock, (iv) 75,861 shares of Series X Junior preferred stock, and
(v) a warrant to purchase 175,000 shares of Series X Junior preferred
stock.
(18) Includes 100,000 shares of common stock, 4,526,665 shares subject to an
option to purchase common stock which is exercisable within 60 days of
November 17, 2000, 75,000 shares of Series A preferred stock, 45,527 shares
of Series B preferred stock, 2,709 shares of Series X Junior preferred
stock and warrants to purchase 6,250 shares of Series X Junior preferred
stock.

167
<PAGE> 175

FUTURE STOCKHOLDER PROPOSALS

Pursuant to Rule 14a-8 promulgated under the Exchange Act, TCS stockholders
may present proposals for inclusion in the TCS proxy statement for consideration
at the next annual meeting of its stockholders by submitting their proposals to
TCS in a timely manner. XYPOINT shareholders who become stockholders of TCS may
present proposals for inclusion in the TCS proxy statement for its 2001 annual
meeting of stockholders. Any such proposal must comply with Rule 14a-8.

OTHER MATTERS

The board of directors of XYPOINT does not know of any other business to be
presented for consideration at the special meetings. If other matters properly
come before the special meeting, the persons named in the accompanying forms of
proxy intend to vote on such matters based on their best judgment.

XYPOINT will bear the cost of the special meeting and the cost of
soliciting proxies, including the cost of mailing the proxy materials. In
addition to solicitation by mail, directors, officers and regular employees of
XYPOINT (none of whom will be specifically compensated for such services) may
solicit proxies by telephone or otherwise.

XYPOINT may engage one or more proxy solicitation firms to assist in
obtaining proxies from its shareholders on a timely basis. As of the date of
this document, XYPOINT has not engaged a proxy solicitation firm or has
committed itself to the payment of any fees for this service.

LEGAL MATTERS

Piper Marbury Rudnick & Wolfe LLP will issue a legal opinion concerning the
legality of the Class A common stock of TCS to be issued to XYPOINT
stockholders. Certain matters relating to the merger will be passed upon by
Venture Law Group, A Professional Corporation, as counsel to XYPOINT.

EXPERTS

Ernst & Young LLP, independent auditors, have audited TCS' financial
statements at December 31, 1998 and 1999, and for each of the three years in the
period ended December 31, 1999, as set forth in their report. TCS has included
its financial statements in this proxy statement/prospectus and elsewhere in
reliance on Ernst & Young LLP's report, given their authority as experts in
accounting and auditing.

The audited financial statements of XYPOINT Corporation included in this
proxy statement/prospectus and elsewhere in this registration statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.

WHERE YOU CAN FIND MORE INFORMATION

TCS is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended, and, in accordance therewith, files annual, quarterly
and special reports,

168
<PAGE> 176

proxy statements and other information with the SEC. You may read and copy any
reports, statements or other information filed by TCS at the SEC's public
reference rooms at:

<TABLE>
<S> <C> <C>
Judiciary Plaza Citicorp Center Seven World Trade Center
Room 1024 500 West Madison St. 13th Floor
450 Fifth Street Suite 1400 New York, NY 10048
Washington, D.C. 20549 Chicago, IL 60661
</TABLE>

Copies of such material also can be obtained from the SEC Public Reference
Section at the addresses noted above at prescribed rates. Information regarding
the operation of the Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330. TCS' filings with the SEC are also available to the public
without charge at the Internet site maintained by the SEC at http://www.sec.gov.

TCS Class A common stock is quoted for trading on the Nasdaq Stock Market's
National Market, and, accordingly, reports, proxy statements and other
information concerning TCS may be inspected at:

The Nasdaq Stock Market
Nasdaq Regulatory Filings
9801 Washingtonian Boulevard
5th Floor
Gaithersburg, MD 20878

TCS has filed with the SEC a registration statement on Form S-4 under the
Securities Act with respect to the common stock to be issued to XYPOINT
shareholders pursuant to the merger. This proxy statement/prospectus does not
contain all of the information set forth in the registration statement and its
exhibits and schedules. For further information with respect to TCS, reference
is made to the registration statement and its exhibits and schedules. Statements
contained in this proxy statement/prospectus as to the contents of any contract
or any other document referred to are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the registration statement, each such statement being qualified
in all respects by such reference. A copy of the registration statement may be
inspected without charge at the offices of the SEC Public Reference Section at
the addresses noted above.

YOU SHOULD RELY ON THE INFORMATION CONTAINED IN THIS PROXY
STATEMENT/PROSPECTUS TO VOTE ON THE MERGER, THE MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREIN. NEITHER TCS NOR XYPOINT HAS AUTHORIZED ANYONE
TO PROVIDE INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS PROXY
STATEMENT/PROSPECTUS. THIS PROXY STATEMENT/PROSPECTUS IS DATED DECEMBER 22,
2000. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS PROXY
STATEMENT/PROSPECTUS IS ACCURATE AS OF ANY OTHER DATE, AND NEITHER THE MAILING
OF THIS PROXY STATEMENT/PROSPECTUS TO STOCKHOLDERS NOR THE ISSUANCE OF TCS
COMMON STOCK PURSUANT TO THE MERGER SHALL CREATE ANY IMPLICATION TO THE
CONTRARY.

169
<PAGE> 177

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
FINANCIAL STATEMENTS OF TELECOMMUNICATION SYSTEMS, INC.
Report of Independent Auditors............................ F-2
Balance Sheets as of December 31, 1998 and 1999 and
September 30, 2000 (unaudited)......................... F-3
Statements of Operations for each of the three years in
the period ended December 31, 1999 and for the nine
months ended September 30, 1999 and 2000 (unaudited)... F-4
Statements of Stockholders' Equity (Deficit) for each of
the three years in the period ended December 31, 1999
and for the nine months ended September 30, 2000
(unaudited)............................................ F-5
Statements of Cash Flows for each of the three years in
the period ended December 31, 1999 and for the nine
months ended September 30, 1999 and 2000............... F-6
Notes to Financial Statements............................. F-7
FINANCIAL STATEMENTS OF XYPOINT CORPORATION
Report of Independent Public Accountants.................. F-24
Balance Sheets as of December 31, 1998 and 1999 and
September 30, 2000 (unaudited)......................... F-25
Statements of Operations for each of the two years in the
period ended December 31, 1999 and for the nine months
ended September 30, 1999 and 2000 (unaudited).......... F-26
Statements of Changes in Shareholders' Equity for each of
the two years in the period ended December 31, 1999 and
for the nine months ended September 30, 2000
(unaudited)............................................ F-27
Statements of Cash Flows for each of the two years in the
period ended December 31, 1999 and for the nine months
ended September 30, 1999 and 2000...................... F-28
Notes to Financial Statements............................. F-29
</TABLE>

F-1
<PAGE> 178

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
TeleCommunication Systems, Inc.

We have audited the accompanying balance sheets of TeleCommunication
Systems, Inc. as of December 31, 1998 and 1999, and the related statements of
operations, stockholders' equity (deficit), and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of TeleCommunication Systems,
Inc. at December 31, 1998 and 1999, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.

/s/ Ernst & Young LLP

Baltimore, Maryland
June 19, 2000

F-2
<PAGE> 179

TELECOMMUNICATION SYSTEMS, INC.

BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1998 1999 2000
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 440 $ 3,257 $67,874
Restricted cash........................................... 1,374 1,445 1,445
Accounts receivable....................................... 3,868 10,522 12,562
Unbilled receivables, less allowance of $72 in 1998 and
$100 in 1999 and 2000................................... 3,178 1,344 4,230
Deferred income taxes..................................... -- 241 241
Other current assets...................................... 68 365 2,150
------- ------- -------
Total current assets............................... 8,928 17,174 88,502
Property and equipment, net of accumulated depreciation and
amortization of $1,222 in 1998, $2,008 in 1999 and $3,770
in 2000................................................... 1,318 2,669 3,232
Software development costs, net of accumulated amortization
of $885 in 1998, $2,286 in 1999 and $4,454 in 2000........ 4,080 7,374 6,900
Other assets................................................ 323 455 606
------- ------- -------
Total assets....................................... $14,649 $27,672 $99,240
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Borrowings under line of credit........................... $ 923 $ -- $ --
Accounts payable and accrued expenses..................... 2,742 4,085 6,446
Accrued payroll and related liabilities................... 1,922 2,730 2,081
Deferred revenue.......................................... 336 720 1,040
Notes payable to related parties.......................... 1,985 1,426 1,426
Current portion of long-term debt and capital lease
obligations............................................. 1,380 3,984 922
------- ------- -------
Total current liabilities.......................... 9,288 12,945 11,915
Long-term debt, less current portion and net of discount of
$559 in 1998 and $361 in 1999............................. 6,072 5,948 --
Capital lease obligations, less current portion............. 549 724 1,257
Commitments and contingent liabilities...................... -- -- --
Deferred income taxes....................................... 85 2,734 461
Series A Redeemable Convertible Preferred Stock, $0.001 par
value:
Authorized shares -- 15,000,000; issued and outstanding
shares of 3,412,000 in 1999; liquidation preference of
$2.93 per share plus accrued dividends, aggregating
$10,000 in 1999....................................... -- 9,520 --
Stockholders' equity (deficit):
Class A Common Stock; $0.01 par value:
Authorized shares -- 225,000,000; issued and outstanding
shares of 10,787,671 in 1998 and 1999; 13,600,626 in
2000.................................................. 108 108 136
Class B Common Stock; $0.01 par value:
Authorized shares -- 75,000,000; issued and outstanding
shares of 10,787,671 in 2000.......................... -- -- 108
Additional paid-in capital................................ 922 -- 93,429
Accumulated deficit....................................... (2,375) (4,307) (8,066)
------- ------- -------
Total stockholders' equity (deficit)............... (1,345) (4,199) 85,607
------- ------- -------
Total liabilities and stockholders' equity
(deficit)........................................ $14,649 $27,672 $99,240
======= ======= =======
</TABLE>

See accompanying notes.

F-3
<PAGE> 180

TELECOMMUNICATION SYSTEMS, INC.

STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -----------------
1997 1998 1999 1999 2000
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Network applications:
Software licenses................................... $ 1,373 $ 2,104 $ 3,975 $ 2,933 $ 6,368
Services............................................ 3,815 5,806 7,345 5,178 8,376
------- ------- ------- ------- -------
Network applications........................... 5,188 7,910 11,320 8,111 14,744
Communications engineering services................... 22,636 17,078 34,440 23,963 26,231
------- ------- ------- ------- -------
Total revenue.................................. 27,824 24,988 45,760 32,074 40,975
Operating costs and expenses:
Direct cost of network applications services.......... 2,918 4,252 4,993 3,539 6,545
Direct cost of communications engineering services.... 17,847 12,358 26,889 18,661 19,914
Sales and marketing................................... 1,046 1,455 2,285 1,621 4,433
Research and development.............................. 204 354 1,098 791 2,711
General and administrative............................ 3,091 4,001 5,329 3,783 7,592
Non-cash stock compensation expense................... -- -- -- -- 841
Depreciation and amortization of property and
equipment........................................... 294 424 916 515 1,762
Amortization of software development costs............ 220 593 1,401 1,050 2,168
------- ------- ------- ------- -------
Total operating costs and expenses............. 25,619 23,437 42,911 29,960 45,966
------- ------- ------- ------- -------
Income (loss) from operations........................... 2,205 1,551 2,849 2,114 (4,991)
Interest expense and other financing costs.............. 1,263 1,550 1,741 1,203 472
------- ------- ------- ------- -------
Income (loss) before income taxes and extraordinary
item.................................................. 942 1 1,108 911 (5,463)
Income tax expense (benefit)............................ -- -- 2,408 -- (2,140)
------- ------- ------- ------- -------
Income (loss) before extraordinary item................. 942 1 (1,300) 911 (3,323)
Extraordinary item -- loss on early extinguishment of
debt, net of tax benefit of $133...................... -- -- -- -- (219)
------- ------- ------- ------- -------
Net income (loss)....................................... 942 1 (1,300) 911 (3,542)
Dividends accrued on Series A Redeemable Convertible
Preferred Stock....................................... -- -- -- -- (482)
Accretion of Series A Redeemable Convertible
Preferred Stock....................................... -- -- -- -- (58)
------- ------- ------- ------- -------
Net income (loss) attributable to common stockholders... $ 942 $ 1 $(1,300) $ 911 $(4,082)
======= ======= ======= ======= =======
Earnings (loss) per common share, before extraordinary
item, basic and diluted............................... $ 0.09 $ -- $ (0.12) $ 0.08 $ (0.27)
======= ======= ======= ======= =======
Earnings (loss) per common share, basic and diluted..... $ 0.09 $ -- $ (0.12) $ 0.05 $ (0.28)
======= ======= ======= ======= =======
Pro forma data (unaudited -- Note 11):
Historical income before income taxes................. $ 1,108
Pro forma income tax expense.......................... 429
-------
Pro forma net income.................................. $ 679
=======
Pro forma earnings per common share:
Basic............................................... $ 0.06
=======
Diluted............................................. $ 0.04
=======
</TABLE>

See accompanying notes.

F-4
<PAGE> 181

TELECOMMUNICATION SYSTEMS, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
CLASS A CLASS B ADDITIONAL
COMMON COMMON PAID-IN ACCUMULATED
STOCK STOCK CAPITAL DEFICIT TOTAL
------- ------- ---------- ----------- -------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997.............. $108 $ -- $ 223 $(3,318) $(2,987)
Issuance of warrants to purchase
1,819,006 shares of Class A Common
Stock................................. -- -- 309 -- 309
Net income for 1997..................... -- -- -- 942 942
---- ---- ------- ------- -------
Balance at December 31, 1997............ 108 -- 532 (2,376) (1,736)
Issuance of warrants to purchase 765,925
shares of Class A Common Stock........ -- -- 390 -- 390
Net income for 1998..................... -- -- -- 1 1
---- ---- ------- ------- -------
Balance at December 31, 1998............ 108 -- 922 (2,375) (1,345)
Repurchase of warrants to purchase
1,292,209 shares of Class A Common
Stock................................. -- -- (922) (632) (1,554)
Net loss for 1999....................... -- -- -- (1,300) (1,300)
---- ---- ------- ------- -------
Balance at December 31, 1999............ 108 -- -- (4,307) (4,199)
Options exercised for the purchase of
3,230,589 shares of Class B Common
Stock................................. -- 32 251 -- 283
Warrants exercised for the purchase of
172,449 shares of Class A Common
Stock................................. 2 -- 48 -- 50
Dividends on Series A Redeemable
Convertible Preferred Stock at $0.08
per share............................. -- -- (289) (193) (482)
Accretion of Series A Redeemable
Convertible Preferred Stock........... -- -- (34) (24) (58)
Stock compensation expense for issuance
of Class A Common Stock options at
below fair market value............... -- -- 841 -- 841
Issuance of 5,405,000 shares of Class A
Common Stock upon initial public
offering............................ 54 -- 85,399 -- 85,453
Initial public offering issuance
costs................................. -- -- (2,345) -- (2,345)
Conversion of Series A Redeemable
Convertible Preferred Stock to
3,505,480 shares of Class A Common
Stock................................. 35 -- 9,489 -- 9,524
Warrants exercised for the purchase
1,204,591 shares of Class A Common
Stock................................. 12 -- (12) -- --
Conversion of Class B Common Stock to
Class A Common Stock -- 3,251,539
shares................................ 32 (32) -- -- --
Conversion of Class A Common Stock into
Class B Common Stock -- 10,787,671
shares................................ (108) 108 -- -- --
Options exercised for the purchase of
61,654 shares of Class A Common
Stock................................. 1 -- 81 -- 82
Net loss for the nine months ended
September 30, 2000.................... -- -- -- (3,542) (3,542)
---- ---- ------- ------- -------
Balance at September 30, 2000
(unaudited)........................... $136 $108 $93,429 $(8,066) $85,607
==== ==== ======= ======= =======
</TABLE>

See accompanying notes.

F-5
<PAGE> 182

TELECOMMUNICATION SYSTEMS, INC.

STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- -----------------
1997 1998 1999 1999 2000
-------- ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)..................................... $ 942 $ 1 $ (1,300) $ 911 $(3,542)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization of property and
equipment....................................... 294 424 916 515 1,762
Amortization of software development costs........ 220 593 1,401 1,050 2,168
Extraordinary item -- loss on early extinguishment
of debt......................................... -- -- -- -- 352
Amortization of debt discount..................... 227 288 315 175 204
Deferred income taxes............................. -- -- 2,408 -- (2,273)
Non-cash stock compensation expense............... -- -- -- -- 841
Changes in operating assets and liabilities:
Accounts receivable............................. 1,032 (1,525) (6,654) (6,771) (2,040)
Unbilled receivables............................ 34 (517) 1,834 1,627 (2,886)
Other current assets............................ (44) 15 (297) (331) (1,785)
Accounts payable and accrued expenses........... (1,817) 255 1,343 324 2,361
Accrued payroll and related liabilities......... (512) 831 808 (153) (649)
Deferred revenue................................ 167 169 384 1,798 320
-------- ------- -------- ------- -------
Net cash provided by (used in) operating activities... 543 534 1,158 (855) (5,167)
INVESTING ACTIVITIES
Purchases of property and equipment................... (134) (101) (324) (1,593) (1,129)
Capitalized software development costs................ (1,626) (2,636) (4,696) (3,111) (1,694)
Change in restricted cash............................. (577) 53 (71) 1,355 --
Proceeds from sale of property and equipment.......... 207 -- -- -- --
Change in other assets................................ (45) (27) (148) (179) (151)
-------- ------- -------- ------- -------
Net cash used in investing activities................. (2,175) (2,711) (5,239) (3,528) (2,974)
FINANCING ACTIVITIES
Proceeds from line of credit.......................... 23,143 7,975 16,322 7,826 1,582
Payments on line of credit............................ (26,261) (8,115) (17,245) (6,309) (1,582)
Proceeds from initial public offering of common
stock............................................... -- -- -- -- 83,108
Proceeds from notes payable to related parties........ 1,740 1,635 1,426 537 --
Payments on notes payable to related parties.......... (850) (1,390) (1,985) -- --
Proceeds from issuance of employee stock options...... -- -- -- -- 415
Proceeds from issuance of subordinated debt and
detachable stock warrants........................... 3,000 5,000 -- -- --
Repurchase of detachable stock warrants............... -- -- (1,554) -- --
Issuance of Series A Redeemable Convertible Preferred
Stock, net of issuance costs of $480................ -- -- 9,520 -- --
Proceeds from issuance of long-term debt.............. 3,650 1,323 2,460 2,331 --
Payments on long-term debt............................ (1,540) (4,419) (1,322) (115) (8,394)
Preferred stock dividend.............................. -- -- -- -- (482)
Payments on capital lease obligations................. (16) (166) (624) (250) (1,869)
Payment of debt issue costs........................... (393) (90) (100) (70) (20)
-------- ------- -------- ------- -------
Net cash provided by financing activities............. 2,473 1,753 6,898 3,950 72,758
-------- ------- -------- ------- -------
Net change in cash.................................... 841 (424) 2,817 (433) 64,617
Cash and cash equivalents at the beginning of the
period.............................................. 23 864 440 440 3,257
-------- ------- -------- ------- -------
Cash and cash equivalents at the end of the period.... $ 864 $ 440 $ 3,257 $ 7 $67,874
======== ======= ======== ======= =======
</TABLE>

See accompanying notes.

F-6
<PAGE> 183

TELECOMMUNICATION SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS

(INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR
THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)

1. SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

TeleCommunications Systems, Inc. (the "Company") is a developer of network
applications that enable the delivery of Internet content, short messages, and
enhanced communication services to a wide variety of wireless devices, including
phones, two-way pagers and personal digital assistants. The Company also
develops custom software applications and provides communications engineering
services, including the design and installation of complex information
processing and communications systems for corporate and government enterprises.

The Company was an 8(a) firm for federal government contracting purposes
through June 19, 1998. The term "8(a)" refers to section 8(a) of the Small
Business Act of 1958 which permits the Small Business Administration to enter
into contracts with federal procuring agencies directly and subcontract the
performance of the work to 8(a) certified companies.

UNAUDITED INTERIM FINANCIAL INFORMATION

The unaudited interim financial information as of September 30, 2000 and
for the nine months ended September 30, 1999 and 2000, has been prepared in
accordance with generally accepted accounting principles for interim financial
information and with instructions to Article 10 of Regulation S-X. In the
opinion of management, such information contains all adjustments, consisting
only of normal recurring adjustments, considered necessary for a fair
presentation of such periods. The operating results for any interim period are
not necessarily indicative of results for any future periods.

USE OF ESTIMATES

PROPERTY AND EQUIPMENT

Property and equipment is stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method based on estimated
useful lives of between three and seven years. Amortization of leasehold
improvements is provided using the straight-line method over the lesser of the
useful life of the asset or the remaining term of the lease. Assets held under
capital leases are stated at the lesser of the present value of future minimum
lease payments or the fair value of the property at the inception of the lease.
The assets recorded under capital leases are amortized over the lesser of the
lease term or the estimated useful life of the assets in a manner consistent
with the Company's depreciation policy for owned assets.

F-7
<PAGE> 184
TELECOMMUNICATION SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SOFTWARE DEVELOPMENT COSTS

Costs of developing software products incurred prior to completion of the
detailed program design confirming technological feasibility are accounted for
as research and development expense. These costs are incurred to enhance
existing packaged software products as well as to create new software products,
and primarily include personnel costs and costs associated with using third
party laboratory and testing resources. Research and development costs are
expensed as incurred.

Costs incurred for the development of computer software that will be sold,
leased or otherwise marketed are capitalized when technological feasibility has
been established. Costs that are capitalized include direct labor, related
overhead and other direct costs. These capitalized costs are subject to an
ongoing assessment of recoverability based upon anticipated future revenue and
changes in hardware and software technologies. Unamortized capitalized software
development costs determined to be in excess of net realizable value of the
product are expensed immediately.

Amortization of capitalized software development costs begins when the
product is available for general release. Amortization is computed on a
product-by-product basis using the straight-line method over the product's
estimated useful life, which is not to exceed four years. Amortization is also
computed using the ratio that current revenue for the product bear to the total
of current and anticipated future revenue for that product. If this revenue
curve method results in amortization greater than the amount computed using the
straight-line method, amortization is recorded at that greater amount.

REVENUE RECOGNITION

The Company generates revenue from two sources, the licensing of software
products and performance of related services, and from the design, development
and deployment of information processing and communication systems. The
accompanying statements of operations report this revenue and related costs on
an operating segment basis, as discussed more fully in Note 20.

Network Application Revenue

The Company licenses packaged network application software principally for
use in the wireless telecommunications industry. These licenses typically
contain two elements, the product license and maintenance. The Company allocates
the total arrangement fee among each element based on vendor-specific objective
evidence of the relative fair value of each of the 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. The Company
determines the fair value of the maintenance element based on separate sales of
that element (the renewal rate). The fair value of the software is then
determined by using the residual method. Under the residual method, the fair
value of the maintenance element is deducted from the value of the total
arrangement to determine an implied fair value of the software. After the
software license fee is determined using the residual method, these license fees
are recognized as revenue when four criteria are met.

F-8
<PAGE> 185
TELECOMMUNICATION SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
These four criteria are (i) evidence of an arrangement (ii) delivery of the
software has occurred, (iii) the fee is fixed or determinable and (iv) the fee
is probable of collection. Software license fees billed and not recognized as
revenue are included in deferred revenue.

Software licenses include a 90-day warranty for defects. The Company has
not incurred significant warranty costs on any software product to date, and no
costs are currently accrued upon recording the related revenue.

The Company's network application services revenue is derived from
maintenance fees for packaged software products, and fees from development,
implementation and maintenance of custom applications.

Software maintenance fees include telephone support, bug fixes, and rights
to software upgrades on a when-and-if-available basis. These fees are collected
in advance and recognized ratably over the annual maintenance period.
Unrecognized maintenance fees are included in deferred revenue.

Fees from the development and implementation of custom applications are
generally performed under time and materials and fixed fee contracts.
Professional services that are provided under long-term fixed fee contracts to
develop and implement customized applications are recognized using the
percentage-of-completion method. These contracts generally allow for monthly
billing or billing upon achieving certain specified milestones. Progress to
completion is generally measured using costs incurred compared to estimated
total costs. Any estimated losses under long-term contracts are recognized in
their entirety at the date that they become evident.

Communications Engineering Services Revenue

The Company generates communications engineering services revenue from the
design, development and deployment of complex information processing and
communications systems for corporate and government enterprises. These services
are provided under time and materials contracts, cost plus fee contracts, or
fixed-price contracts. Revenue is recognized under time and materials contracts
and cost plus fee contracts as billable costs are incurred. Fixed-price
contracts are accounted for using the percentage-of-completion method, measured
by total costs incurred as a percentage of total estimated costs at the
completion of the contract. These contracts generally allow for monthly billing
or billing upon achieving certain specified milestones. Any estimated losses on
contracts are recognized in their entirety at the date that they become evident.
Federal government contract costs, including allocated indirect expenses, are
subject to audit and adjustment by the Defense Contract Audit Agency. Contract
revenue under these contracts are recorded at estimated net realizable amounts.

COST OF REVENUE

Cost of network application software licenses consists of the amortization
of capitalized software development costs. Cost of network application services
consists of

F-9
<PAGE> 186
TELECOMMUNICATION SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
compensation, benefits and travel expenses incurred while providing these
services. Cost of communication engineering services consists of compensation,
benefits, travel and the costs of third-party consultants. Cost of revenue for
providing services under governmental contracts include an allocation of
indirect overhead and general and administrative expenses, at approved rates.

INCOME TAXES

From January 1, 1993 through December 14, 1999, the Company's stockholder
elected under Subchapter S of the Internal Revenue Code to include the Company's
income in his personal income tax return for federal and state income tax
purposes. Accordingly, the Company was not subject to federal and state income
taxes during that period. The Company terminated this election on December 14,
1999, and upon termination determined the differences between the financial
reporting and income tax bases of its assets and liabilities. The tax effects of
these differences were recorded as deferred tax assets or liabilities, and the
net difference as income tax expense.

Income tax amounts and balances are accounted for using the liability
method of accounting for income taxes and deferred tax assets and liabilities
are measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse.

ADVERTISING COSTS

The Company expenses advertising as incurred. Advertising expense totaled
less than $15 in each of the years ended December 31, 1997, 1998 and 1999,
respectively.

STOCK SPLIT AND REVERSE STOCK SPLIT

In April 2000, the Company declared a three-for-one stock split of its
common stock for stockholders of record on April 5, 2000. In June 2000, the
Company declared a one-for-2.92 reverse stock split of its common stock for
stockholders of record on June 15, 2000 and increased the number of authorized
shares of common stock to 300,000,000. All share and per share data including
stock option, warrant and earnings (loss) per common share information has been
restated in the accompanying financial statements to retroactively reflect the
stock split and reverse stock split.

PENDING ACCOUNTING PRONOUNCEMENTS

In December 1999, the SEC staff issued Staff Accounting Bulletin 101,
Revenue Recognition in Financial Statements ("SAB 101"). SAB 101 explains how
the SEC believes existing rules for revenue recognition should be applied to
transactions not specifically addressed by existing rules. In October 2000, the
SEC staff issued a Frequently Asked Questions Document ("FAQ") on SAB 101 to
assist with implementation questions. The Company will be required to adopt SAB
101 in the fourth quarter of 2000, and based upon a preliminary review of the
SAB and the FAQ, management believes the adoption of SAB 101 will have no effect
on the Company's reported operating results.

F-10
<PAGE> 187
TELECOMMUNICATION SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
The Statement, which the Company will be required to adopt in January 2001,
provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. Management believes that the
adoption of Statement 133 will have no effect on the Company's financial
statements as the Company currently does not conduct hedging activities or
purchase derivative financial instruments.

2. EARNINGS (LOSS) PER COMMON SHARE

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Income (loss) before
extraordinary item..... $ 942 $ 1 $ (1,300) $ 911 $ (3,323)
Extraordinary item, net
of taxes............... -- -- -- -- (219)
----------- ----------- ----------- ----------- -----------
Net income (loss)........ 942 1 (1,300) 911 (3,542)
Dividends on Series A
Redeemable Convertible
Preferred Stock........ -- -- -- -- (482)
Accretion of Series A
Redeemable Convertible
Preferred Stock........ -- -- -- -- (58)
----------- ----------- ----------- ----------- -----------
Net income (loss)
attributable to common
stockholders........... $ 942 $ 1 $ (1,300) $ 911 $ (4,082)
=========== =========== =========== =========== ===========
Income (loss)
attributable to common
stockholders before
extraordinary item..... $ 942 $ 1 $ (1,300) $ 911 $ (3,863)
=========== =========== =========== =========== ===========
Denominator:
Denominator for basic
earnings (loss) per
common share --
weighted-average
shares................. 10,787,671 10,787,671 10,787,671 10,787,671 14,447,323
----------- ----------- ----------- ----------- -----------
Effect of dilutive
securities:
Employee stock
options........... 288,546 2,993,590 -- 5,403,533 --
Warrants............ -- 986,948 -- 1,494,565 --
----------- ----------- ----------- ----------- -----------
288,546 3,980,538 -- 6,898,098 --
----------- ----------- ----------- ----------- -----------
Denominator for diluted
earnings (loss) per share... 11,076,217 14,768,209 10,787,671 17,685,769 14,447,323
----------- ----------- ----------- ----------- -----------
</TABLE>

F-11
<PAGE> 188
TELECOMMUNICATION SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. EARNINGS (LOSS) PER COMMON SHARE (CONTINUED)

Basic loss per common share is based upon the average number of shares of
common stock outstanding during the period. Because the Company incurred a net
loss in 1999 and for the nine months ended September 30, 2000, potentially
dilutive securities were excluded from the computation because the result would
be anti-dilutive. These potentially dilutive securities consist of stock
options, warrants and convertible preferred stock.

3. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

The Company acquired property and equipment under capital leases totaling
$187, $626 and $1,943 during the years ended December 31, 1997, 1998 and 1999,
respectively, and $1,043 and $1,329 for the nine months ended September 30, 1999
and 2000, respectively.

Interest paid totaled $654, $1,087 and $1,447 during the years ended
December 31, 1997, 1998, and 1999, respectively, and $1,125 and $1,410 for the
nine months ended September 30, 1999 and 2000, respectively.

4. RESTRICTED CASH

Restricted cash consisted of the following as of December 31:

<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Amounts invested in certificates of deposit which are
pledged as collateral for a promissory note issued by the
Company to its principal stockholder (see Note 8)......... $1,360 $1,426
Amounts on deposit with a surety insurance company which
have been pledged as collateral under bonding requirements
contained in certain performance contracts................ 14 19
------ ------
$1,374 $1,445
====== ======
</TABLE>

F-12
<PAGE> 189
TELECOMMUNICATION SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. UNBILLED RECEIVABLES

Unbilled receivables consisted of the following at December 31:

<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Amounts billable at specified milestones.................... $2,788 $ 630
Contract retentions......................................... 159 160
Rate variances and costs and estimated earnings in advance
of billings............................................... 231 554
------ ------
$3,178 $1,344
====== ======
</TABLE>

Substantially all unbilled receivables are expected to be collected within
twelve months.

6. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at December 31:

<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Furniture and fixtures...................................... $ 258 $ 368
Computer equipment.......................................... 1,819 3,727
Computer software........................................... 278 390
Leasehold improvements...................................... 95 102
Vehicles.................................................... 90 90
------- -------
2,540 4,677
Less: accumulated depreciation and amortization............. (1,222) (2,008)
------- -------
$ 1,318 $ 2,669
======= =======
</TABLE>

7. LINE OF CREDIT

On March 17, 1997, the Company entered into a revolving line of credit
agreement with a lender which allows for aggregate borrowings of up to $8,000.
The revolving line of credit agreement is cancelable upon 60 days' written
notice.

The line of credit allows the Company to borrow 92% of assigned accounts
receivable balances less than 90 days old. For any assigned accounts receivable
balances that become greater than 90 days old, the Company must either replace
the collateral with an eligible receivable balance or repay the related portion
of the borrowings. Borrowings under the line, which are secured by the assigned
accounts receivable, bear interest at the prime rate plus 1.5% (10% at December
31, 1999), payable monthly. In addition, the Company is charged fees for
uncollected assigned accounts receivable balances more than 44 days outstanding.

F-13
<PAGE> 190
TELECOMMUNICATION SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8. NOTES PAYABLE TO RELATED PARTIES

Notes payable to related parties consisted of the following at December 31:

<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Unsecured note payable to the controlling stockholder
bearing interest at 6.41% in 1998 and 7.32% in 1999, due
on demand................................................. $1,360 $1,426
Unsecured notes payable to relatives of employees bearing
interest at 20% per annum. The notes required monthly
payments of interest only through maturity................ 625 --
------ ------
$1,985 $1,426
====== ======
</TABLE>

Interest expense on notes payable to related parties totaled approximately
$80, $140 and $152 for the years ended December 31, 1997, 1998 and 1999,
respectively.

9. LONG-TERM DEBT

Long-term debt consisted of the following at December 31:

<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Note payable dated February 26, 1999, due October 26, 2001,
and bearing interest at 14.5% per annum The note requires
monthly installments of principal and interest ranging
from $50 to $94 through October 26, 2001. The note is
secured by the assignment of the Company's rights and
interest in revenue earned under certain specified
assigned contracts........................................ $ -- $ 1,727
Note payable, net of discount of $84, dated August 21, 1997,
due August 21, 2002, and bearing interest at 14% per
annum. The note requires monthly installments of interest
only through August 21, 2002. The note is secured by a
second lien on all tangible assets of the Company and a
first lien on all intellectual property................... 2,808 2,916
Note payable, net of discount of $277, dated August 28,
1998, due September 30, 2002, and bearing interest at 14%
per annum. The note requires monthly installments of
principal and interest of $137 through September 30,
2002...................................................... 4,314 3,355
------- -------
Total............................................. 7,122 7,998
Less: current portion....................................... (1,050) (2,050)
------- -------
$ 6,072 $ 5,948
======= =======
</TABLE>

Subsequent to the closing of the Company's initial public offering in
August 2000, the Company extinguished all outstanding long-term debt (see Note
12).

During 1998, the State of Maryland approved a $400 loan-to-grant
arrangement with the Company pursuant to Maryland's Sunny Day economic
development program. When drawn by the Company, the loan will accrue interest at
5% per annum, payable at maturity on December 31, 2002, and must be secured by a
letter of credit in favor of the State of Maryland. The loan becomes a grant in
$100 increments based on employment levels at annual milestones.

F-14
<PAGE> 191
TELECOMMUNICATION SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

9. LONG-TERM DEBT (CONTINUED)
The fair value of the Company's long-term fixed rate debt is estimated
using a discounted cash flow calculation, based on current rates for similar
debt. The fair value of long-term fixed rate debt at December 31, 1998 and 1999
is $7,374 and $8,173, respectively.

10. CAPITAL LEASES

The Company leases certain furniture and equipment under capital leases.
Property and equipment included the following amounts for capital leases at
December 31, 1999:

<TABLE>
<S> <C>
Furniture and fixtures...................................... $ 178
Computer equipment.......................................... 2,604
Computer software........................................... 176
Vehicles.................................................... 90
------
3,048
Less: accumulated amortization.............................. (467)
------
$2,581
======
</TABLE>

Amortization of leased assets is included in depreciation and amortization
expense.

Future minimum payments under capital lease obligations consisted of the
following at December 31, 1999:

<TABLE>
<S> <C>
2000........................................................ $2,169
2001........................................................ 521
2002........................................................ 205
2003........................................................ 5
------
Total minimum lease payments.............................. 2,900
Less: amounts representing interest......................... (242)
------
Present value of net minimum lease payments (including
current portion of $1,934)................................ $2,658
======
</TABLE>

11. INCOME TAXES

Income tax expense for the year ended December 31, 1999 consisted of the
following:

<TABLE>
<S> <C>
Current:
State and local........................................ $ --
Federal................................................ --
------
--
------
Deferred:
State and local........................................ 385
Federal................................................ 2,023
------
2,408
------
Total............................................. $2,408
======
</TABLE>

F-15
<PAGE> 192
TELECOMMUNICATION SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

11. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
at December 31 consisted of:

<TABLE>
<CAPTION>
1998 1999
---- -------
<S> <C> <C>
Deferred tax assets:
Reserves and accrued expenses.......................... $ -- $ 241
Net operating loss carryforward........................ -- 83
---- -------
Total deferred tax assets......................... -- 324
---- -------
Deferred tax liabilities:
Built-in gain.......................................... (85) --
Depreciation........................................... -- (15)
Capitalized software development costs................. -- (2,802)
---- -------
Total deferred tax liabilities.................... (85) (2,817)
---- -------
Net deferred tax liability........................ $(85) $(2,493)
==== =======
</TABLE>

At December 31, 1999, the Company had a net operating loss carryforward for
income tax purposes of approximately $216 which will expire in 2019.

The reconciliation of the reported income tax expense in 1999 to the amount
that would result by applying the U.S. federal statutory rate to net income for
the year ended December 31, 1999 is as follows:

<TABLE>
<S> <C>
Income tax at statutory rate................................ $ 377
Less: effect of income taxed at shareholder level during
1999...................................................... (459)
Add: tax expense recorded upon termination of S Corporation
status.................................................... 2,490
------
Total............................................. $2,408
======
</TABLE>

During the nine months ended September 30, 2000, the Company reduced its
deferred tax liability by $2,273 for the tax effect of its net operating loss
for that period.

Pro Forma Income Taxes (unaudited)

Upon the closing of the sale of the Series A in December 1999, the Company
terminated its status as an S Corporation and is subject to federal and state
income taxes thereafter. Accordingly, for informational purposes, the
accompanying statement of operations for the year ended December 31, 1999
includes an unaudited pro forma adjustment for income taxes which would have
been recorded if the Company had been a C Corporation, for the entire period.

F-16
<PAGE> 193
TELECOMMUNICATION SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

11. INCOME TAXES (CONTINUED)
Pro forma income tax expense (benefit) consists of the following for the
year ended December 31, 1999:

<TABLE>
<S> <C>
Current:
Federal................................................ $(575)
State.................................................. (78)
-----
(653)
Deferred:
Federal................................................ 954
State.................................................. 128
-----
1,082
-----
Pro forma income tax expense................................ $ 429
=====
</TABLE>

The Company's pro forma income tax expense for the year ended December 31,
1999 would result in an effective tax rate that varies from the statutory
federal income tax rate, as follows:

<TABLE>
<S> <C>
Federal income taxes at the statutory rate.................. $377
State income taxes, net of federal benefit.................. 52
----
$429
====
</TABLE>

12. INITIAL PUBLIC OFFERING, RECAPITALIZATION AND EXTRAORDINARY LOSS
(UNAUDITED)

During the third quarter of 2000, the Company completed an initial public
offering of 5,405,000 shares of Class A Common Stock which resulted in net
proceeds of $83,108, after deducting underwriting discounts, commissions and
offering expenses. Upon the closing of the offering, the Series A Redeemable
Convertible Preferred Stock automatically converted into 3,505,480 shares of
Class A Common Stock and all outstanding warrants were exchanged for 1,204,591
shares of Class A Common Stock. Concurrently with the closing, a
recapitalization occurred in which (i) all outstanding shares of non-voting
Class B Common Stock were converted into an equal number of shares of Class A
Common Stock having one vote per share; (ii) all outstanding options and
warrants to purchase non-voting Class B Common Stock were converted to be
exercisable for an equal number of shares of Class A Common Stock having one
vote per share; and (iii) the outstanding shares of Class A Common Stock issued
to Maurice B. Tose, the Company's President, Chief Executive Officer and
Chairman of the Board, were converted into an equal number of shares of Class B
Common Stock, which have three votes per share.

The Company used approximately $9,300 of proceeds from the initial public
offering to extinguish debt and has invested the remainder of such proceeds in
investment grade, interest-bearing securities. In conjunction with the early
extinguishment, $352 of unamortized debt discount and deferred financing costs
were expensed as an extraordinary loss and presented net of a tax benefit of
$133 in the accompanying statement of operations.

F-17
<PAGE> 194
TELECOMMUNICATION SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

13. PREFERRED STOCK

In December 1999, the Company issued 3,412,000 shares of Series A
Redeemable Convertible Preferred Stock (Series A) for a total aggregate purchase
price of $10,000. The Series A was issued with the following terms:

Conversion Rights

The Series A was converted into 3,505,480 shares Class A Common Stock in
August 2000, upon the closing of the initial public offering. Each share of
Series A was converted into 1.027397 shares of Class A Common Stock. The
conversion rate was adjusted for the stock split and reverse stock split
described in Note 1.

Dividends

The holders of the Series A were entitled to receive quarterly cumulative
dividends at an initial rate of 8% per annum subject to annual increases of 2%
per annum on each of the fifth, sixth and seventh anniversaries of the Series A
issue date. All accrued dividends were paid in October 2000.

Voting Rights

Each share of Series A had substantially the same voting rights as the
number of shares of Class A Common Stock into which it was converted. In
addition, certain corporate actions required the consent of at least a majority
of the issued and outstanding shares of Series A acting as a separate class.

14. COMMON STOCK

Class A Common Stock

The Company has authorized the issuance of 225,000,000 shares of Class A
Common Stock, $0.01 par value per share. Each holder of the Class A Common Stock
is entitled to one vote for each share of stock held for the election of
directors and all matters submitted to a vote of stockholders of the Company.

Class B Common Stock

The Company has authorized the issuance of 75,000,000 shares of Class B
Common Stock, $0.01 par value per share. Prior to the recapitalization in August
2000 as described in Note 12, the holders of the Class B Common Stock had rights
identical to the holders of Class A Common Stock, except that they were not
entitled to vote on any matters submitted to a vote of stockholders of the
Company. Subsequent to the August 2000 recapitalization, the holders of Class B
Common Stock have three votes per share.

15. STOCK WARRANTS

Warrants to Purchase Class A Common Stock

In connection with the 1997 and 1998 issuance of debt in an aggregate
amount of $8,000 with a stated interest rate of 14%, the Company issued warrants
to purchase a total

F-18
<PAGE> 195
TELECOMMUNICATION SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

15. STOCK WARRANTS (CONTINUED)
of 2,584,931 shares of Class A Common Stock. The warrants had exercise prices of
either $0.03 per share or $0.29 per share. Upon issuance, the aggregate proceeds
received for the issuance of the debt and the warrants was allocated to these
securities based on an estimate of the fair value of the debt assuming that no
warrants were attached. In calculating the estimated fair value of the debt, the
Company discounted the cash flows associated with the debt using its estimated
incremental borrowing rate of 18.5%. The derived value of the warrants after
estimating the value of the debt was $699. This amount was recorded as
additional paid-in capital, and a corresponding debt discount was recorded that
is being recognized as additional interest expense over the term of the related
debt. For the years ended December 31, 1998 and 1999, the Company recognized
interest expense related to the amortization of this discount of $113 and $198,
respectively. In December 1999, the Company negotiated the repurchase of
warrants to purchase 1,292,209 shares of Class A Common Stock for aggregate
consideration of $1,600.

Warrants to Purchase Class B Common Stock

In December 1999, the Company issued warrants to purchase 105,185 shares of
Class B Common Stock at an exercise price of $2.86 as a finders fee to a
third-party in connection with its issuance of Series A. The Company estimated
the value of these warrants using the Black-Scholes option pricing model with
the following assumptions: risk-free interest rate of 5.7%; dividend yield of
0%; volatility factor of the expected market price of the Class A Common Stock
of 60%; an expected life of the warrant of three years; and the fair value of
Class B Common Stock of $1.28 per share as determined by an appraisal of the
Class B Common Stock. The resulting aggregate warrant valuation was
insignificant.

<TABLE>
<CAPTION>
EXERCISE
NUMBER OF PRICE EXPIRATION
SHARES PER SHARE DATE
--------------- --------- -------------
<S> <C> <C>
909,503 Class A. $0.03 June 30, 2005
383,219 Class A. $0.29 June 30, 2005
105,185 Class B. $2.86 June 30, 2005
</TABLE>

In accordance with the terms of the warrants, all outstanding warrants were
exercised for 1,204,591 shares of Class A Common Stock concurrent with the
closing of the Company's initial public offering in August 2000.

16. STOCK OPTIONS

The Company records 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). Under APB
No. 25, if the exercise price of the Company's employee stock options equals the
estimated fair value of the underlying stock on the date of grant, no
compensation expense is generally recognized.

F-19
<PAGE> 196
TELECOMMUNICATION SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

16. STOCK OPTIONS (CONTINUED)
Financial Accounting Standards Board Statement No. 123, Accounting for
Stock-Based Compensation (Statement No. 123) encourages companies to recognize
expense for stock-based awards based on their estimated value on the date of
grant. Statement No. 123 requires the disclosure of pro forma net income in the
notes to the financial statements if the fair value method is not elected. The
Company has determined that the use of the minimum value method to record
compensation expense at fair value would have an immaterial effect on reported
net income (loss) and earnings (loss) per share in 1997, 1998 and 1999.

Effective August 20, 1997, the Company adopted the TeleCommunication
Systems, Inc. 1997 Stock Option Plan (Plan) which is administered by the
Compensation Committee of the Board of Directors. The Plan was amended in April
2000 and provides for the granting of either qualified or non-qualified options
to purchase an aggregate of up to 8,904,110 shares of Class B Common Stock to
employees, officers, and directors of the Company, as well as others who provide
services to the Company. Upon the closing of the initial public offering in
August 2000, the Plan was amended to provide for the granting of options to
purchase Class A Common Stock. All outstanding options were converted to options
to purchase Class A Common Stock (See Note 12). Options granted under the plan
vest over periods ranging from one to five years. The fair value of these
options was estimated at the date of grant using the minimum value method with
the following assumptions for 1997, 1998 and 1999: risk-free interest rate of
5.5%; dividend yield rate of 0%; and an expected life of the options of five
years.

A summary of the Company's stock option activity, and related information
consists of the following at December 31 (all share amounts in thousands):

<TABLE>
<CAPTION>
1997 1998 1999
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year... -- $ -- 3,761 $0.03 4,846 $0.09
Granted.......................... 3,761 0.03 1,264 0.26 1,201 1.26
Exercised........................ -- -- -- -- -- --
Forfeited........................ -- -- (179) 0.03 (435) 0.44
---------- ----- ---------- ----- ---------- -----
Outstanding, end of year......... 3,761 $0.03 4,846 $0.09 5,612 $0.32
========== ===== ========== ===== ========== =====
Exercisable at end of year... -- $ -- 2,096 $0.03 3,355 $0.09
========== ===== ========== ===== ========== =====
Estimated weighted-average grant-
date fair value of options
granted during the year minimum
value method).................. $ 0.00 $ 0.06 $ 0.29
========== ========== ==========
Weighted-average remaining
contractual life of options
outstanding at end of year..... 9.8 years 9.0 years 8.2 years
========== ========== ==========
</TABLE>

F-20
<PAGE> 197
TELECOMMUNICATION SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

16. STOCK OPTIONS (CONTINUED)
Exercise prices for options outstanding at December 31, 1999 ranged from
$0.03 to $1.26 as follows (all share amounts in thousands):

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
REMAINING WEIGHTED AVERAGE
WEIGHTED AVERAGE CONTRACTUAL LIFE OF EXERCISE PRICES OF
EXERCISE OPTIONS EXERCISE PRICES OF OPTIONS OPTIONS OPTIONS
PRICES OUTSTANDING OPTIONS OUTSTANDING OUTSTANDING (YEARS) EXERCISABLE EXERCISABLE
-------- ----------- ------------------- ------------------- ----------- ------------------
<S> <C> <C> <C> <C> <C>
$0.03 3,462 $0.03 7.7 2,907 $0.03
0.26 1,066 0.26 8.5 364 0.26
1.26 1,084 1.26 9.4 84 1.26
----- -----
5,612 3,355
===== =====
</TABLE>

During the nine months ended September 30, 2000, the Company granted
incentive stock options to employees and directors to purchase 773,080 shares of
Class A Common Stock. The options were granted at an exercise price less than
the estimated market value of the Company's Class A Common Stock at the date of
grant.

For the nine months ended September 30, 2000, the Company recorded $841 of
non-cash stock compensation expense related to these grants. The Company expects
to record future stock compensation expense of approximately $8,700 as a result
of option grants that will be recognized ratably over the vesting period of five
years.

17. OPERATING LEASES

The Company leases certain office space and equipment under noncancellable
operating leases that expire on various dates through the year 2002. Future
minimum payments under noncancellable operating leases with initial terms of one
year or more consisted of the following at December 31, 1999:

Rent expense aggregated $706, $809, and $935 for the years ended December
31, 1997, 1998 and 1999, respectively.

18. RETIREMENT PLANS

The Company maintains a defined contribution benefit plan that covers
substantially all employees who have attained age twenty-one. Participants may
contribute from 1% to 15% of their annual compensation to the plan. The Company,
on a discretionary basis, may match contributions made by participants. All
employer contributions vest over a six-year period. During 1998 and 1999, the
Company made contributions of $212 and $446, respectively. The Company made no
contributions during 1997.

F-21
<PAGE> 198
TELECOMMUNICATION SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

19. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS

Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of accounts receivable and
unbilled receivables. To date, these financial instruments have been derived
primarily from contracts with agencies of the federal government. Accounts
receivable are generally due within thirty days and no collateral is required.
The Company maintains reserves for potential credit losses and historically such
losses have been insignificant and within management's expectations.

At December 31, 1997, 1998 and 1999, accounts receivable from agencies of
the federal government represented 44%, 49% and 46% of accounts receivable,
respectively, and represented substantially all of the unbilled receivables.
Revenue earned in 1997, 1998 and 1999 from federal agencies represented 70%, 67%
and 64% of total revenue, respectively. The Company's network applications
business is highly concentrated with one customer. This customer contributed
approximately 5%, 15%, and 11% to total revenue for the years ended December 31,
1997, 1998 and 1999, respectively.

20. BUSINESS AND GEOGRAPHIC SEGMENT INFORMATION

The Company develops network applications software and provides
communications engineering services for corporate and government enterprises
through two operating segments:

NETWORK APPLICATIONS -- The Company develops packaged and custom
network application software including intelligent network products
(Wireless Internet Gateway, Short Message Service Center and Prepaid
Wireless) that enable the delivery of Internet content, short messages, and
enhanced communication services to a wide variety of wireless devices,
including phones, two-way pagers and personal digital assistants.

COMMUNICATIONS ENGINEERING SERVICES -- The Company provides
communication engineering services, which include the design, development
and deployment of complex information processing and communication systems.

Customers include commercial telecommunications carriers, other commercial
customers, and federal, state and local government agencies.

The Company evaluates performance and allocates resources based on
operating income before interest expense and other financing costs and income
taxes. Substantially all revenue are generated from external customers within
the United States.

The Company does not prepare information regarding segment assets.
Accordingly, asset information by reportable segment is not presented. The
accounting policies used by the reportable segments are the same as those used
by the Company as described in Note 1 to the financial statements.

F-22
<PAGE> 199
TELECOMMUNICATION SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

20. BUSINESS AND GEOGRAPHIC SEGMENT INFORMATION (CONTINUED)
The following table sets forth information on the Company's reportable
segments.

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------- -----------------
1997 1998 1999 1999 2000
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenue:
Network applications.............. $ 5,188 $ 7,910 $11,320 $ 8,111 $14,744
Communications engineering........ 22,636 17,078 34,440 23,963 26,231
------- ------- ------- ------- -------
Total revenue................ $27,824 $24,988 $45,760 $32,074 $40,975
======= ======= ======= ======= =======
Segment profit (loss):
Network applications.............. $ 1,241 $ 1,576 $ 1,016 $ 787 $(5,296)
Communications engineering........ 964 (25) 1,833 1,327 305
------- ------- ------- ------- -------
Total segment profit
(loss)..................... $ 2,205 $ 1,551 $ 2,849 $ 2,114 $(4,991)
======= ======= ======= ======= =======
Depreciation and amortization of
property and equipment:
Network applications.............. $ 172 $ 322 $ 435 $ 388 $ 728
Communications engineering........ 122 102 481 127 1,034
------- ------- ------- ------- -------
Total depreciation and
amortization of property
and equipment.............. $ 294 $ 424 $ 916 $ 515 $ 1,762
======= ======= ======= ======= =======
</TABLE>

F-23
<PAGE> 200

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of XYPOINT Corporation:

We have audited the accompanying balance sheets of XYPOINT Corporation (a
Washington corporation) as of December 31, 1999 and 1998, and the related
statements of operations, changes in shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of XYPOINT Corporation as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.

/s/ Arthur Andersen LLP

Seattle, Washington
December 6, 2000

F-24
<PAGE> 201

XYPOINT CORPORATION

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ---------------------------
2000 1999 1998
------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 7,333,107 $ 3,949,307 $ 10,779,639
Accounts receivable, trade................................ 1,945,720 771,039 255,303
Tenant improvement allowance receivable................... -- -- 262,427
Prepaid warrant and option expense........................ 41,812 1,008,996 --
Prepaid expenses and other................................ 350,865 219,273 247,925
------------ ------------ ------------
Total current assets............................... 9,671,504 5,948,615 11,545,294
Property and Equipment, net of accumulated depreciation and
amortization.............................................. 3,340,221 3,196,325 3,103,444
Other assets................................................ 224,521 198,444 179,576
------------ ------------ ------------
Total assets....................................... $ 13,236,246 $ 9,343,384 $ 14,828,314
============ ============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 935,225 $ 736,241 $ 834,925
Accrued liabilities....................................... 1,094,775 339,415 275,812
Deferred revenue.......................................... 484,602 360,629 8,750
Current portion of capital lease obligations.............. 960,072 987,924 1,042,266
------------ ------------ ------------
Total current liabilities.......................... 3,474,674 2,424,209 2,161,753
Capital lease obligations, less current portion............. 610,161 1,004,154 1,166,944
------------ ------------ ------------
Total liabilities.................................. 4,084,835 3,428,363 3,328,697
------------ ------------ ------------
Commitments & Contingencies (Notes 10 and 11)
Redeemable Convertible Preferred Stock:
Senior convertible preferred stock ($.01 par value,
35,733,767 shares authorized; 22,402,934, 15,895,660 and
15,895,660 issued and outstanding in 2000, 1999 and
1998, respectively)..................................... 36,589,169 26,522,995 26,091,520
------------ ------------ ------------
Shareholders' equity:
Convertible preferred stock ($.01 par value, 21,311,748
shares authorized; 16,696,842, 16,637,676 and 15,902,383
issued and outstanding in 2000, 1999 and 1998,
respectively):
Senior convertible preferred stock...................... 6,150,683 6,150,683 4,705,685
Junior convertible preferred stock...................... 1,276,172 1,273,214 1,245,005
Common stock ($.01 par value, 47,500,000 shares
authorized, 480,230, 406,817 and 30,200 shares issued
and outstanding as of 2000, 1999, and 1998,
respectively)........................................... 593,580 473,304 367,550
Warrants issued........................................... 1,691,250 1,335,492 --
Deferred compensation..................................... -- -- (39,070)
Accumulated deficit....................................... (37,149,443) (29,840,667) (20,871,073)
------------ ------------ ------------
Total shareholders' equity......................... (27,437,758) (20,607,974) (14,591,903)
------------ ------------ ------------
Total liabilities and shareholders' equity......... $ 13,236,246 $ 9,343,384 $ 14,828,314
============ ============ ============
</TABLE>

The accompanying notes are an integral part of these statements.

F-25
<PAGE> 202

XYPOINT CORPORATION

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
NINE MONTHS TWELVE MONTHS ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
------------------------- ---------------------------------------
2000 1999 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue....................... $ 5,553,624 $ 1,332,075 $ 2,206,660 $ 239,495 $ --
----------- ----------- ----------- ----------- -----------
Operating Expenses:
Operations.................. 2,863,426 2,023,582 2,813,425 2,250,178 --
Field marketing and
deployment............... 748,479 1,014,320 1,209,102 1,609,348 --
Research and development.... 2,911,575 1,229,398 1,793,670 1,871,093 2,861,948
General and
administrative........... 1,896,309 1,387,620 1,970,290 1,704,951 1,801,979
Sales and marketing......... 1,575,221 538,503 639,292 1,252,542 1,404,132
Stock option and warrant
compensation............. 1,152,454 93,496 369,958 75,035 328,046
Depreciation and
amortization............. 1,260,928 1,282,470 1,709,642 1,271,686 758,489
Restructuring charge........ -- 165,942 181,160 -- --
----------- ----------- ----------- ----------- -----------
Total operating
expenses.......... 12,408,392 7,735,331 10,686,539 10,034,833 7,154,594
----------- ----------- ----------- ----------- -----------
Loss from operations.......... (6,854,768) (6,403,256) (8,479,879) (9,795,338) (7,154,594)
Other income (expense):
Interest income............. 123,015 269,314 323,231 471,884 132,007
Interest expense............ (241,298) (288,034) (372,851) (301,015) (275,737)
Loss on disposal of fixed
assets................... (6,300) (9,619) (8,620) (14,298) --
----------- ----------- ----------- ----------- -----------
Net loss...................... (6,979,351) (6,431,595) (8,538,119) (9,638,767) (7,298,324)
Accretion of preferred
stock....................... (329,425) (323,607) (431,475) (274,236) (80,961)
----------- ----------- ----------- ----------- -----------
Net loss attributable to
common shareholders......... $(7,308,776) $(6,755,202) $(8,969,594) $(9,913,003) $(7,379,285)
=========== =========== =========== =========== ===========
Basic and diluted loss per
share....................... $ (15.65) $ (66.82) $ (57.10) $ (892.74) $ --
=========== =========== =========== =========== ===========
Weighted average number of
shares of common stock
outstanding................. 467,067 101,099 157,084 11,104 --
=========== =========== =========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these statements.

F-26
<PAGE> 203

XYPOINT CORPORATION

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
----------------------------------------------
SENIOR JUNIOR COMMON STOCK
-------------------- ----------------------- -------------------------
SERIES A SERIES D SERIES X NUMBER DEFERRED
SHARES SHARES SHARES AMOUNT OF SHARES AMOUNT COMPENSATION
--------- -------- ---------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996............. 5,000,000 -- -- $4,705,685 10,510,000 $ 1,263,976 $(120,789)
Recapitalization and issuance of
Series X junior preferred stock..... -- -- 10,510,000 1,263,976 (10,510,000) (1,263,976) --
Issuance of compensatory stock options
($.05 per share).................... -- -- -- -- -- 360,000 (360,000)
Exercise of compensatory stock
options............................. -- -- 50 50 -- -- --
Accretion of redeemable convertible
preferred stock..................... -- -- -- -- -- -- --
Amortization of deferred
compensation........................ -- -- -- -- -- -- 328,046
Net loss.............................. -- -- -- -- -- -- --
--------- ------- ---------- ---------- ----------- ----------- ---------
Balance, December 31, 1997............. 5,000,000 -- 10,510,050 5,969,711 -- 360,000 (152,743)
Exercise of stock options............. -- -- 392,333 19,617 30,200 7,550 --
Forfeitures of compensatory stock
options............................. -- -- -- (38,638) -- -- 38,638
Accretion of redeemable convertible
preferred stock..................... -- -- -- -- -- -- --
Amortization of deferred
compensation........................ -- -- -- -- -- -- 75,035
Net loss.............................. -- -- -- -- -- -- --
--------- ------- ---------- ---------- ----------- ----------- ---------
Balance, December 31, 1998............. 5,000,000 -- 10,902,383 5,950,690 30,200 367,550 (39,070)
Issuance of Series D preferred stock
($2.69 per share)................... -- 546,110 -- 1,469,034 -- -- --
Cost of issuance of preferred stock... -- -- -- (24,036) -- -- --
Exercise of stock options............. -- -- 189,183 9,459 376,617 94,154 --
Valuation adjustment of compensatory
stock options....................... -- -- -- 18,750 -- 11,600 --
Issuance of warrants.................. -- -- -- -- -- -- --
Accretion of redeemable preferred
stock............................... -- -- -- -- -- -- --
Amortization of deferred
compensation........................ -- -- -- -- -- -- 39,070
Net loss.............................. -- -- -- -- -- -- --
--------- ------- ---------- ---------- ----------- ----------- ---------
Balance, December 31, 1999............. 5,000,000 546,110 11,091,566 7,423,897 406,817 473,304 --
Exercise of stock options............. -- 59,166 2,958 73,413 18,631 --
Issuance of warrants.................. -- -- -- -- -- -- --
Accretion of redeemable convertible
preferred stock..................... -- -- -- -- -- -- --
Equity based compensation expense..... -- -- -- -- -- 101,645 --
Net loss.............................. -- -- -- -- -- -- --
--------- ------- ---------- ---------- ----------- ----------- ---------
Balance, September 30, 2000
(unaudited)........................... 5,000,000 546,110 11,150,732 $7,426,855 480,230 $ 593,580 $ --
========= ======= ========== ========== =========== =========== =========

TOTAL
ACCUMULATED SHAREHOLDERS'
WARRANTS ISSUED DEFICIT EQUITY
--------------- ------------ -------------
<S> <C> <C> <C>
Balance, December 31, 1996............. $ -- $(3,578,785) $ 2,270,087
Recapitalization and issuance of
Series X junior preferred stock..... -- -- --
Issuance of compensatory stock options
($.05 per share).................... -- -- --
Exercise of compensatory stock
options............................. -- -- 50
Accretion of redeemable convertible
preferred stock..................... -- (80,961) (80,961)
Amortization of deferred
compensation........................ -- -- 328,046
Net loss.............................. -- (7,298,324) (7,298,324)
---------- ------------ ------------
Balance, December 31, 1997............. -- (10,958,070) (4,781,102)
Exercise of stock options............. -- -- 27,167
Forfeitures of compensatory stock
options............................. -- -- --
Accretion of redeemable convertible
preferred stock..................... -- (274,236) (274,236)
Amortization of deferred
compensation........................ -- -- 75,035
Net loss.............................. -- (9,638,767) (9,638,767)
---------- ------------ ------------
Balance, December 31, 1998............. -- (20,871,073) (14,591,903)
Issuance of Series D preferred stock
($2.69 per share)................... -- -- 1,469,034
Cost of issuance of preferred stock... -- -- (24,036)
Exercise of stock options............. -- -- 103,613
Valuation adjustment of compensatory
stock options....................... -- -- 30,350
Issuance of warrants.................. 1,335,492 -- 1,335,492
Accretion of redeemable preferred
stock............................... -- (431,475) (431,475)
Amortization of deferred
compensation........................ -- -- 39,070
Net loss.............................. -- (8,538,119) (8,538,119)
---------- ------------ ------------
Balance, December 31, 1999............. 1,335,492 (29,840,667) (20,607,974)
Exercise of stock options............. -- -- 21,589
Issuance of warrants.................. 355,758 -- 355,758
Accretion of redeemable convertible
preferred stock..................... -- (329,425) (329,425)
Equity based compensation expense..... -- -- 101,645
Net loss.............................. -- (6,979,351) (6,979,351)
---------- ------------ ------------
Balance, September 30, 2000
(unaudited)........................... $1,691,250 $(37,149,443) $(27,437,758)
========== ============ ============
</TABLE>

The accompanying notes are an integral part of these statements.

F-27
<PAGE> 204

XYPOINT CORPORATION

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, TWELVE MONTHS DECEMBER 31,
------------------------- ---------------------------------------
2000 1999 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss....................................... $(6,979,351) $(6,431,595) $(8,538,119) $(9,638,767) $(7,298,324)
Adjustments to reconcile net loss to net cash
used in operating activities--
Stock option and warrant compensation
expense.................................... 1,197,084 93,496 386,645 75,035 328,046
Accrued interest on bridge notes converted to
redeemable preferred stock................. 21,202 -- -- -- 33,972
Loss on disposal of fixed assets............. 6,300 9,619 8,620 14,298 --
Depreciation and amortization................ 1,260,928 1,282,470 1,709,644 1,271,686 758,489
Changes in certain assets and liabilities:
Accounts receivable........................ (1,174,681) (437,335) (515,736) (202,222) 741,623
Tenant improvement allowance receivable and
other................................... -- -- -- (262,427) --
Prepaid expenses and other assets.......... (157,669) 361,500 344,482 (158,890) (64,732)
Accounts payable and accrued liabilities... 954,344 83,434 149,869 484,128 (57,802)
Deferred revenue........................... 123,973 124,074 352,379 (27,046) (8,916)
----------- ----------- ----------- ----------- -----------
Net cash used in operating activities...... (4,747,870) (4,914,337) (6,102,216) (8,444,205) (5,567,644)
----------- ----------- ----------- ----------- -----------
Cash Flows From Investing Activities:
Long-term lease deposit........................ -- -- -- (156,842) --
Proceeds from sale of equipment................ -- -- 1,000 2,080 --
Equipment purchases............................ (939,375) (798,426) (1,014,465) (440,978) (499,994)
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities...... (939,375) (798,426) (1,013,465) (595,740) (499,994)
----------- ----------- ----------- ----------- -----------
Cash Flows From Financing Activities:
Proceeds from sale of convertible preferred
stock, net of issuance costs paid............ -- -- 1,444,998 -- --
Proceeds from sale of redeemable convertible
preferred stock, net of issuance costs
paid......................................... 7,943,409 -- -- 15,445,729 8,256,622
Bridge note loan............................... 2,000,000 -- -- -- 2,000,000
Proceeds from exercise of common and preferred
stock options................................ 21,589 57,226 103,613 27,167 50
Payments of capital lease obligations.......... (893,953) (974,309) (1,263,262) (743,946) (440,352)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used for) financing
activities.............................. 9,071,045 (917,083) 285,349 14,728,950 9,816,320
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................. 3,383,800 (6,629,846) (6,830,332) 5,689,005 3,748,682
Cash and Cash Equivalents:
Beginning of year.............................. 3,949,307 10,779,639 10,779,639 5,090,634 1,341,952
----------- ----------- ----------- ----------- -----------
End of period.................................. $ 7,333,107 $ 4,149,793 $ 3,949,307 $10,779,639 $ 5,090,634
=========== =========== =========== =========== ===========
Noncash supplemental disclosures of cash flow
information:
Conversion of bridge loan and interest......... $ 2,021,202 $ -- $ -- $ -- $ 2,033,972
Assets acquired under capital leases........... $ 476,107 $ 472,977 $ 860,679 $ 1,795,614 $ 1,020,192
Issuance of warrants and options............... $ 127,896 $ 54,427 $ 1,335,492 $ -- $ --
Issuance of warrants to bridge note holders.... $ 277,862 $ -- $ -- $ -- $ --
=========== =========== =========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these statements.

F-28
<PAGE> 205

XYPOINT CORPORATION

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1999 AND SEPTEMBER 30, 2000
(AMOUNTS AND DISCLOSURES AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999 ARE UNAUDITED)

1. ORGANIZATION:

XYPOINT Corporation (the Company), a Washington corporation, was organized
to develop and market location-enhanced services to mobile people through their
wireless devices. From inception it has been engaged in research and development
on several such technologies. Beginning in 1996 the Company began to devote
substantial resources to build a service platform and test the market
opportunity for providing enhanced 911 (E-911) services to wireless carriers. In
1998 the Company launched such services on a commercial basis. Prior to 1998 the
Company was a development stage company. During 1999 the Company initiated
research activities to extend its capabilities to include wireless connectivity
to digital data originating on the Internet and on corporate networks. The first
products in this line of business will be launched in 2000 under the name
WebWirelessNow. Substantially all revenue recognized by the Company in 1999 and
1998 and for the nine months ended September 30, 2000 relate to E-911 phone
location services.

On December 23, 1997, with its order 94-102 (the Order), the Federal
Communications Commission (FCC) finalized a regulatory action that requires
location-based information be provided when cellular users access local E-911
systems. Cellular carriers are required to make this information available to
public safety answering points (PSAPs) when requested and when the applicable
state or local jurisdiction has approved a cost reimbursement methodology. The
requirement will be phased in, with call location determined by the nearest
cellular site required as of April 1, 1998, and with location precision down to
125 meters by October 2001. Carriers are required to provide such services in
Phase I within six months of receiving a formal request. There are, however, no
monetary penalties associated with non-compliance. On December 12, 1999, the
FCC, in an attempt to increase the pace of deployment of E-911 services, amended
the Order to eliminate the requirement that carrier cost reimbursement from
Public Safety be provided.

The Company has developed an end-to-end network-based solution to provide
this service to carriers in compliance with the FCC order. Its solution meets
the requirements of Phase I of the Order and was developed specifically to
integrate with all types of precise location technology that may ultimately be
used in Phase II. During 1997 and 1998, the Company substantially increased its
expenditures on sales and marketing, research and development, and in building
infrastructure to prepare for a product launch of its wireless E-911 services.
Sales and marketing and deployment expenses were reduced in 1999 to reflect the
market opportunity to sell and deploy such services. Revenues were generated in
1998 as service was activated in several markets and such revenues increased in
1999. As of December 31, 1999, the Company had signed agreements to provide
services to 14 cellular carriers.

To achieve profitability from its phone location services, the Company must
deploy its services to a substantial percentage of the PSAPs covered under its
current carrier

F-29
<PAGE> 206
XYPOINT CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

1. ORGANIZATION: -- (CONTINUED)
contracts and/or secure and deploy services under additional carrier contracts.
Although the Company expects the pace of deployment of its services to
accelerate, particularly in response to the recent FCC rulings, due to the
nature of dealing with state and local governments the pace of activation of
services is difficult to predict. Although its phone location revenues are
increasing faster than the cost to provide such services, the Company plans to
expend significant additional resources in 2001 on product development and sales
and marketing for its WebWirelessNow family of services. Therefore, the Company
does not expect to achieve overall profitability in 2001. If, during the period
required to roll out such services, the Company requires additional funds, there
is no assurance that such funding will be available at terms satisfactory to the
Company.

To date, the Company has incurred recurring operating losses and has
accumulated a deficit of $29,840,667 as of December 31, 1999 and $37,149,443 as
of September 30, 2000. Accordingly, if the merger discussed in Note 14 is not
completed, management intends to raise additional funds during 2001.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Cash and Cash Equivalents

The Company considers highly liquid instruments with an original maturity
of three months or less to be cash equivalents. Cash equivalents are stated at
cost, which approximates market value. At December 31, 1999 and September 30,
2000 the Company's cash and cash equivalents (which consist of repurchase
agreements) were held with a single commercial bank.

Property and Equipment

Property and equipment are stated at cost. Leases to finance furniture and
equipment that include a bargain purchase option or that transfer title to the
Company at the end of the lease term are accounted for as capital leases, as are
those where the discounted present value of the required lease payments equals
or exceeds 90% of the fair value of the equipment acquired. Improvements and
replacements are capitalized. Maintenance and repairs are expensed when
incurred. The provision for depreciation is determined using the straight-line
method, which allocates costs over the property and equipment's estimated useful
lives of two to seven years.

Equity-Based Compensation

The Company accounts for its equity-based compensation plans following the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." As such, the Company is subject to the disclosure-only
requirements provided for under Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation" and accordingly, does
not recognize compensation expense for options granted to employees with an
exercise price equal to or in excess of fair value of the underlying security at
the date of grant.

F-30
<PAGE> 207
XYPOINT CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Income Taxes

The Company accounts for income taxes using the asset and liability method
as required by SFAS No. 109, "Accounting for Income Taxes." Under this method,
deferred income taxes are recognized for the future tax consequences of
differences between tax and financial accounting bases of assets and liabilities
at each year-end. Deferred income taxes are based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. A valuation allowance is established when
necessary to reduce deferred tax assets to the amounts expected to be realized.

Revenue Recognition

Revenue is primarily from monthly recurring service fees related to its
E9-1-1 business. Such revenues are recognized in the month earned. Revenues
billed in advance of completing the earnings process are deferred.

Research and Development

Research and development costs are expensed as incurred.

Reclassifications

Certain reclassifications have been made to conform the prior year's data
with the current year presentation.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.

Classifications

Costs of operating the Company's service platform (except depreciation) are
classified as "Operations" expense in the accompanying statements of operations.
Costs of personnel to interface with and secure commitment from PSAPs, to work
with individual governmental jurisdictions on setting up administrative
procedures, and to technically deploy the XYPOINT solution are classified as
"Field marketing and deployment". Costs related to the Company's general
marketing programs, carrier sales programs, and legislative activities are
classified as "Sales and marketing" expense.

Unaudited Interim Financial Data

In the opinion of management, the accompanying unaudited financial
statements reflect all adjustments, consisting of only normal recurring
accruals, necessary for a fair

F-31
<PAGE> 208
XYPOINT CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
presentation of the financial position of the Company as of September 30, 2000,
and the results of its operations an cash flows for the nine month periods ended
September 30, 1999 and 2000. The September 30, 1999 and 2000 financial
statements are unaudited, and do not include all related footnote disclosures
that would be necessary in year end audited financial statements. The results of
operations for the nine months ended September 30, 2000 are not necessarily
indicative of the results of operations expected in the future.

Segment Information

The Company has adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information". The
Company manages its business under one reporting segment, telecommunications
services. As such, all operating decisions are based upon the company operating
under a single segment. Additionally, all of its activities take place in the
United States.

Recently Issued Accounting Standards

In March 2000, the FASB released FASB Interpretation No. 44, "Accounting
for Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25," which provides clarification of Opinion 25 for certain issues
such as the determination of an employee, the criteria for determining whether a
plan qualifies as a non-compensatory plan, the accounting consequences of
various modification to the terms of a previously fixed stock option award, and
the accounting for an exchange of stock compensation award in a business
combination. Management believes that the Company's practices are in conformity
with this guidance, and therefore Interpretation No. 44 will have no impact on
our financial statements.

Advertising Costs

All advertising costs are expensed as incurred. The Company does not incur
any significant direct-response advertising costs. For the years ended December
31, 1999, 1998 and 1997 and for the nine months ended September 30, 2000 and
1999 advertising costs totaled $47,181, $80,579, $96,113, $332,232 and $36,834,
respectively.

Computation of Basic and Diluted Net Loss Per Share

Historical net loss per share has been calculated under Statement of
Financial Accounting Standards No. 128 "Earnings per Share." Basic net loss per
share on a historical basis is computed using the weighted average number of
shares of common stock outstanding. No diluted loss per share information has
been presented in the accompanying statements, of operations since potential
common shares from conversion of preferred stock, stock options, and warrants
are anti-dilutive.

F-32
<PAGE> 209
XYPOINT CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

3. EARNINGS PER SHARE:

At September 30, 2000, approximately 43,000,000 options, warrants and
preferred shares were outstanding but were not included in the computation of
diluted earnings per share, as their inclusion would be anti-dilutive.

4. REDEEMABLE CONVERTIBLE PREFERRED STOCK:

Redeemable Convertible Preferred Stock

In 2000, the Board approved the amendment of the Company's Articles of
Incorporation which increased the number of shares of authorized redeemable
convertible preferred stock from 19,500,000 to 35,733,767, of which 7,000,000 is
designated Series B preferred stock, 12,500,000 is designated Series C preferred
stock, and 16,233,767 is designated as Series E preferred stock. The Series B,
C, and E preferred stock are voting redeemable convertible preferred stock with
liquidation preferences of $1.75, $1.75, and $1.54 per share, respectively. All
series of redeemable convertible (Series B, C, and E) and convertible (Series A
and D) (Note 5) preferred stock have equal priority in liquidation and have
priority superior to the Series X junior preferred stock. At any time on or
after December 31, 2002 the Series B, C and E shares can be redeemed upon demand
by the majority of the holders of the respective shares or at the option of the
Company. The redemption price is $1.75 per share for Series B and C and $1.54
for Series E, plus, in the case of redemption at the option of the Company, a
cumulative dividend at the rate of 8% per annum. Accordingly, the reduction in
recorded value of Series B, C, and E preferred stock attributable to the stock
issuance costs is being accreted back into the recorded value of the stock from
the issuance date of each respective class to the redemption date on a ratable
basis. Each preferred share is convertible into one share (Series B, C, and E
are subject to an anti-dilutive conversion formula) of the Company's common
stock at the option of the preferred shareholder or automatically at the earlier
of (i) an initial public offering of the Company's common stock pursuant to an
effective registration statement under the Securities Act of 1933 (subject to
other restrictions and limitations), or (ii) by the written consent of one-half
of the outstanding Series B, C or E shareholders, with each series of preferred
stock voting as a separate class. Warrants to purchase shares of redeemable
convertible preferred stock are outstanding as follows:

Series B -- 156,809 at a price of $1.93, Series C -- 490,207 at prices
ranging from $1.75 to $2.69, Series E -- 259,740 at a price of $1.54.

Series C Redeemable Preferred Stock Offering

In July and October 1998 the Company issued a total of 9,506,431 shares of
its Series C preferred stock at $1.75 per share for net consideration of
approximately $15,446,000. In connection with this offering, the Company granted
five-year warrants to purchase 285,193 (3%) of the Series C preferred stock sold
by the offering agent. The warrants are exercisable for a four-year period
commencing one year from the offering date at a price of $2.10 per warrant. In
connection with the issuance of the Series C shares, the number of authorized
common shares was increased to 47,500,000. During 1999

F-33
<PAGE> 210
XYPOINT CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

4. REDEEMABLE CONVERTIBLE PREFERRED STOCK: -- (CONTINUED)
an additional 205,014 Series C warrants were issued to outside consultants with
a strike price ranging from $1.75 to $2.69 per share.

Series E Redeemable Preferred Stock Offering

On May 8, 2000, the Board approved an amendment to the Articles of
Incorporation authorizing 16,233,767 shares of Series E Convertible Preferred
and, at the same time designated and approved for sale up to that amount of
Series E Convertible Preferred stock at $1.54 per share. In July 2000 the
Company issued $2 million in aggregate principal amount of 9% Subordinated
Convertible Notes (the Bridge Notes) due September 30, 2000 to existing
shareholders of the Company. In connection with the issuance of the Bridge
Notes, the Company issued warrants exercisable for that number of shares
purchasable in the Company's next equity financing raising $10 million equal to
the face amount of the notes multiplied by 20%. On August 18, 2000 the Company
closed on the sale of approximately 6.5 million shares of Series E Convertible
Preferred Stock with proceeds of approximately $10 million, including the $2
million in Bridge Notes, which were converted together with accrued interest to
Series E shares. On that date, the warrants issued by the Company in connection
with the issuance of the Bridge Notes became exercisable for 259,740 shares of
Series E Preferred Stock at an exercise price of $1.54 per share.

The issuance of Series E at a price less than that of Series B, C and D
caused certain antidilution clauses relative to the earlier issuances to become
effective. Therefore, the conversion ratio for Series B and C increased from 1.0
to 1.017 common shares per preferred share, and the Series D conversion ratio
increased from 1.0 to 1.067 common shares per preferred share.

5. SHAREHOLDERS' EQUITY:

Convertible Preferred Stock

In 1999, the Board approved the amendment of the Company's Articles of
Incorporation which increased the number of shares of authorized convertible
preferred stock from 18,000,000 to 21,311,748, of which 5,000,000 is designated
Series A senior preferred stock, 3,311,748 is designated as Series D senior
preferred stock, and 13,000,000 is designated Series X junior preferred stock.
The Series A, D and X preferred stock are voting convertible preferred stock
with liquidation preferences of $1.00, $2.69 and $0.80 per share, respectively.
All series of convertible (Series A and D) and redeemable convertible (Series B,
C, and E) (Note 4) preferred stock have equal priority in liquidation and have
priority superior to the Series X junior preferred stock. The redemption price
is $2.69 per share for Series D, plus, in the case of redemption at the option
of the Company, a cumulative dividend at the rate of 8% per annum. Each
preferred share is convertible into one share (Series A and D are subject to an
anti-dilutive conversion formula) of the Company's common stock at the option of
the preferred shareholder or automatically at the earlier of (i) an initial
public offering of the Company's common stock pursuant to an effective
registration statement under the Securities Act of 1933 (subject to other
restrictions and limitations), or (ii) by the written

F-34
<PAGE> 211
XYPOINT CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

5. SHAREHOLDERS' EQUITY: -- (CONTINUED)
consent of two-thirds of the outstanding Series A preferred shareholders,
one-half of the outstanding Series X shareholders, or 60% of the outstanding
Series D shareholders, with each series of preferred stock voting as a separate
class. Warrants to purchase shares of convertible preferred stock are
outstanding as follows:

Series D -- 2,400,000 at a price of $2.69 (expired, see Series D Preferred
Stock Offering below), Series X -- 216,250 and 500,000 at a price of $1.10 and
$2.50, respectively.

Founders' Agreement

The Company granted options to purchase 3,000,000 shares of common stock to
the president of the Company under the 1997 Plan. The founders of the Company
each agreed to contribute up to 1,150,000 shares of Junior X preferred stock to
the Company on a one-for-one basis at the time the President of the Company
exercises common options. They granted the president voting control over
1,583,333 shares of Series X junior preferred stock owned by each of them,
reduced by the number of shares of Series X junior preferred stock contributed
by the founders to the Company, and to the extent the president of the Company
exercises options to purchase more than 2,300,000 shares of common stock, by
one-half of the number of shares issued to the president of the Company upon
such exercise. In conjunction with the Series B preferred stock issuance the two
founders and president agreed to contribute certain shares to the Series B
investors as necessary to maintain certain return levels for those investors.
Accordingly, 701,000 shares of the president's stock options have been accounted
for using the variable accounting rules whereby the increase of estimated fair
market value of the company's stock at each reporting date over the options
original strike price is recorded as additional compensation expense in the
period of the change. The charge for the nine-month period ended September 30,
2000 was $101,645. For 1999, 1998, and 1997 the compensation expense for these
options represents a portion of the amortization of the deferred compensation
shown on the face of the statement of operations.

In September 2000, in connection with the issuance of the Series E
Redeemable Preferred Stock the founders of the Company and the president
modified the above agreement. Pursuant to the modification, the president
surrendered 350,500 options back to the Company and reduced his voting control
over shares of Series X junior preferred stock owned by each of the founders by
175,250 shares. In addition, the founders' obligation to contribute Junior X
preferred stock back to the Company was reduced by 175,250 shares each. As a
result, the 350,500 options were cancelled and the compensation expense related
to them was reversed in the period ended September 30, 2000. In conjunction with
the modification, the remaining 350,500 stock options were no longer subject to
this arrangement and therefore they are no longer subject to future adjustments
under variable accounting.

Series D Preferred Stock Offering

In November and December 1999 the Company issued a total of 546,110 shares
of its Series D preferred stock at $2.69 for net consideration of approximately
$1,445,000. Shares

F-35
<PAGE> 212
XYPOINT CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

5. SHAREHOLDERS' EQUITY: -- (CONTINUED)
with gross proceeds of $1,000,000 (371,748 shares) were issued to a strategic
investor who simultaneously signed a one-year service agreement for the Company
to provide certain Internet related wireless data services. This strategic
investor has also been issued a warrant to purchase Series D preferred stock in
an amount that would allow the investor to obtain ownership of 6.9% (up to
2,400,000 additional shares) of the equity of the Company on a fully diluted
basis. This warrant is priced at $2.69 per share, is fully vested, and expired
on May 12, 2000. The warrant may be exercised in full or in part, subject to a
minimum exercise of $1,000,000 face value. The warrant was determined to have a
fair market value, using the Black-Scholes method, of $1,153,000. This amount
has been recorded as equity and is being amortized to expense ratably over a
12-month period. The Series D preferred shares are redeemable only in the case
that warrants with a minimum value of $3,000,000 were exercised. In connection
with the issuance of the Series D shares and warrants the number of authorized
common shares was increased to 47,500,000 and certain preferred return features
of the Series C preferred were eliminated.

On the date of expiration, May 12, 2000, the Series D warrants expired
unexercised. Accordingly, the remaining unamortized value of such warrants was
charged to expense at that time.

6. EQUITY-BASED COMPENSATION:

The shareholders and Board approved the combined incentive and nonqualified
1995 Stock Option Plan (the 1995 Plan) in May 1995. Pursuant to a
recapitalization in April 1997 the Company determined to no longer grant any
options under the 1995 Plan and converted the existing options to options to
purchase Series X Junior Preferred stock. The Board adopted the 1997 Stock Plan
(the 1997 Plan) in April 1997. The 1997 Plan provides for the grant of options
to purchase 6,850,000 shares of common stock and for the issuance of restricted
stock to employees, directors and consultants of the Company. The 1997 Plan is
administered by the Board or a committee of the Board (the Administrator). In
addition to option grants, the Administrator has the authority to grant
restricted stock pursuant to the stock purchase rights provisions of the 1997
Plan. The purchase price per share of all restricted stock issued under the 1997
Plan must equal at least 85% of the fair market value of the common stock on the
date of issuance. As of September 30, 2000 no restricted stock has been issued.
In September 2000, the Board and shareholders approved the discontinuance of
future grants under the 1997 Plan and created the 2000 Stock Plan (the 2000
Plan), which reserves for issuance 1,300,000 shares of the Company's common
stock. The terms and conditions of the 2000 Plan are substantially equivalent to
those in the 1997 Plan. All options granted subsequent to September 19, 2000
were granted under the 2000 Plan.

The Company recognized stock option and warrant expense in 1999, 1998, and
1997 for vesting of compensatory options issued in prior years, for warrants and
options issued to a strategic investor and to consultants, and for the extension
of the exercise period for certain stock options. Compensation expense relating
to the vesting of options granted by the Company for the years ended December
31, 1999, 1998 and 1997 and for the nine

F-36
<PAGE> 213
XYPOINT CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

6. EQUITY-BASED COMPENSATION: -- (CONTINUED)
months ended September 30, 2000 and 1999 was $39,070, $75,035, $328,046,
$143,457, and $0, respectively. Had compensation cost for the 1997 and 1995
Plans been determined consistent with SFAS No. 123, the Company's net loss for
the years ended December 31, 1999, 1998, and 1997 would have been increased to
$8,556,738 and $9,718,566, and $7,380,881 respectively, on a pro forma basis.

The following table describes the transactions under the 1995 and 1997
Plans.

<TABLE>
<CAPTION>
SERIES X JUNIOR
COMMON STOCK PREFERRED STOCK
--------------------- ----------------------
WEIGHTED WEIGHTED
SHARES AVERAGE SHARES AVERAGE
SUBJECT TO EXERCISE SUBJECT TO EXERCISE
OPTION PRICE OPTION PRICE
---------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1997............... 4,660,750 $0.16 827,583 $0.05
Grants......................................... 1,613,925 0.49 -- --
Exercised...................................... (30,200) 0.25 (392,333) 0.05
Canceled....................................... (283,850) 0.25 (61,650) 0.05
--------- --------
Outstanding at December 31, 1998............... 5,960,625 0.26 373,600 0.05
Grants......................................... 794,500 0.33
Exercised...................................... (376,617) 0.25 (189,183) 0.05
Canceled....................................... (556,711) 0.25 (4,752) 0.05
--------- --------
Outstanding at December 31, 1999............... 5,821,797 0.27 179,665 0.05
Grants......................................... 1,007,000 0.54 --
Exercised...................................... (73,413) 0.25 (59,166) 0.05
Cancelled...................................... (403,833) 0.21 (4,499) 0.05
--------- --------
Outstanding at September 30, 2000.............. 6,351,551 0.16 116,000 0.05
========= ========
Exercisable at December 31, 1999............... 4,807,466 0.22 179,665 0.05
========= ========
</TABLE>

On January 12, 1999, the Board of Directors retroactively adjusted the
vesting period of all options outstanding to current employees under both plans
from five to three years. The amounts shown as exercisable in the table above
and the expected life of the outstanding options take into account the
three-year vesting period.

Of the 5,821,797 options outstanding under the 1997 Plan at December 31,
1999, 1,800,000 have an exercise price of $.05 and a weighted average remaining
contractual life of 7.49 years; all of these options are currently exercisable.
Another 150,000 and 100,000 options have exercise prices of $1.50 and $2.25,
respectively. The weighted average remaining contractual life of both pools of
options is 8.41 years; 87,500 and 58,333 of these options, respectively are
currently exercisable. The remaining options have an exercise price of $0.25 and
a weighted average remaining contractual life of 8.02 years; 2,861,633 of these
options are currently exercisable. The weighted average per share fair value of
options granted under the 1997 Plan was $0.04, $0.05 and $0.11 for 1999, 1998
and 1997, respectively. The weighted average remaining contractual life of the
options outstanding under the 1995 Plan is 6.0 years.

F-37
<PAGE> 214
XYPOINT CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

6. EQUITY-BASED COMPENSATION: -- (CONTINUED)
The Company's calculation of the fair market value of options granted was
based on the minimum value method as prescribed for private companies under SFAS
No. 123. Significant assumptions used to determine fair market value are as
follows:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Weighted average risk-free interest
rates................................... 5.9% 5.9% 6.1%
Weighted average expected life of
options................................. 3 years 5 years 3 years
Expected dividends........................ -- -- --
</TABLE>

On December 5, 2000 XYPOINT granted options to employees to purchase
134,500 shares of common stock with an exercise price of $0.87 per share.

7. PROPERTY AND EQUIPMENT:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Computer equipment and software............................ $ 6,104,055 $ 5,058,809
Furniture.................................................. 525,277 144,660
Leasehold improvements..................................... 464,557 24,854
Construction in progress................................... -- 100,050
----------- -----------
7,093,889 5,328,373
Less accumulated depreciation and amortization............. (3,897,564) (2,224,929)
----------- -----------
$ 3,196,325 $ 3,103,444
=========== ===========
</TABLE>

8. ACCRUED LIABILITIES:

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- -------------------
2000 1999 1998
------------- -------- --------
<S> <C> <C> <C>
Carrier liability................................... $ 807,592 $161,590 $ 84,173
Vacation............................................ 154,719 98,761 127,445
Other............................................... 132,464 79,064 64,194
---------- -------- --------
1,094,775 $339,415 $275,812
========== ======== ========
</TABLE>

F-38
<PAGE> 215
XYPOINT CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

9. INCOME TAXES:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1999 1998
------------ -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward......... $ 9,328,000 $ 6,684,000
Research and development credit
carryforward......................... 329,000 242,000
Stock and warrant compensation.......... 191,000 201,000
Property and Equipment.................. 102,000 --
Other................................... 62,000 51,000
Valuation allowance..................... (10,012,000) (7,169,000)
------------ -----------
Total deferred tax assets............ -- 9,000
Deferred tax liabilities:
Property and equipment.................. -- (9,000)
------------ -----------
Net deferred taxes................... $ -- $ --
============ ===========
</TABLE>

At December 31, 1999, the Company's net has operating loss and research and
development credit carryforwards of approximately $27,400,000 and $329,000
respectively, which begin to expire in 2007, and are subject to limitations. The
Company has determined that its deferred tax assets do not satisfy the
recognition criteria set forth under SFAS No. 109. Accordingly, a valuation
allowance has been recorded against the applicable deferred tax assets,
therefore no tax benefit has been recorded in the accompanying statements of
operations. The Company's valuation allowance increased by $2,843,000,
$3,279,000 and $2,671,000 during 1999, 1998 and 1997, respectively.

10. CAPITAL LEASES:

The Company has entered into noncancelable capital lease agreements
involving, furniture and equipment through 2003. Future minimum payments under
these leases, as of December 31, 1999, are as follows:

<TABLE>
<S> <C>
2000.................................................... $1,176,231
2001.................................................... 826,053
2002.................................................... 266,526
2003.................................................... 11,132
----------
Total minimum lease payments............................ 2,279,942
Less- Amount representing interest (9-21%).............. (287,864)
----------
Present value of net minimum lease payments............. 1,992,078
Less current portion.................................... (987,924)
----------
$1,004,154
==========
</TABLE>

Furniture, equipment, and software financed by capital leases amounted to
$4,544,312 and $3,683,632 as of December 31, 1999 and 1998, respectively.
Accumulated depreciation related to these assets was $2,071,126 and $1,424,133
as of December 31, 1999 and 1998,

F-39
<PAGE> 216
XYPOINT CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

10. CAPITAL LEASES: -- (CONTINUED)
respectively. Cash paid for interest by the Company, primarily relating to
capital leases, was $365,413, $293,993, $261,969, $240,712 and $288,034 for the
years ended December 31, 1999, 1998 and 1997 and for the nine months ended
September 30, 2000 and 1999, respectively.

11. FACILITIES:

The Company leases its principal facilities, located in Seattle,
Washington, under an operating lease covering 22,400 square feet at a monthly
rental of $52,300. The lease term extends through March 31, 2004 and contains a
renewal option for an additional five-year term at fair market rent. At December
31, 1998 the Company had recorded a receivable of $262,427 related to amounts
due from the landlord for construction in progress pursuant to the lease
agreement. A related payable to a construction company of $262,427 was included
in accounts payable. Both the receivable and payable were settled during 1999.

During the first quarter of 1999, the Company leased approximately 10,000
square feet under an operating lease and additional space on a month-to-month
basis for its principal office facility in Seattle, Washington.

The Company also has an operating lease agreement for approximately 1,500
square feet for a redundant data center in Phoenix, Arizona. The lease commenced
March 1, 1999, has a five-year term, and has an average monthly rental rate of
$2,200.

The following shows operating lease commitments through 2004:

<TABLE>
<S> <C>
2000.................................................... $ 652,488
2001.................................................... 652,488
2002.................................................... 654,581
2003.................................................... 655,000
2004.................................................... 161,447
----------
Total minimum lease payments............................ $2,776,004
==========
</TABLE>

Total rental expense for the Company's operating leases for the years ended
December 31, 1999, 1998 and 1997 and for the nine months ended September 30,
2000 and 1999 was $465,128, net of sublease rentals, $291,052, $239,810,
$468,294 and $360,897, respectively.

12. CUSTOMER CONCENTRATION:

Substantially all of the Company's revenues in the periods presented were
related to its E-911 phone location services. The Company has generated revenue
from a limited number of customers and in a limited number of state and local
jurisdictions with enabling cost recovery mechanisms. At September 30, 2000 and
December 31, 1999 approximately 64% and 86%, respectively, of accounts
receivable were due from a single wireless carrier. At December 31, 1998
approximately 52% of accounts receivable were due from a single wireless carrier
and 46% were due from two other wireless carriers. Following are two

F-40
<PAGE> 217
XYPOINT CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

12. CUSTOMER CONCENTRATION: -- (CONTINUED)
tables showing revenue concentration by customer and by state for 1999 and for
the nine months ended September 30, 2000. Information for 1998 is not presented
as total revenues in that year were insignificant.

<TABLE>
<CAPTION>
DECEMBER 31, 1999 SEPTEMBER 30, 2000
----------------- ------------------
CUSTOMER PERCENT OF REVENUE
-------- --------------------------------------
<S> <C> <C>
A 63% 70%
B 15 7
C 14 5
</TABLE>

<TABLE>
<CAPTION>
STATE PERCENT OF REVENUE
----- --------------------------------------
<S> <C> <C>
A 53% 22%
B 12 10
C 11 5
D -- 15
E -- 13
F -- 11
</TABLE>

During 1999 it was announced that four wireless carriers would, through a
series of mergers and joint ventures, form a nationwide entity to be known as
Verizon Wireless. The majority owner of this new joint venture entity is not
currently a customer of the Company but the other three carriers are. These
three carriers accounted for approximately 63% of the Company's 1999 revenues
and approximately 70% of revenues for the nine months ended September 30, 2000.
Subsequent to September 30, 2000, Verizon announced the pending acquisition of
Price Communications, a customer of the Company. Taking into account this
pending transaction, approximately 77% of the Company's revenue for the nine
months ended September 30, 2000 would be attributed to Verizon. Contracts with
these customers contain various terms through October 2001.

13. RESTRUCTURING CHARGE:

During the first quarter of 1999 the Company determined it was overstaffed
relative to the near term-opportunity to generate phone location revenues from
its E9-1-1 service. Accordingly, approximately twenty employees were
involuntarily terminated and special termination benefits were provided. All
amounts classified as "restructuring charge" in the accompanying statements of
operations relate to such termination benefits and all such amounts had been
fully paid by December 31, 1999.

14. MERGER AGREEMENT:

On November 15, 2000 XYPOINT entered into a definitive merger agreement
with TeleCommunications Systems Corporation (TCS) whereby all outstanding common
shares and options, convertible preferred stock, warrants and options, and
redeemable convertible preferred stock and warrants will be acquired for 4.3
million shares of TCS Series A common stock. The transaction will be treated as
a purchase for accounting purposes. Completion of the transaction is subject to
approval of XYPOINT shareholders and the

F-41
<PAGE> 218
XYPOINT CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

14. MERGER AGREEMENT: -- (CONTINUED)
effectiveness of a Form S-4 registration statement to be filed by TCS. In
contemplation of the merger, the Founder's Agreement, more fully described in
Footnote 5, was terminated by the founders' contribution of a total of 1,949,500
shares of Series X junior preferred stock back to the Company and the
termination president's voting control over the remaining Series X shares held
by the founders.

F-42
<PAGE> 219

APPENDIX A

AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
TELECOMMUNICATION SYSTEMS, INC.
WINDWARD ACQUISITION CORP., AND
XYPOINT CORPORATION

NOVEMBER 15, 2000
<PAGE> 220

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE I THE MERGER............................................. A-1
1.1 The Merger.................................................. A-2
1.2 Closing; Effective Time..................................... A-2
1.3 Effect of the Merger........................................ A-2
1.4 Articles of Incorporation; Bylaws........................... A-2
1.5 Directors and Officers...................................... A-2
1.6 Effect on Target Capital Stock and Options.................. A-3
1.7 Exchange Procedures......................................... A-6
1.8 No Further Ownership Rights in Target Capital Stock......... A-7
1.9 Lost, Stolen or Destroyed Certificates...................... A-8
1.10 Tax Consequences............................................ A-8
1.11 Taking of Necessary Action; Further Action.................. A-8
1.12 Definitions................................................. A-8
ARTICLE II REPRESENTATIONS AND WARRANTIES OF TARGET.............. A-11
2.1 Organization, Standing and Power............................ A-11
2.2 Capital Structure........................................... A-12
2.3 Authority; No Conflict...................................... A-13
2.4 Financial Statements........................................ A-14
2.5 Disclosure Documents........................................ A-14
2.6 Absence of Certain Changes; Liabilities..................... A-14
2.7 Accounts Receivable......................................... A-15
2.8 Litigation.................................................. A-16
2.9 Restrictions on Business Activities......................... A-16
2.10 Title to Property; Absence of Liens......................... A-16
2.11 Intellectual Property....................................... A-17
2.12 Environmental Matters....................................... A-19
2.13 Taxes....................................................... A-20
2.14 Employee Benefit Plans...................................... A-21
2.15 Employees and Consultants................................... A-23
2.16 Customers and Suppliers; Products........................... A-24
2.17 Material Contracts.......................................... A-25
2.18 Target 911 Business Regulatory Compliance and Contracts..... A-26
2.19 Third-Party Consents........................................ A-27
2.20 Insurance................................................... A-27
2.21 Compliance with Laws; Governmental Authorizations........... A-27
2.22 Brokers' and Finders' Fees.................................. A-27
2.23 Target Agreements........................................... A-28
2.24 Board Approval; Shareholder Approval Required............... A-28
2.25 Minute Books................................................ A-28
2.26 Export Control Laws and Foreign Corrupt Practices Act....... A-28
2.27 Representations Complete.................................... A-29
2.28 Registration Rights......................................... A-29
2.29 Beneficial Ownership of Acquiror Stock...................... A-29
</TABLE>

A-i
<PAGE> 221

<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE III REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND MERGER
SUB............................................... A-29
3.1 Organization, Standing and Power............................ A-29
3.2 Capital Structure........................................... A-30
3.3 Authority................................................... A-30
3.4 SEC Documents; Financial Statements......................... A-31
3.5 Disclosure Documents........................................ A-31
3.6 Absence of Certain Changes.................................. A-31
3.7 Brokers' and Finders' Fees.................................. A-32
3.8 Representations Complete.................................... A-32
3.9 Litigation.................................................. A-32
3.10 Tax Matters................................................. A-32
ARTICLE IV COVENANTS OF TARGET................................... A-33
4.1 Information................................................. A-33
4.2 Regulatory Approvals; Consents.............................. A-33
4.3 Conduct of Business......................................... A-33
4.4 Approval of Shareholders of Target; Document Preparation.... A-35
4.5 Current Information; Advice of Changes...................... A-35
4.6 No Solicitation of Other Offers............................. A-36
4.7 Public Announcements........................................ A-36
4.8 Escrow Agreement............................................ A-37
4.9 Stock Restriction Agreement................................. A-37
4.10 Cooperation and Conditions.................................. A-37
4.11 Tax Free Reorganization..................................... A-37
4.12 Capitalization.............................................. A-37
ARTICLE V COVENANTS OF ACQUIROR AND MERGER SUB................... A-38
5.1 Information................................................. A-38
5.2 Applications to Governmental Entities....................... A-38
5.3 Acquiror Common Stock....................................... A-38
5.4 Registration of Shares...................................... A-38
Current Information; Advice of Changes; Conduct of
5.5 Business.................................................... A-39
5.6 Public Announcements........................................ A-40
5.7 Escrow Agreement............................................ A-40
5.8 Cooperation and Conditions.................................. A-40
5.9 Form S-8 Registration Statement............................. A-40
5.10 Tax Free Reorganization..................................... A-40
5.11 Employee Benefits Matters................................... A-41
5.12 Target Officers and Directors............................... A-41
5.13 Reports Under Securities Exchange Act of 1934............... A-42
5.14 Acquiror or Shareholder Approval............................ A-42
ARTICLE VI CONDITIONS TO ACQUIROR'S AND MERGER SUB'S OBLIGATIONS...
A-43
6.1 Representations, Warranties, and Covenants.................. A-43
6.2 Shareholder Approval........................................ A-43
6.3 Other Evidence.............................................. A-43
No Adverse Proceedings, Events, or Regulatory
6.4 Requirements................................................ A-43
</TABLE>

A-ii
<PAGE> 222

<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
6.5 Consents, Etc............................................... A-44
6.6 Opinion of Tax Counsel...................................... A-44
6.7 Opinion of Counsel.......................................... A-44
6.8 Escrow Agreement............................................ A-44
6.9 Securities Matters.......................................... A-44
6.10 280G Agreements............................................. A-44
6.11 Resignation of Directors and Officers....................... A-45
6.12 Stock Restriction Agreement................................. A-45
6.13 Termination of Pension Plan................................. A-45
ARTICLE VII CONDITIONS TO TARGET'S OBLIGATIONS................... A-45
7.1 Representations, Warranties, and Covenants.................. A-45
7.2 Shareholder Approval........................................ A-46
7.3 Other Evidence.............................................. A-46
No Adverse Proceedings, Events, or Regulatory
7.4 Requirements................................................ A-46
7.5 Opinion of Tax Counsel...................................... A-46
7.6 Opinion of Counsel.......................................... A-46
7.7 Securities Matters.......................................... A-47
7.8 Escrow Agreement............................................ A-47
ARTICLE VIII TERMINATION, EXPENSES, AMENDMENT AND WAIVER......... A-47
8.1 Termination................................................. A-47
8.2 Effect of Termination....................................... A-48
8.3 Expense..................................................... A-48
8.4 Extension; Waiver........................................... A-49
ARTICLE IX ESCROW AND INDEMNIFICATION............................ A-49
9.1 Survival of Representations, Warranties and Covenants....... A-49
9.2 Indemnification............................................. A-49
9.3 Escrow Fund................................................. A-50
9.4 Certain Limitations......................................... A-50
9.5 Certain Procedural Matters.................................. A-51
9.6 Exclusive Remedy............................................ A-51
9.7 Resolution of Conflicts; Arbitration........................ A-51
9.8 Shareholders' Agent......................................... A-52
9.9 Actions of Shareholders' Agent.............................. A-53
ARTICLE X GENERAL PROVISIONS..................................... A-53
10.1 Notices..................................................... A-53
10.2 Interpretation.............................................. A-54
10.3 Counterparts................................................ A-54
10.4 Entire Agreement; Third Party Beneficiaries................. A-54
10.5 Severability................................................ A-55
10.6 Remedies Cumulative......................................... A-55
10.7 Governing Law............................................... A-55
10.8 Assignment; Amendment; Binding Effect....................... A-55
10.9 Rules of Construction....................................... A-56
</TABLE>

A-iii
<PAGE> 223

<TABLE>
<S> <C>
EXHIBITS
---------
Exhibit A Voting Agreement
Exhibit B Articles of Merger
Exhibit C Stock Restriction Agreement
Exhibit D Escrow Agreement
Exhibit E Legal Opinion of Venture Law Group
Exhibit F 280G Agreements
Exhibit G Legal Opinion of Piper Marbury Rudnick & Wolfe LLP
Exhibit H Amendment to Articles of Incorporation
</TABLE>

A-iv
<PAGE> 224

AGREEMENT AND PLAN OF REORGANIZATION

This AGREEMENT AND PLAN OF REORGANIZATION (this "AGREEMENT") is made and
entered into as of November 15, 2000 (the "Execution Date") by and among
TeleCommunication Systems, Inc., a Maryland corporation ("ACQUIROR"), Windward
Acquisition Corp., a Washington State corporation and wholly-owned subsidiary of
Acquiror ("MERGER SUB"), XYPOINT Corporation, a Washington State corporation
("TARGET").

RECITALS

The Boards of Directors of Target, Acquiror and Merger Sub believe it is in
the best interests of their respective companies and the stockholders of their
respective companies that Target and Merger Sub combine into a single company
through the statutory merger of Target with and into Merger Sub with Merger Sub
being the surviving corporation in the merger (the "MERGER") and, in furtherance
thereof, have approved the Merger.

A. Pursuant to the Merger, among other things, each outstanding share of
the capital stock of Target shall be converted into shares of Class A common
stock of Acquiror, $0.01 par value per share ("ACQUIROR COMMON STOCK"), upon the
terms and subject to the conditions set forth herein and at the exchange rates
set forth herein.

B. Target, Acquiror and Merger Sub desire to make certain representations
and warranties and other agreements and covenants in connection with the Merger.

C. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended (the "CODE"), and to cause the Merger to qualify as a
reorganization under the provisions of Sections 368(a)(1)(A) and 368(a)(2)(E) of
the Code.

D. Concurrent with the execution of this Agreement and as an inducement to
Acquiror to enter into this Agreement, certain shareholders of Target
(collectively, the "TARGET PRINCIPAL SHAREHOLDERS") are entering into an
agreement in substantially the form attached hereto as Exhibit A (the "VOTING
AGREEMENT") to vote the shares of Target Capital Stock (as defined herein)
beneficially owned or controlled by such person to approve this Agreement and
the Merger and the other transactions contemplated hereby and against any
competing proposals.

NOW, THEREFORE, in consideration of the covenants and representations set
forth herein, and for other good and valuable consideration, the parties agree
as follows:

ARTICLE I

THE MERGER

1.1 THE MERGER

At the Effective Time (as hereinafter defined) and subject to and upon the
terms and conditions of this Agreement, the Articles of Merger substantially in
the form attached hereto as Exhibit B (the "ARTICLES OF MERGER") and the
applicable provisions of the Washington Business Corporation Act ("WASHINGTON
LAW"), Target shall be merged with and into Merger Sub, in accordance with
Washington Law and other applicable law, the

A-1
<PAGE> 225

separate corporate existence of Target shall cease and Merger Sub shall continue
as the surviving corporation. Merger Sub as the surviving corporation after the
Merger is hereinafter sometimes referred to as the "SURVIVING CORPORATION."

1.2 CLOSING; EFFECTIVE TIME

The closing of the transactions contemplated hereby (the "CLOSING") shall
be held at the offices of Piper Marbury Rudnick & Wolfe LLP at 6225 Smith
Avenue, Baltimore, Maryland 21209, on December 29, 2000; provided, however, that
in the event that all the conditions to the Closing set forth in Articles VI and
VII below shall not have been satisfied or waived by that time, then the Closing
shall occur on the third business day after such conditions have been satisfied
or waived (the date on which the Closing shall occur being the "CLOSING DATE").
On the Closing Date, the parties hereto shall cause the Merger to be consummated
by filing the Articles of Merger with the Secretary of State of the State of
Washington, in accordance with the relevant provisions of Washington Law (the
time and date of such filing being the "EFFECTIVE TIME" and the "EFFECTIVE
DATE," respectively).

1.3 EFFECT OF THE MERGER

At the Effective Time, the effect of the Merger shall be as provided in
this Agreement, the Articles of Merger and the applicable provisions of
Washington Law. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time, all the property, rights, privileges, powers and
franchises of Target shall vest in the Surviving Corporation, and all debts,
liabilities and duties of Target shall become the debts, liabilities and duties
of the Surviving Corporation.

1.4 ARTICLES OF INCORPORATION; BYLAWS

(a) At the Effective Time, the articles of incorporation of Merger Sub, as
in effect immediately prior to the Effective Time, shall be the articles of
incorporation of the Surviving Corporation until thereafter amended as provided
by Washington Law and such articles of incorporation.

(b) At the Effective Time, the Bylaws of Merger Sub, as in effect
immediately prior to the Effective Time, shall be the Bylaws of the Surviving
Corporation until thereafter amended as provided by Washington Law. Thereafter,
the Bylaws may be amended or repealed in accordance with their terms and the
articles of incorporation of the Surviving Corporation and as provided by law.

1.5 DIRECTORS AND OFFICERS

At the Effective Time, the directors and officers of the Target shall
resign and be removed and the directors of Merger Sub immediately prior to the
Effective Time shall be the directors of the Surviving Corporation, to hold
office until such time as such directors resign, are removed or their respective
successors are duly elected or appointed and qualified. The officers of Merger
Sub immediately prior to the Effective Time shall be the officers of the
Surviving Corporation, to hold office until such time as such officers resign,
are removed or their respective successors are duly elected or appointed and
qualified.

A-2
<PAGE> 226

1.6 EFFECT ON TARGET CAPITAL STOCK AND OPTIONS

By virtue of the Merger and without any action on the part of Acquiror,
Merger Sub, Target or the holders of any of Target's securities:

(a) Conversion of Target Capital Stock. (i) Subject to Section 1.6(c)
below, on the Effective Date, all Target capital stock outstanding,
including all common stock, preferred stock and shares reserved for
issuance pursuant to outstanding warrants and options to purchase common
and preferred stock (the "TARGET CAPITAL STOCK"), immediately prior to the
Effective Date, shall, without any action on the part of the holder
thereof, be canceled and converted into an aggregate of 4,300,000 shares of
Acquiror Common Stock (rounded to the nearest 0.01 share), as set forth
below; provided, however, the assumption of any New Options (as defined in
Section 4.3) or the issuance of any shares of Acquiror Common Stock as a
result of the exercise of any New Options shall be in addition to such
4,300,00 shares of Acquiror Common Stock and shall be exchanged at the same
rate as the Common Stock Exchange Ratio. Any shares with respect to which
dissenter's rights shall have been perfected in accordance with Washington
Law (the "DISSENTING SHARES") shall be excluded from the foregoing and the
aggregate requirement for delivery of 4,300,000 shares of Acquiror Common
Stock shall be accordingly reduced.

(i) Conversion of Target Common Stock. At the Effective Time, each
share of Target Common Stock issued and outstanding immediately prior to
the Effective Time (other than any Dissenting Shares) will be converted
automatically into the right to receive that number of shares of
Acquiror Common Stock equal to the Common Stock Exchange Ratio, rounded
down to the nearest whole share of Acquiror Common Stock.

(ii) Conversion of Series A Preferred Stock. At the Effective
Time, each share of Target Series A Preferred Stock issued and
outstanding immediately prior to the Effective Time (other than any
Dissenting Shares) will be automatically converted into the right to
receive that number of shares of Acquiror Common Stock equal to the
Series A Exchange Ratio, rounded down to the nearest whole share of
Acquiror Common Stock.

(iii) Conversion of Series B Preferred Stock. At the Effective
Time, each share of Target Series B Preferred Stock issued and
outstanding immediately prior to the Effective Time (other than any
Dissenting Shares) will be automatically converted into the right to
receive that number of shares of Acquiror Common Stock equal to the
Series B Exchange Ratio, rounded down to the nearest whole share of
Acquiror Common Stock.

(iv) Conversion of Series C Preferred Stock. At the Effective
Time, each share of Target Series C Preferred Stock issued and
outstanding immediately prior to the Effective Time (other than any
Dissenting Shares) will be automatically converted into the right to
receive that number of shares of Acquiror Common Stock equal to the
Series C Exchange Ratio, rounded down to the nearest whole share of
Acquiror Common Stock.

(v) Conversion of Series D Preferred Stock. At the Effective Time,
each share of Target Series D Preferred Stock issued and outstanding
immediately prior to the Effective Time (other than any Dissenting
Shares) will be automatically

A-3
<PAGE> 227

converted into the right to receive that number of shares of Acquiror
Common Stock equal to the Series D Exchange Ratio, rounded down to the
nearest whole share of Acquiror Common Stock.

(vi) Conversion of Series E Preferred Stock. At the Effective
Time, each share of Target Series E Preferred Stock issued and
outstanding immediately prior to the Effective Time (other than any
Dissenting Shares) will be automatically converted into the right to
receive that number of shares of Acquiror Common Stock equal to the
Series E Exchange Ratio, rounded down to the nearest whole share of
Acquiror Common Stock.

(vii) Conversion of Series X Junior Preferred Stock. At the
Effective Time, each share of Target Series X Junior Preferred Stock
issued and outstanding immediately prior to the Effective Time (other
than any Dissenting Shares) will be automatically converted into the
right to receive that number of shares of Acquiror Common Stock equal to
the Series X Exchange Ratio, rounded down to the nearest whole share of
Acquiror Common Stock.

(b) Fractional Shares. No fraction of a share of Acquiror Common
Stock shall be issued; in lieu thereof, each holder otherwise entitled to a
fractional interest (after aggregating all fractional shares to be received
by such holder) shall receive from Acquiror an amount in cash (rounded to
the nearest whole cent) based on the market value of Acquiror Common Stock
as determined by multiplying such fraction by the price per share of Class
A Common Stock, as listed on the NASDAQ National Market, on the close of
trading the day prior to Closing. Each such holder shall have no other
rights with respect to such fractional interest and shall have no rights as
a stockholder of Acquiror.

(c) Escrow of Shares. Of the shares of the Acquiror Common Stock to
be issued by the Acquiror at the Effective Date, 400,000 shares (the
"Escrow Shares") shall be deposited into an escrow fund (the "ESCROW FUND")
in accordance with Article IX and the Escrow Agreement (as defined
hereinafter), which shall be registered in the name of the Escrow Agent (as
defined in the Escrow Agreement) as nominee for the holders of such shares.
Such Escrow Shares shall be beneficially owned by such holders and shall be
held in escrow and shall be available to compensate Acquiror for damages as
provided in Article IX and the Escrow Agreement. To the extent not used for
such purposes, such shares shall be released, all as provided in Article IX
and in the Escrow Agreement.

(d) Assumption of Common Options and Target Warrants and New
Options. At the Effective Time all unexpired and unexercised Common
Options and Target Warrants and New Options then outstanding, whether
vested or unvested, together with the Target Stock Plans, shall be assumed
by the Acquiror in accordance with provisions described below.

(i) At the Effective Time, each unexpired and unexercised Target
Option and Target Warrant and New Option then outstanding, whether
vested or unvested, together with the Target Stock Plans, shall be, in
connection with the Merger, assumed by the Acquiror. Each Target Option
and Target Warrant and New Option so assumed by the Acquiror under this
Agreement shall continue to have, and be subject to, the same terms and
conditions as were applicable to such Target Option or Target Warrant or
New Option immediately prior to the
A-4
<PAGE> 228

Effective Time; provided that (1) such Target Option or Target Warrant
or New Option, as the case may be, shall be exercisable for that number
of whole shares of Acquiror Common Stock equal to the product of the
number of shares of Target Capital Stock that were issuable upon
exercise of such Target Option or Target Warrant or New Option
immediately prior to the Effective Time multiplied by the Exchange Ratio
applicable to the series or class of Target Capital Stock subject to the
Target Option or Target Warrant or New Option (rounded down to the
nearest whole number of shares of Acquiror Common Stock) and (2) the per
share exercise price for the shares of Acquiror Common Stock issuable
upon exercise of such assumed Target Option or Target Warrant or New
Option, as the case may be, shall be equal to the quotient determined by
dividing the exercise price per share of Target Capital Stock at which
such Target Option or Target Warrant or New Option was exercisable
immediately prior to the Effective Time by the Exchange Ratio applicable
to the series or class of Target Capital Stock subject to the Target
Option or Target Warrant or New Option (rounded up to the nearest whole
cent).

(ii) The adjustments provided in this Section 1.6(d) with respect
to any Outstanding Option which are "incentive stock options" (as
defined in Section 422 of the Internal Revenue Code of 1986, as amended
(the "CODE") shall be and are intended to be effected in a manner which
is consistent with Section 424(a) of the Code. Within thirty (30) days
following the Effective Time, Acquiror shall deliver to former holders
of Common Options and New Options appropriate agreements representing
the right to acquire Acquiror Common Stock on the terms and conditions
set forth in this Section 1.6(d).

(e) Capital Stock of Merger Sub. At the Effective Time, each share of
Merger Sub common stock, par value $0.01 per share, issued and outstanding
immediately prior to the Effective Time shall be converted into and
exchanged for one validly issued, fully paid and nonassessable share of
common stock, $0.01 par value per share, of the Surviving Corporation. Each
stock certificate of Merger Sub evidencing ownership of any such shares
shall continue to evidence ownership of such shares of capital stock of the
Surviving Corporation.

(f) Dissenters' Rights. Any Dissenting Shares, which as of the
Effective Date the holder thereof has not withdrawn or lost any right to
such appraisal, shall not be converted into Acquiror Common Stock or
represent the right to receive shares of Acquiror Common Stock and shall
not receive or represent the right to receive any cash in lieu of
fractional shares but instead shall be converted into the right to receive
such consideration as may be determined to be due with respect to such
Dissenting Shares pursuant to Washington Law. The Target shall give the
Acquiror (i) prompt notice of any written demands for appraisal of any
shares of Target Capital Stock, withdrawals or modifications of such
demands, and any other instruments served pursuant to Washington Law and
received by the Target which relate to any such demand for appraisal and
(ii) the opportunity to participate in all negotiations and proceedings
which take place prior to the Closing. Target agrees that, except with the
prior written consent of Acquiror, it will not make any payment with
respect to, or settle or offer to settle, any claim, demand or other
liability with respect to any Dissenting Shares. Each holder of Dissenting
Shares (a "DISSENTING SHAREHOLDER") who, pursuant to the provisions of
Washington Law becomes entitled to payment of

A-5
<PAGE> 229

the fair value for shares of Target Capital Stock shall receive payment
therefor (but only after the value therefor shall have been agreed upon or
finally determined pursuant to such provisions) and thereupon such
Dissenting Shares shall be canceled, retired and cease to exist. If, after
the Effective Time, any Dissenting Shares shall lose their status as
Dissenting Shares (either because the Dissenting Shareholder withdraws,
fails to perfect or otherwise loses the right to appraisal), Acquiror shall
issue and deliver, upon surrender by such Dissenting Shareholder of a
certificate or certificates representing shares of Target Capital Stock,
the number of shares of Acquiror Common Stock to which such Dissenting
Shareholder would otherwise be entitled under Section 1.6(a) and the
Articles of Merger, without interest thereon. Notwithstanding any provision
of this Agreement to the contrary, Acquiror shall have the right to
terminate this Agreement and be released from all obligations hereunder if,
immediately prior to the proposed Effective Date, Target shareholders who
would otherwise receive in excess of 5% of the 4,300,000 shares of Acquiror
Common Stock to be delivered in connection with the Merger have demanded
appraisal rights (which demands have not been withdrawn).

1.7 EXCHANGE PROCEDURES

(a) Exchange Agent. Acquiror, or an agent designated by it, shall act as
exchange agent (the "EXCHANGE AGENT") in the Merger.

(b) Acquiror to Provide Acquiror Common Stock and Cash. After the
Effective Time, Acquiror shall make available in accordance with this Article I,
through such reasonable procedures as Acquiror may adopt, (i) the shares of
Acquiror Common Stock issuable pursuant to Section 1.6(a) in exchange for shares
of Target Capital Stock outstanding immediately prior to the Effective Time less
the Escrow Shares deposited in the Escrow Fund pursuant to the requirements of
Article IX and the Escrow Agreement, and (ii) cash in an amount sufficient to
permit payment of cash in lieu of fractional shares pursuant to Section 1.6(b).

(c) Exchange Procedures. Promptly after the Effective Time, Acquiror shall
cause the Exchange Agent to mail to each holder of record (the "FORMER TARGET
SHAREHOLDERS") of a certificate or certificates (the "CERTIFICATES") which
immediately prior to the Effective Time represented outstanding shares of Target
Capital Stock, whose shares were converted into the right to receive shares of
Acquiror Common Stock pursuant to Section 1.6(a), (i) a letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and title
to the Certificates shall pass, only upon receipt of the Certificates by the
Exchange Agent, and shall be in such form and have such other provisions as
Acquiror may reasonably specify) and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for certificates representing shares
of Acquiror Common Stock (and cash in lieu of fractional shares). Upon surrender
of a Certificate, free and clear of all Liens (as defined herein below) and
other charges thereon of every kind, for cancellation to the Exchange Agent,
together with such letter of transmittal, duly completed and validly executed in
accordance with the instructions thereto, the holder of such Certificate shall
be entitled to receive in exchange therefor a certificate representing the
number of whole shares of Acquiror Common Stock (less the Escrow Shares to be
deposited in the Escrow Fund on such holder's behalf pursuant to Article IX and
the Escrow Agreement), and the Certificate so surrendered shall forthwith be
canceled. "LIENS" means any mortgage, lien (including mechanics, warehousemen,
laborers and

A-6
<PAGE> 230

landlords liens), claim, pledge, charge, security interest, preemptive right,
right of first refusal, option, judgment, title defect or encumbrance of any
kind. Until so surrendered, each outstanding Certificate that, prior to the
Effective Time, represented shares of Target Capital Stock will be deemed from
and after the Effective Time, for all corporate purposes, other than the payment
of dividends, to evidence the ownership of the number of full shares of Acquiror
Common Stock into which such shares of Target Capital Stock shall have been so
converted and the right to receive an amount in cash in lieu of fractional
shares pursuant to Section 1.6. As soon as practicable after the Effective Time
and subject to and in accordance with the provisions of Section 9.3, Acquiror
shall cause to be delivered to the Escrow Agent a certificate or certificates
representing the Escrow Shares, which shall be registered in the name of the
Escrow Agent as nominee for the holders of Certificates cancelled pursuant to
this Section 1.7(c).

(d) Distributions with Respect to Unexchanged Shares. No dividends or
other distributions with respect to Acquiror Common Stock with a record date
after the Effective Time shall be paid to the holder of any unsurrendered
Certificate with respect to the shares of Acquiror Common Stock represented
thereby until the holder of record of such Certificate surrenders such
Certificate. Subject to applicable law, following surrender of any such
Certificate, there shall be paid to the record holder of the certificates
representing whole shares of Acquiror Common Stock issued in exchange therefor,
without interest, at the time of such surrender, the amount of any such
dividends or other distributions with a record date after the Effective Time
which would have been previously payable (but for the provisions of this Section
1.7(d)) with respect to such shares of Acquiror Common Stock.

(e) Transfers of Ownership. If any certificate for shares of Acquiror
Common Stock is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it shall be a condition of the
issuance thereof that the Certificate so surrendered is properly endorsed and
otherwise in proper form for transfer and that the person requesting such
exchange will have paid to Acquiror or the Exchange Agent any transfer or other
Taxes (as defined in Section 2.13) required by reason of the issuance of a
certificate for shares of Acquiror Common Stock in any name other than that of
the registered holder of the Certificate surrendered, or established to the
satisfaction of Acquiror or the Exchange Agent that such Tax has been paid or is
not payable.

(f) No Liability. Notwithstanding anything to the contrary in this Section
1.7, no party hereto or any of their respective agents shall be liable to any
person for any amount properly paid to a public official pursuant to any
applicable abandoned property, escheat or similar law.

(g) Dissenting Shares. The provisions of this Section 1.7 also shall apply
to Dissenting Shares that lose their status as such, except that the obligations
of Acquiror under this Section 1.6 shall commence on the date of loss of such
status and the holder of such shares shall be entitled to receive in exchange
for such shares the number of shares of Acquiror Common Stock to which such
holder is entitled pursuant to Section 1.6.

1.8 NO FURTHER OWNERSHIP RIGHTS IN TARGET CAPITAL STOCK

All shares of Acquiror Common Stock issued upon the surrender for exchange
of shares of Target Capital Stock in accordance with the terms hereof shall be
deemed to have been issued in full satisfaction of all rights pertaining to such
shares of Target Capital

A-7
<PAGE> 231

Stock, and there shall be no further registration of transfers on the records of
the Acquiror of shares of Target Capital Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Acquiror for any reason, they shall be
canceled and exchanged as provided in this Article I.

1.9 LOST, STOLEN OR DESTROYED CERTIFICATES

In the event any Certificate shall have been lost, stolen or destroyed, the
Acquiror shall issue or cause to be issued in exchange for such lost, stolen or
destroyed Certificate, upon the making of an affidavit of that fact by the
holder thereof, such shares of Acquiror Common Stock as may be required pursuant
to Section 1.6; provided, however, that Acquiror may, in its discretion and as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed Certificate to deliver a bond in such sum as it may
reasonably direct as indemnity against any claim that may be made against
Acquiror, the Surviving Corporation or any of their agents with respect to the
Certificate alleged to have been lost, stolen or destroyed.

1.10 TAX CONSEQUENCES

It is intended by the parties hereto that the Merger shall constitute a
reorganization within the meaning of Section 368 of the Code. No party shall
take any action, or fail to take any action, whether before or after the
Closing, which would reasonably be expected to cause the Merger to fail to so
qualify as a reorganization within the meaning of Section 368 of the Code.

1.11 TAKING OF NECESSARY ACTION; FURTHER ACTION

If, at any time after the Effective Time, any further action is necessary
or desirable to carry out the purposes of this Agreement and to vest the
Surviving Corporation with full right, title and possession to all assets,
property, rights, privileges, powers and franchises of Target and Merger Sub,
the officers and directors of Target and Merger Sub are fully authorized in the
name of their respective corporations or otherwise to take, and shall take, all
such lawful and necessary action, so long as such action is not inconsistent
with this Agreement.

1.12 DEFINITIONS

As used in this Agreement, the following defined terms shall have the
meanings indicated below.

"Aggregate Common Share Number" means the aggregate number of shares of
Target Common Stock outstanding as of the Effective Time and shares of Target
Common Stock issuable upon exercise of the Common Warrants and shares of Target
Common Stock issuable upon exercise of Common Options.

"Aggregate Merger Share Number" means 4,300,000 shares of Acquiror Common
Stock (as appropriately adjusted to reflect the effect of any stock split, stock
dividend, stock combination, reorganization, reclassification or similar change
by the Acquiror occurring after the date of this Agreement and prior to the
Effective Time and as appropriately adjusted to take into account any Dissenting
Shares).

A-8
<PAGE> 232

"Aggregate Series A Share Number" means the aggregate number of shares of
Series A Preferred Stock outstanding as of the Effective Time and shares of
Series A Preferred Stock issuable upon exercise of the Series A Warrants.

"Aggregate Series B Share Number" means the aggregate number of shares of
Series B Preferred Stock outstanding as of the Effective Time and shares of
Series B Preferred Stock issuable upon exercise of the Series B Warrants.

"Aggregate Series C Share Number" means the aggregate number of shares of
Series C Preferred Stock outstanding as of the Effective Time and shares of
Series C Preferred Stock issuable upon exercise of the Series C Warrants.

"Aggregate Series D Share Number" means the aggregate number of shares of
Series D Preferred Stock outstanding as of the Effective Time and shares of
Series D Preferred Stock issuable upon exercise of the Series D Warrants.

"Aggregate Series E Share Number" means the aggregate number of shares of
Series E Preferred Stock outstanding as of the Effective Time and shares of
Series E Preferred Stock issuable upon exercise of the Series E Warrants.

"Aggregate Series X Share Number" means the aggregate number of shares of
Series X Junior Preferred Stock outstanding as of the Effective Time and shares
of Series X Junior Preferred Stock issuable upon exercise of the Series X
Warrants and shares of Series X Junior Preferred Stock issuable upon exercise of
the Series X Options.

"Aggregate Target Share Number" means the sum of (a) Aggregate Common Share
Number, (b) the Aggregate Series A Share Number, (c) the Aggregate Series B
Share Number, (d) the Aggregate Series C Share Number, (e) the Aggregate Series
D Share Number), (f) the Aggregate Series E Share Number, and (g) the Aggregate
Series X Share Number.

"Closing Price" means the average closing sales price of Acquiror Common
Stock as traded on the NASDAQ National Market and reported by The Wall Street
Journal, for the forty-five consecutive trading days ending on and including the
third trading day prior to the Execution Date.

"Common Stock Exchange Ratio" means the quotient obtained by dividing (x)
the Aggregate Merger Share Number minus the Liquidation Share Number by (y) the
Aggregate Common Share Number.

"Common Option(s)" means any option to purchase Target Common Stock
pursuant to the Target Stock Plans which remain outstanding and unexercised and
unexpired as of the Effective Time, excluding the Common Warrants and the New
Options.

"Common Warrants" means all of the warrants to purchase Target Common Stock
which remain outstanding and unexercised and unexpired as of the Effective Time,
excluding the Common Options and the New Options.

"Exchange Ratios" means the Series A Exchange Ratio, the Series B Exchange
Ratio, the Series C Exchange Ratio, the Series D Exchange Ratio, the Series E
Exchange Ratio, the Series X Exchange Ratio and the Common Stock Exchange Ratio.

"Liquidation Share Number" means the quotient of (x) the Series A
Liquidation Preference plus the Series B Liquidation Preference plus the Series
C Liquidation

A-9
<PAGE> 233

Preference plus the Series D Liquidation Preference plus the Series E
Liquidation Preference plus the Series X Liquidation Preference divided by (y)
the Closing Price.

"Series A Warrants" means all of the warrants to purchase Target Series A
Preferred Stock which remain outstanding and unexercised and unexpired as of the
Effective Time.

"Series A Exchange Ratio" means the quotient of (i) $1.00 divided by (ii)
the Closing Price.

"Series A Liquidation Preference" means the product of (i) the Aggregate
Series A Share Number and (ii) $1.00.

"Series B Exchange Ratio" means the quotient of (i) $1.75 divided by (ii)
the Closing Price.

"Series B Liquidation Preference" means the product of (i) the Aggregate
Series B Share Number and (ii) $1.75.

"Series B Warrants" means all of the warrants to purchase Target Series B
Preferred Stock which remain outstanding and unexercised and unexpired as of the
Effective Time.

"Series C Exchange Ratio" means the quotient of (i) $1.75 divided by (ii)
the Closing Price.

"Series C Liquidation Preference" means the product of (i) the Aggregate
Series C Share Number and (ii) $1.75.

"Series C Warrants" means all of the warrants to purchase Target Series C
Preferred Stock which remain outstanding and unexercised and unexpired as of the
Effective Time.

"Series D Exchange Ratio" means the quotient of (i) $2.69 divided by (ii)
the Closing Price.

"Series D Liquidation Preference" means the product of (i) the Aggregate
Series D Share Number and (ii) $2.69.

"Series D Warrants" means all of the warrants to purchase Target Series D
Preferred Stock which remain outstanding and unexercised and unexpired as of the
Effective Time.

"Series E Exchange Ratio" means the quotient of (i) $1.54 divided by (ii)
the Closing Price.

"Series E Liquidation Preference" means the product of (i) the Aggregate
Series E Share Number and (ii) $1.54.

"Series E Warrants" means all of the warrants to purchase Target Series E
Preferred Stock which remain outstanding and unexercised and unexpired as of the
Effective Time.

"Series X Exchange Ratio" means the quotient of (i) $0.80 divided by (ii)
the Closing Price.

"Series X Liquidation Preference" means the product of (i) the Aggregate
Series X Share Number and (ii) $0.80.

"Series X Option(s)" means any option to purchase shares of Target Series X
Junior Preferred Stock pursuant to the Target Stock Plans which remain
outstanding and unexercised and unexpired as of the Effective Time.

A-10
<PAGE> 234

"Series X Warrants" means all of the warrants to purchase Target Series X
Preferred Stock which remain outstanding and unexercised and unexpired as of the
Effective Time.

"Target Capital Stock" means the Target Common Stock and Target Preferred
Stock.

"Target Stock Plans" means Target's 1995 Stock Option Plan, 1997 Stock
Option Plan and 2000 Stock Option Plan.

ARTICLE II

REPRESENTATIONS AND WARRANTIES OF TARGET

In this Agreement, (i) any reference to any event, change, condition or
effect being "material" with respect to any entity means any material event,
change, condition or effect related to the financial condition, properties,
assets (including intangible assets), operations or products that is material to
such entity and its subsidiaries, if any, taken as a whole; (ii) any reference
to a "MATERIAL ADVERSE EFFECT" with respect to any entity means any event,
change or effect that is materially adverse to the financial condition,
properties, assets (including intangible assets), business, operations or
products of such entity and its subsidiaries, if any, taken as a whole, except
for (A) matters generally effecting the industry in which such entity operates
and (B) changes in general economic conditions; (iii) the words "AWARE",
"KNOWLEDGE" or similar words, expressions or phrases with respect to a party
means such party's actual knowledge after inquiry of officers, directors and
other employees of such party and its subsidiaries, if any, reasonably believed
to have knowledge of the relevant matters. Any reference in this Agreement to an
agreement being "ENFORCEABLE" shall be deemed to be qualified to the extent such
enforceability is subject to (A) laws of general application relating to
bankruptcy, insolvency, moratorium, fraudulent conveyance and the relief of
debtors and (B) the availability of specific performance, injunctive relief and
other equitable remedies.

Target represents and warrants to Acquiror and Merger Sub that the
statements contained in this Article II are true and correct, except as set
forth in the Disclosure Schedule delivered by Target to Acquiror immediately
prior to the execution and delivery of this Agreement (the "TARGET DISCLOSURE
SCHEDULE"). The Target Disclosure Schedule shall be arranged in paragraphs
corresponding to the numbered Sections contained in this Article II and the
disclosure in any Section shall qualify only the corresponding Section in
Article II, unless it is reasonably apparent that the disclosure in one section
should apply to one or more other sections.

2.1 ORGANIZATION, STANDING AND POWER

Target is a corporation duly organized and validly existing under the laws
of the State of Washington and has full corporate power and authority (i) to
conduct its business as presently conducted and as proposed to be conducted,
(ii) to enter into this Agreement and (iii) to carry out the transactions
contemplated by this Agreement. Target is duly qualified and in good standing to
do business as a foreign corporation in each jurisdiction where the character of
the property owned or leased by it or the nature of its activities makes such
qualifications necessary or where the failure to qualify would have a Material
Adverse Effect. Target has furnished to Acquiror true and complete copies of its
Articles of Incorporation, as amended ("TARGET ARTICLES OF INCORPORATION") and
Bylaws, as amended ("TARGET BYLAWS") each currently in effect and said copies
are due, correct and

A-11
<PAGE> 235

complete, and contain all amendments through the date hereof. Target is not in
violation of any of the provisions of Target Articles of Incorporation or Target
Bylaws. Target has no subsidiaries. Target does not own, directly or indirectly,
any equity or similar interest in, or any interest convertible into or
exchangeable or exercisable for, any equity or similar interest in, any
corporation, partnership, joint venture or other business association or entity.

2.2 CAPITAL STRUCTURE

(a) As of the Execution Date, the authorized capital stock of Target
consists of 70,000,000 shares of Target Common Stock, of which 480,230 shares
are issued and outstanding, and 54,279,877 shares of preferred stock, par value
$0.01 per share ("TARGET PREFERRED STOCK"), of which 5,000,000 shares have been
designated Series A Preferred Stock, all of which shares are issued and
outstanding; 13,000,000 shares have been designated Series X Junior Preferred
Stock, of which 11,150,732 shares are issued and outstanding; 7,000,000 shares
have been designated Series B Preferred Stock, of which 6,389,229 shares are
issued and outstanding; 12,500,000 shares have been designated Series C
Preferred Stock, of which 9,506,431 shares are issued and outstanding; 546,110
shares have been designated Series D Preferred Stock, all of which shares are
issued and outstanding; and 16,233,767 shares have been designated Series E
Preferred Stock, of which 6,507,274 are issued and outstanding. All of the
issued and outstanding shares of Target Capital Stock have been duly authorized
and validly issued and are fully paid and nonassessable. Except as set forth in
Section 2.2 of the Target Disclosure Schedule, (a) no subscription, warrant,
option, convertible security or other right (contingent or otherwise) to
purchase or acquire from Target any shares of capital stock of Target is
authorized, reserved or outstanding, (b) Target has no obligation (contingent or
otherwise) to issue any subscription, warrant, option, convertible security or
other such right or to issue or distribute to holders of any shares of its
capital stock any evidences of indebtedness or assets of Target, (c) Target has
no obligation (contingent or otherwise) to purchase, redeem or otherwise acquire
any shares of its capital stock or any interest therein or to pay any dividend
or make any other distribution in respect thereof and (d) no other shares of
capital stock of the Target are issued and outstanding. All of the issued and
outstanding securities of Target, including those offered pursuant to the Target
Stock Option Plans or the Target Warrants, have been offered, issued and sold by
Target in compliance with applicable federal and state securities laws.

(b) Section 2.2(b) of the Target Disclosure Schedule contains a true and
complete list of all issued and outstanding Warrants to purchase or acquire from
Target any shares of capital stock of Target as of the date hereof. Schedule
2.2(b) sets forth (i) the name and address of each warrant holder; (ii) the
manner in which each warrant terminates; and (iii) the number of shares and
class of capital stock of Target into which each warrant is exercisable. True
and complete copies of all agreements and instruments relating to or issued
under the Target Stock Plans and the Warrants have been made available to
Acquiror, and such agreements and instruments have not been amended, modified or
supplemented, and there are no agreements to amend, modify or supplement such
agreements or instruments from the forms made available to Acquiror.

A-12
<PAGE> 236

2.3 AUTHORITY; NO CONFLICT

(a) The execution, delivery and performance by Target of this Agreement and
the Articles of Merger, and the consummation by Target of the transactions
contemplated hereby and thereby, have been duly authorized by all necessary
corporate action on the part of Target and its shareholders, subject only to the
approval of the Merger by Target's shareholders. This Agreement has been duly
executed and delivered by Target and constitutes a valid and binding obligation
of Target enforceable against Target in accordance with its terms. The Articles
of Merger upon execution will constitute a valid and binding obligation of
Target enforceable against Target in accordance with its terms.

(b) The execution, delivery and performance of this Agreement by Target
does not, and the consummation of the transactions contemplated hereby on the
part of Target will not, (i) conflict with, or result in any violation of, or
breach of or default under (with or without notice or lapse of time, or both),
or give rise to a right of termination, cancellation or acceleration of any
obligation or loss of any benefit under, or require a waiver or consent under
(x) the Target Articles of Incorporation or Target Bylaws, (y) any material
mortgage, indenture, lease, contract or other agreement or instrument, permit,
concession, franchise, or license to which Target is subject, or (z) any
judgment, order, decree, statute, law, judgment, injunction, order, decree,
ordinance, rule or regulation applicable to Target or its properties or assets,
other than in each case any such conflicts, violations, breaches or defaults
which would not impair the ability of Target to consummate the Merger and which
would not have a Material Adverse Effect on Target, or (ii) conflict with or
result in a breach or violation of, or constitute a default under, or result in
a contractual right to cause the termination or cancellation or loss of a
material benefit under, or right to accelerate, any agreement, contract or other
instrument binding upon the Target or any license, franchise, permit or other
similar authorization held by the Target which conflict, breach, violation or
default would, individually or in the aggregate, have a Material Adverse Effect
on Target.

(c) No consent, approval, order or authorization of, or registration,
qualification, designation, declaration or filing with, any court,
administrative agency or commission or other federal, state, county, municipal,
domestic or foreign governmental or regulatory authority or instrumentality
("GOVERNMENTAL ENTITY" or "GOVERNMENTAL ENTITIES") is required on the part of
Target in connection with the execution and delivery of this Agreement or the
consummation of the other transactions contemplated by this Agreement, except
for (i) the filing of the Articles of Merger, (ii) compliance with any
applicable requirements of the Securities Act, and the rules and regulations
promulgated thereunder (iii) such consents, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
state securities or "blue sky" laws and the securities laws of any foreign
country; (iv) such filings as may be required under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended ("HSR"); and (v) such other
consents, approvals, orders or authorizations which if not obtained or made
would not have a Material Adverse Effect, individually or in the aggregate, on
Target or impair its ability to consummate the Merger.

(d) The terms of the Target Stock Plans and the underlying Common Options,
and the terms of the Target Warrants, permit the assumption thereof by Acquiror
or the substitution of options or warrants, as the case may be, to purchase
Acquiror Common Stock as provided in this Agreement, without the consent or
approval of the holders of

A-13
<PAGE> 237

such options or warrants, the Target shareholders or otherwise and without any
acceleration of the exercise schedule or vesting provisions in effect for such
options or warrants.

2.4 FINANCIAL STATEMENTS

Target has delivered to Acquiror its audited financial statements (balance
sheet, statement of operations and statement of cash flow) on a consolidated
basis as at, and for the fiscal years ended December 31, 1997, 1998 and 1999
(the "AUDITED FINANCIAL STATEMENTS") and its unaudited financial statements
(balance sheet (the "TARGET BALANCE SHEET"), statement of operations and
statement of cash flow) on a consolidated basis as at and for the nine-month
period ended September 30, 2000 (the "UNAUDITED FINANCIAL STATEMENTS")
(collectively, the AUDITED FINANCIAL STATEMENTS and the UNAUDITED FINANCIAL
STATEMENTS, the "TARGET FINANCIAL STATEMENTS"). The Target Financial Statements
are complete and correct in all material respects as of their respective dates,
and were prepared in accordance with generally accepted accounting principles
("GAAP") (except that the Unaudited Financial Statements do not have notes
thereto) applied on a consistent basis throughout the periods indicated and with
each other (except as may be indicated in the notes thereto). The Target
Financial Statements fairly present in all material respects the consolidated
financial condition and operating results of Target as of the dates, and for the
periods, indicated therein, provided, however, that in the case of the Unaudited
Financial Statements, subject to normal year-end audit adjustment. Target
maintains and will continue to maintain prior to the Effective Time a standard
system of accounting established and administered in accordance with GAAP. There
has been no change in Target's accounting policies except as described in the
notes to the Target Financial Statements. No financial statements of any other
person or entity are required by GAAP to be consolidated with those of the
Target.

2.5 DISCLOSURE DOCUMENTS

None of the written information supplied or to be supplied by Target
expressly for inclusion in and that is actually included in the Registration
Statement (as defined in Section 5.4), will contain any untrue statement of a
material fact or omits or will omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading or will contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances in which they were made, not misleading.

2.6 ABSENCE OF CERTAIN CHANGES; LIABILITIES

(a) Since September 30, 2000 (the "TARGET BALANCE SHEET DATE"), Target has
conducted its business in the ordinary course consistent with past practice and
there has not occurred: (a) any change, event, condition or development of a
state of circumstances or facts (whether or not covered by insurance) that has
resulted in, or would result in, a Material Adverse Effect on Target; (b) any
acquisition, sale or transfer of any material asset of Target other than in the
ordinary course of business and consistent with past practice (including
transfers of Target Intellectual Property (as defined in Section 2.11) on a
non-exclusive basis to Target's customers, distributors or other licensees in
the ordinary course of business and consistent with past practice); (c) any
change in accounting

A-14
<PAGE> 238

methods or practices (including any change in depreciation or amortization
policies or rates) by Target or any revaluation by Target of any of its assets;
(d) any declaration, setting aside, or payment of a dividend or other
distribution with respect to the capital stock Target, or any direct or indirect
redemption, purchase or other acquisition by Target of any of its capital stock;
(e) any reduction in the amounts of coverage provided by existing casualty and
liability insurance policies with respect to the business or properties of
Target; (f) any repurchase, redemption or other acquisition by Target of any
outstanding shares of capital stock or other securities of or other ownership
interests in the Target; (g) any amendment or termination of, or default under,
any contract to which Target is a party or by which it is bound which would
reasonably be expected to have a Material Adverse Effect on Target; (h) any
amendment or change to the Target Articles of Incorporation or Target Bylaws;
(i) any (x) grant of any severance or termination pay to any director, officer,
or employee of the Target, (y) entering into of any employment, deferred
compensation or other similar agreement (or any amendment to any such existing
agreement) with any director, officer or employee of the Target (z) increase in
or modification of the compensation or benefits payable by Target under any of
its existing severance or termination pay policies or employment agreements to
any of its consultants, independent contractors, directors, officers or
employees (except for annual increases not in excess of amounts established by
its regular past practices); (i) any contracts, agreement, extension of credit,
business arrangement or other relationship of any kind with any of the following
persons (i) any officer or director of Target; (ii) any shareholder owning five
(5) percent or more of the outstanding capital stock of Target; or (iii) any
"affiliate" or "associate" (as such terms are defined in SEC Rule 405 of the
Securities Act (an "AFFILIATE(S)") of the foregoing person or any business in
which any of the foregoing person is an officer, director, employee, or five (5)
percent or greater equity holder; or (j) any agreement by Target to do any of
the things described in the preceding clauses (a) through (j) (other than
negotiations with Acquiror and its representatives regarding the transactions
contemplated by this Agreement).

(b) Target has no Liabilities (as defined herein below) of any nature
(matured or unmatured, fixed or contingent) other than (a) those set forth or
adequately reserved for in the Target Balance Sheet, (b) those not required to
be set forth or adequately reserved for in the Target Balance Sheet under GAAP,
(c) those incurred in the ordinary course of business since the date of the
Target Balance Sheet which are consistent with past practice, and (d) those
incurred in connection with the execution of this Agreement. "LIABILITIES" or
"LIABILITY" mean any direct or indirect indebtedness, liability, assessment,
claim, loss, damage, deficiency, obligation or responsibility, fixed or unfixed,
choate or inchoate, liquidated or unliquidated, secured or unsecured, accrued,
absolute, actual or potential, contingent or otherwise (including any liability
under any guaranties, letter of credit, performance credits or with respect to
insurance loss accruals).

2.7 ACCOUNTS RECEIVABLE

The accounts receivable reflected in the Target Financial Statements arose
in the ordinary course of business and consistent with past practice and
represent valid receivables not subject to defense, offsets, returns, set off,
counter claim, allowances or credits of any kind, and are current and
collectible (subject to the reserve for bad debt set forth in the Target
Financial Statements), represent bona fide claims against debtors for sales or
services performed or other charges, and all goods sold or services performed

A-15
<PAGE> 239

that gave rise to such accounts were delivered or performed in all material
respects in accordance with applicable orders, contracts or customer
requirements. Allowances for doubtful accounts and returns have been prepared in
accordance with GAAP consistent with the past practices of Target. The accounts
receivable of Target arising after the Target Balance Sheet Date and prior to
the date hereof arose in the ordinary course of business and consistent with
past practice. No agreement for deduction or discount has been made with respect
to any accounts receivable.

2.8 LITIGATION

There is no private or Governmental Entity action, suit, proceeding, claim,
arbitration or investigation pending before any agency, court or tribunal,
foreign or domestic, or, to Target's knowledge, threatened against Target or any
of its properties or any of its officers or directors (in their capacities as
such) that, individually or in the aggregate, would reasonably be expected to
have a Material Adverse Effect on Target. Further, there are no material
actions, suits, proceedings, claims, arbitrations or investigations initiated by
Target or that Target intends to initiate. Target is not aware of any fact or
condition now existing that may give rise to any action, suit, proceeding,
claim, arbitration or investigation against Target or any of its properties or
any of its officers or directors (in their capacities as such) that,
individually or in the aggregate, would reasonably be expected to have a
Material Adverse Effect on Target. There is no judgment, decree or order against
Target or, to the knowledge of Target, any of its directors or officers (in
their capacities as such), that will prevent, enjoin, or materially alter or
delay any of the transactions contemplated by this Agreement.

2.9 RESTRICTIONS ON BUSINESS ACTIVITIES

There is no agreement, judgment, injunction, order or decree binding upon
Target which would reasonably be expected to have the effect of prohibiting or
impairing in any material respect any current business practice of Target, any
acquisition of property by Target or the conduct of business by Target as
currently conducted by Target.

2.10 TITLE TO PROPERTY; ABSENCE OF LIENS

Target has good and valid title to all of its properties, interests in
properties and assets, real and personal, reflected in the Target Balance Sheet
or acquired after the Target Balance Sheet Date (except properties, interests in
properties and assets sold or otherwise disposed of since the Target Balance
Sheet Date in the ordinary course of business and consistent with past
practice), or with respect to leased properties and assets, valid leasehold
interests in, free and clear of all Liens of any kind or character, except (a)
the Lien of current taxes not yet due and payable, (b) such imperfections of
title and Liens as do not and will not materially detract from or interfere with
the use of the properties subject thereto or affected thereby, or otherwise
materially impair business operations involving such properties, and (c) Liens
securing debt which is reflected on the Target Balance Sheet. The real
properties, structures, buildings, equipment, and the tangible personal property
owned, operated, or leased by Target are (x) in good repair, order, and
condition, except for depletion, depreciation, and ordinary wear and tear, (y)
suitable for the uses for which they were intended, and (z) free from any known
structural defects. There are no conditions of record, or other impediments
which materially interfere with the intended uses by Target of the real property
or tangible

A-16
<PAGE> 240

personal property owned or leased by it. Target has not received any notice of
any violation of any applicable law, building code, zoning ordinance, or other
similar law. All properties used in the operations of Target are reflected in
the Target Balance Sheet to the extent GAAP requires the same to be reflected.
Section 2.10 of the Target Disclosure Schedule identifies each parcel of real
property owned or leased by Target.

2.11 INTELLECTUAL PROPERTY

Target owns or is licensed for, and in any event possesses sufficient and
legally enforceable rights with respect to, all Intellectual Property (as
hereinafter defined) that is used, exercised or exploited in, or that may be
necessary for its business as currently conducted or as proposed to be conducted
("TARGET INTELLECTUAL PROPERTY," which term will also include all other
Intellectual Property necessary for its business owned by or licensed to Target
now or in the past) without any conflict with or infringement or
misappropriation of any rights or property of others ("INFRINGEMENT"). Target
represents that it is not infringing on the trademark, service mark or trade
name and any third party, whether or not Target, is aware of such infringement.
Such ownership, licenses and rights are exclusive except (i) with respect to
Inventions (as hereinafter defined) in the public domain, or (ii) with respect
to standard, generally commercially available, "off-the-shelf" third party
products that are not part of any current or proposed product, service or
Intellectual Property offering of Target. Section 2.11 of the Target Disclosure
Schedule sets forth a true and complete list of all Target Intellectual
Property. With respect to Target Intellectual Property developed by Target,
there are no agreements, arrangements, claims or any other rights of any
character entitling any entity other than the Acquiror to any interests in the
Target Intellectual Property.

No Target Intellectual Property (excluding Intellectual Property licensed
to Target only on a nonexclusive basis) was conceived or developed directly or
indirectly with or pursuant to funding with or from a Governmental Entity or in
connection with a Governmental Entity contract. "INTELLECTUAL PROPERTY" means:
(A) inventions (whether or not patentable); trade names, trademarks, service
marks, logos and other designations (collectively, "MARKS"); works of
authorship; mask works; data; technology, know-how, trade secrets, ideas and
information; designs; formulas; algorithms; processes; schematics; computer
software (in source code and/or object code form); and all other intellectual
and industrial property of any sort (collectively, "INVENTIONS") and (B) patent
rights; Mark rights; copyrights; mask work rights; sui generis database rights;
trade secret rights; rights to domain names, moral rights; and all other
intellectual and industrial property rights of any sort throughout the world,
and all applications, registrations, issuances and the like with respect thereto
(collectively, "IP RIGHTS"). All copyrightable matter within Target Intellectual
Property has been created by persons who were employees or contractors of Target
at the time of creation and no third party has or will have "moral rights" or
rights to terminate any assignment or license with respect thereto. Target has
not received any written or verbal communication alleging that Target has been
or may be (whether in its current or proposed business or otherwise) engaged in,
liable for or contributing to any Infringement, nor does Target have knowledge
that any such communication will be forthcoming.

(a) To the extent included in Target Intellectual Property (but
excluding Intellectual Property licensed to Target only on a nonexclusive
basis), Section 2.11 of the Target Disclosure Schedule lists (by name,
number, jurisdiction, owner and,

A-17
<PAGE> 241

where applicable, the name and address of each inventor) all patents and
patent applications; all registered and unregistered Marks; and all
registered and, if material, unregistered copyrights and mask works; all
Internet domain names; and all other issuances, registrations, applications
and the like with respect to those or any other IP Right. Except for
natural termination or termination at the end of the full possible term,
including extensions and renewals, and prospective failures to obtain
allowable subject matter for patent applications from applicable patent
examining authorities, no cancellation, termination, expiration or
abandonment of any of the foregoing is anticipated by Target, except as
indicated in Section 2.11 of the Target Disclosure Schedule. Except for
Intellectual Property licensed to Target from a third party, Target
represents that none of its present or contemplated business activities,
including but not limited to manufacture, use, sale, offering for sale and
importation of products and methods; creation, reproduction, display and
dissemination of works of authorship; and use of any of the Marks on or in
connection with Target or Target's goods or services, infringes any third
party intellectual property right other than a patent right; that such
present or contemplated business activities do not, to Target's knowledge,
infringe any third party patent right; and that to Target's knowledge,
matter which has been obtained from any third party by license does not
infringe any third party intellectual property right.

(b) There is, to the knowledge of Target, no unauthorized use,
exercise, exploitation, disclosure, infringement or misappropriation of any
Target Intellectual Property (excluding any such activity with respect to
third party Intellectual Property outside the scope of any exclusivity
granted to Target) by any third party, including, without limitation, any
employee or former employee of Target.

(c) Target has taken necessary and appropriate steps to protect and
preserve the confidentiality of all Target Intellectual Property with
respect to which Target has exclusivity and wishes to maintain
confidentiality and that is not otherwise disclosed in published patents or
patent applications or registered copyrights (collectively, the "TARGET
CONFIDENTIAL INFORMATION"). All use by and disclosure to employees or
others of Target Confidential Information has been pursuant to the terms of
valid and binding written confidentiality and nonuse/restricted-use
agreements. Target has not disclosed or delivered to any third party, or
permitted the disclosure or delivery to any escrow holder or other person
any part of any source code.

(d) Each current and former employee and contractor of Target who is
or was involved in, or who has contributed to, the creation or development
of any Target Intellectual Property (other than third-party Intellectual
Property licensed to Target) has executed and delivered and is in
compliance with an enforceable agreement in substantially the form of
Target's standard Proprietary Information and Inventions Agreements (which
agreement provides valid written assignments of all title and rights to any
Target Intellectual Property conceived or developed thereunder, or
otherwise in connection with his or her consulting or employment).

(e) Target has not in the past and is not currently using, exercising
or exploiting, and it will not be necessary to use, exercise or exploit (i)
any Inventions of any of its past or present employees or contractors (or
people currently intended to be hired) made prior to or outside the scope
of their employment by Target or (ii) any confidential information or trade
secrets of any former employer of any such person.

A-18
<PAGE> 242

(f) To Target's knowledge, there are not currently any actions that
must be taken by Target within 60 days following the Closing Date that, if
not taken, would result in the loss of any Intellectual Property, including
the payment of any registration, maintenance or renewal fees or the filing
of any responses to U.S. Patent and Trademark Office actions, documents,
applications or certificates for the purposes of obtaining, maintaining,
perfecting or preserving or renewing any Intellectual Property.

2.12 ENVIRONMENTAL MATTERS

(a) The following terms shall be defined as follows:

(i) "ENVIRONMENTAL AND SAFETY LAWS" shall mean any federal, state,
local or foreign laws, ordinances, codes, regulations, rules and orders
relating to the protection of the environment, or that classify, regulate,
call for the remediation of, require reporting with respect to, or list or
define air, water, groundwater, solid waste, hazardous or toxic substances,
materials, wastes, pollutants or contaminants, or which relate to the
health and safety of employees, workers or other persons, including the
public, as in effect on the date hereof.

(ii) "HAZARDOUS MATERIALS" shall mean any toxic or hazardous
substance, material or waste or any pollutant or contaminant, or infectious
or radioactive substance or material, including without limitation, such
substances, materials, wastes, pollutants defined in or regulated under any
Environmental and Safety Laws.

(iii) "PROPERTY" shall mean all real property leased or owned by
Target either currently or in the past.

(iv) "FACILITIES" shall mean all buildings and improvements on the
Property of Target.

(b) Target represents and warrants as follows: (i) no methylene chloride or
asbestos is contained in or has been used at or released from the Facilities by
Target or to Target's knowledge, by a third party; (ii) all Hazardous Materials
and wastes have been used, handled and disposed of by Target, or to Target's
knowledge, by any third party with whom Target has contracted with to dispose of
such Hazardous Materials, in material compliance with all Environmental and
Safety Laws; (iii) Target has received no written notice of any noncompliance of
the Facilities or of its past or present operations with Environmental and
Safety Laws (except for such matters which have been resolved without material
liability to Target); (iv) no notices, administrative actions or suits are
pending or, to Target's knowledge, threatened relating to a violation of any
Environmental and Safety Laws by Target; (v) Target has not received written
notice that it is a potentially responsible party under the federal
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
or analogous state statute or any similar foreign law or regulation requiring
assessment or clean up, (vi) there have not been in the past, and are not now,
as a result of any action by Target, or to Target's knowledge, any action by a
third party, any Hazardous Materials on, under or migrating from the Facilities
or Property, for which Target could reasonably be expected to have a material
liability; (vii) to Target's knowledge, there have not been in the past, and are
not now, any underground tanks at, on or under the Property including without
limitation, treatment or storage tanks, sumps, or water, gas or oil wells;
(viii) to Target's knowledge, there are no polychlorinated biphenyls ("PCBS")
deposited, stored, disposed of or located on the Property or Facilities or any
equipment on the Property containing PCBs at levels in

A-19
<PAGE> 243

excess of 50 parts per million; (ix) to Target's knowledge, there is no
formaldehyde on the Property or in the Facilities, nor any insulating material
containing urea formaldehyde in the Facilities; (x) Target's, and to Target's
knowledge, any third party's, activities at the Facilities have at all times
been in material compliance with all Environmental and Safety Laws; (xi) Target
has all the permits and licenses required to be issued for its operations and is
in full compliance with the terms and conditions of those permits, except where
the failure to have such permits and licenses or to be in compliance therewith
would not have a Material Adverse Effect on Target; and (xii) all written
environmental assessments known to Target of Target's current or past Properties
or Facilities have been provided to Acquiror.

2.13 TAXES

Target and any consolidated, combined, unitary or aggregate group (and all
members thereof) for Tax purposes of which Target is or has been a member, have
properly completed and timely filed with all appropriate Governmental Entities,
all Tax Returns, estimates and reports required to be filed by them and have
paid all Taxes shown thereon to be due or which otherwise are or have become due
and payable prior to the date hereof. The accruals and reserves reflected in the
Target Financial Statements specified as being with respect to Taxes are
adequate to cover all Taxes that are or may become payable or that have accrued
as a result of the operations of Target for all periods prior to the date of
such Target Financial Statements and that have not been paid as of the date
hereof. Target does not have any Liability for unpaid Taxes accruing prior to
the date of the Target Balance Sheet (except to the extent adequately provided
for by the above-specified accruals and/or reserves) or accruing after the date
of the Target Balance Sheet except for Taxes incurred in the ordinary course of
business and consistent with past practice subsequent to the date of the Target
Balance Sheet. There is (a) no claim for Taxes that is a Lien against the
property of Target being asserted against Target other than Liens for Taxes not
yet due and payable, (b) except as set forth in Section 2.13 of the Target
Disclosure Schedule, no audit of any Tax Return of Target being conducted or, to
the knowledge of Target, threatened or contemplated by a Tax Authority and (c)
no extension of any statute of limitations on the assessment of any Taxes
granted by Target and currently in effect. Target is not nor will it be required
to include any material adjustment in Taxable income for any Tax period (or
portion thereof) pursuant to Section 481 or 263A of the Code or any comparable
provision under state or foreign Tax Laws as a result of transactions, events or
accounting methods employed prior to the Merger. Target has not filed nor will
it file any consent to have the provisions of paragraph 341(f)(2) of the Code
(or comparable provisions of any state Tax Laws) apply to Target. Target is not
a party to any Tax sharing or Tax allocation agreement nor does Target have any
Liability or potential Liability to another party under any such agreement.
Target has not filed any disclosures under Section 6662 or comparable provisions
of state, local or foreign Law to prevent the imposition of penalties with
respect to any Tax reporting position taken on any Tax Return. Target has not
ever been a member of a consolidated, combined, unitary or aggregate group of
which Target was not the ultimate parent corporation. Target is not or has ever
been a "United States real property holding corporation" within the meaning of
Section 897 of the Code.

For purposes of this Agreement, the following terms have the following
meanings: "TAX" (and, with correlative meaning, "TAXES" and "TAXABLE") means (x)
any net income,

A-20
<PAGE> 244

alternative or add-on minimum tax, gross income, gross receipts, sales, use, ad
valorem, transfer, franchise, profits, license, withholding, payroll,
employment, excise, severance, stamp, occupation, premium, property,
environmental or windfall profit tax, custom duty or other tax, Governmental
Entity fee or other like assessment or charge of any kind whatsoever, together
with any interest or any penalty, addition to tax or additional amount imposed
by any Governmental Entity (a "TAX AUTHORITY") responsible for the imposition of
any such tax (domestic or foreign), (y) any liability for the payment of any
amounts of the type described in (x) as a result of being a member of an
affiliated, consolidated, combined, unitary or aggregate group for any Taxable
period, and (z) any liability for the payment of any amounts of the type
described in (x) or (y) as a result of being a transferee of or successor to any
person or as a result of any express or implied obligation to indemnify any
other person. As used herein, "TAX RETURN" shall mean any return, statement,
report or form (including, without limitation, estimated tax returns and
reports, withholding tax returns and reports and information returns and
reports) required to be filed with respect to Taxes. As used in this Section
2.13, the term "TARGET" means Target and any entity included in, or required
under GAAP to be included in, any of the Target Financial Statements.

2.14 EMPLOYEE BENEFIT PLANS

(a) Section 2.14 of the Target Disclosure Schedule lists, with respect to
Target any trade or business (whether or not incorporated) which is treated as a
single employer with Target (an "ERISA AFFILIATE") within the meaning of Section
414(b), (c), (m) or (o) of the Code, (i) all employee benefit plans (as defined
in Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), (ii) each loan to any non-officer employee, officer or
director and any stock option, stock purchase, phantom stock, stock appreciation
right, supplemental retirement, severance, sabbatical, medical, dental, vision
care, disability, employee relocation, cafeteria benefit (Code Section 125) or
dependent care (Code Section 129), life insurance or accident insurance plans,
programs or arrangements, (iii) all bonus, pension, profit sharing, savings,
deferred compensation or incentive plans, programs or arrangements, (iv) other
fringe or employee benefit plans, programs or arrangements that apply to senior
management of Target that do not generally apply to all employees, and (v) any
current or former employment or executive compensation or severance agreements,
written or otherwise, as to which unsatisfied obligations of Target of greater
than $10,000 remain for the benefit of, or relating to, any present or former
employee, consultant or director of Target (together, the "TARGET EMPLOYEE
PLANS").

(b) Target has made available to Acquiror a copy of each of the Target
Employee Plans and related plan documents (including trust documents, insurance
policies or contracts, employee booklets, summary plan descriptions and other
authorizing documents, and any employee communications required by Law relating
thereto) and has, with respect to each Target Employee Plan which is subject to
ERISA reporting requirements, provided copies of the Form 5500 reports filed for
the last three plan years. Any Target Employee Plan intended to be qualified
under Section 401(a) of the Code has either obtained from the Internal Revenue
Service a favorable determination letter as to its qualified status under the
Code, or has applied (or has time remaining in which to apply) to the Internal
Revenue Service for such a determination letter prior to the expiration of the
requisite period under applicable Treasury Regulations or Internal Revenue
Service

A-21
<PAGE> 245

pronouncements in which to apply for such determination letter and to make any
amendments necessary to obtain a favorable determination or has been established
under a standardized prototype plan for which an Internal Revenue Service
opinion letter has been obtained by the plan sponsor and is valid as to the
adopting employer. Target has also furnished Acquiror with the most recent
Internal Revenue Service determination or opinion letter issued with respect to
each such Target Employee Plan, and nothing has occurred since the issuance of
each such letter which could reasonably be expected to cause the loss of the
tax-qualified status of any Target Employee Plan subject to Code Section 401(a).

(c) (i) None of the Target Employee Plans promises or provides retiree
medical or other retiree welfare benefits to any person other than as required
under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"); (ii)
there has been no "prohibited transaction," as such term is defined in Section
406 of ERISA and Section 4975 of the Code, with respect to any Target Employee
Plan, which would reasonably be expected to have, in the aggregate, a Material
Adverse Effect on Target; (iii) each Target Employee Plan has been administered
in all material respects in accordance with its terms and in compliance with the
requirements prescribed by any and all statutes, rules and regulations
(including ERISA and the Code), and each ERISA Affiliate has performed in all
material respects all obligations required to be performed by it under, is not
in any material respect in default under or violation of, and has no knowledge
of any material default or violation by any other party to, any of the Target
Employee Plans; (iv) neither Target nor any ERISA Affiliate are subject to any
material Liability or penalty under Sections 4976 through 4980 of the Code or
Title I of ERISA with respect to any of the Target Employee Plans; (v) all
material contributions required to be made by Target and any ERISA Affiliate to
any Target Employee Plan have been made on or before their due dates and a
reasonable amount has been accrued for contributions to each Target Employee
Plan for the current plan years; (vi) with respect to each Target Employee Plan,
no "reportable event" within the meaning of Section 4043 of ERISA (excluding any
such event for which the 30 day notice requirement has been waived under the
regulations to Section 4043 of ERISA) nor any event described in Section 4062,
4063 or 4041 of ERISA has occurred; (vii) no Target Employee Plan is covered by,
and neither Target nor any ERISA Affiliate has incurred or expects to incur any
Liability under Title IV of ERISA or Section 412 of the Code; and (viii) each
Target Employee Plan can be amended, terminated or otherwise discontinued after
the Effective Time in accordance with its terms, without any material Liability
to Acquiror (other than ordinary administrative expenses typically incurred in a
termination event). With respect to each Target Employee Plan subject to ERISA
as either an employee pension plan within the meaning of Section 3(2) of ERISA
or an employee welfare benefit plan within the meaning of Section 3(1) of ERISA,
Target has prepared in good faith and timely filed all requisite Governmental
Entity reports (which were true and correct as of the date filed) and has
properly and timely filed and distributed or posted all notices and reports to
employees required to be filed, distributed or posted with respect to each such
Target Employee Plan. No suit, administrative proceeding, action or other
litigation has been brought, or to the knowledge of Target is threatened against
or with respect to any such Target Employee Plan, including any audit or inquiry
by the Internal Revenue Service or United States Department of Labor.

A-22
<PAGE> 246

(d) With respect to each Target Employee Plan, Target has complied in all
material respects with (i) the applicable health care continuation and notice
provisions of COBRA and the regulations (including proposed regulations)
thereunder, (ii) the applicable requirements of the Family Medical and Leave Act
of 1993 and the regulations thereunder, (iii) the applicable requirements of the
Health Insurance Portability and Accountability Act of 1996 and the regulations
(including proposed regulations) thereunder, (iv) the applicable requirements of
the Newborns' and Mothers' Health Protection Act of 1996 and any regulation or
guidance issued thereunder, and (v) the Mental Health Parity Act of 1996 and any
regulations or guidance issued thereunder.

(e) There has been no amendment to, written interpretation or announcement
(whether or not written) by Target or any ERISA Affiliate relating to, or change
in participation or coverage under, any Target Employee Plan which would
materially increase the expense of maintaining such plan above the level of
expense incurred with respect to that plan for the most recent fiscal year
included in Target's Financial Statements.

(f) Target does not currently maintain, sponsor, participate in or
contribute to, nor has it ever maintained, established, sponsored, participated
in, contributed to, or is or was required to contribute to, any pension plan
(within the meaning of Section 3(2) of ERISA) which is subject to Part 3 of
Subtitle B of Title I of ERISA, Title IV of ERISA or Section 412 of the Code.

(g) Neither Target nor any ERISA Affiliate is a party to, or has made any
contribution to or otherwise incurred any obligation under, any "multiemployer
plan" as defined in Section 3(37) of ERISA.

(h) Except as set forth in Section 2.14 of the Target Disclosure Schedule,
there is no agreement, contract or arrangement to which Target is a party that
may result in the payment of any amount that would not be deductible by reason
of Section 280G or Section 404 of the Code.

2.15 EMPLOYEES AND CONSULTANTS

(a) Target has provided Acquiror with a true and complete list of all
persons employed by Target, all persons who perform work for Target pursuant to
any agreement(s) between Target and any employment agency, and all independent
contractors of Target as of the date hereof and the position and total
compensation, including base salary or wages, bonus, commissions, and all other
available forms of compensation, payable to each such individual. Section 2.15
of the Target Disclosure Schedule lists all current written or oral employment
agreements, independent contractor agreements, consulting agreements or
termination or severance agreements to which Target is a party. Any employment,
independent contractor or consulting agreement which varies in any material
terms from Target's standard form agreement has been provided to Acquiror. This
Agreement and the transactions contemplated hereby do not and will not violate
any such employment, independent contractor or consulting agreements. Target is
in compliance in all material respects with all currently applicable laws and
regulations respecting employment, discrimination in employment, terms and
conditions of employment, wages, hours and occupational safety and health and
employment practices, and is not engaged in any unfair labor practice. All
individuals performing services for Target as independent contractors (defined
as any individual who provides services for Target who is not treated

A-23
<PAGE> 247

as a common-law employee for purposes of statutory withholdings and/or
employment benefits) at any time are properly classified as independent
contractors pursuant to all applicable regulations, including but not limited to
I.R.S. Revenue Ruling 87-41, 1987-1 C.B. 296. Target has withheld all amounts
required by law or by agreement to be withheld from the wages, salaries, and
other payments to employees; and is not liable in any material respect for any
arrears of wages or any taxes or any penalty for failure to comply with any of
the foregoing. Target is not liable for any payment to any trust or other fund
or to any Governmental Entity, with respect to unemployment compensation
benefits, social security or other benefits or obligations for employees (other
than routine payments to be made in the normal course of business and consistent
with past practice). There are no pending claims against Target under any
workers compensation plan or policy or for long term disability. There are no
claims or controversies pending or, to the knowledge of Target, threatened,
between Target and any of its employees, which claims of controversies have or
could reasonably be expected to result in an action, suit, proceeding, claim,
arbitration or investigation before any agency, court or tribunal, foreign or
domestic. Target is not a party to any collective bargaining agreement or other
labor union contract nor does Target know of any activities or proceedings of
any labor union to organize any such employees. No employees or independent
contractors of Target are in violation of any term of any employment contract,
patent disclosure agreement, enforceable noncompetition agreement, or any
enforceable restrictive covenant to a former employer or customer relating to
the right of any such employee or independent contractor to be employed by
Target because of the nature of the business conducted or presently proposed to
be conducted by Target or to the use of trade secrets or proprietary information
of others. No employees or independent contractors of Target have given notice
to Target, nor is Target otherwise aware, that any such employee intends to
terminate his or her employment with Target.

(b) Target has complied with all Laws relating to verification of
employment eligibility of its employees, including but not limited to,
Verification of the Employment eligibility of Target's employees in accordance
with Section 274A of the Immigration and Nationality Act, as amended (8 U.S.C.
Section 1324 (a)).

(c) Except as set forth in Section 2.15 of the Target Disclosure Schedule,
neither the execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will (a) result in any payment (including,
without limitation, severance, unemployment compensation, golden parachute,
bonus or otherwise) becoming due to any director, employee or consultant of
Target, (b) increase any benefits otherwise payable by Target or (c) result in
the acceleration of the time of payment or vesting of any such benefits (other
than as required under Code Section 411(d)(3)).

2.16 CUSTOMERS AND SUPPLIERS; PRODUCTS

As of the date hereof, no customer which individually accounted for more
than 5% of Target's gross revenues during the 12-month period preceding the date
hereof, and no material supplier of Target during such period, has canceled or
otherwise terminated, or made any threat to Target to cancel or otherwise
terminate its relationship with Target for any reason including, without
limitation the consummation of the transactions contemplated hereby, or has at
any time on or after the Target Balance Sheet Date decreased materially its
services or supplies to Target in the case of any such supplier, or its usage of
the services or products of Target in the case of such customer and all amounts
owing

A-24
<PAGE> 248

from such customers, if not in dispute, have been paid in accordance with their
respective terms. Target has not knowingly breached, so as to provide a benefit
to Target that was not intended by the parties, any agreement with, or engaged
in any fraudulent conduct with respect to, any customer or supplier of Target.

2.17 MATERIAL CONTRACTS

Section 2.17 of the Target Disclosure Schedule sets forth a list of all
material agreements or commitments ("MATERIAL CONTRACTS") of any nature to which
Target is a party or by which it is bound, including without limitation:

(a) each agreement which requires future expenditures by Target in
excess of $50,000 or which might result in payments to Target in excess of
$50,000;

(b) all employment and consulting agreements, employee benefit, bonus,
pension, profit-sharing, stock option, stock purchase and similar plans and
arrangements, and distributor and sales representative agreements,
including all Target Employee Plans;

(c) each agreement with any shareholder, officer or director of
Target, or any Affiliate of such persons, including without limitation any
agreement or other arrangement providing for the furnishing of services by,
rental of real or personal property from, or otherwise requiring payments
to, any such person or entity;

(d) any agreement between Target and a third party relating to
sharing, licensing, or developing any product, technology or Target
Intellectual Property;

(e) any agreement for the borrowing of money or line of credit, trust
indenture, mortgage, promissory note, loan agreement or any currency
exchange, commodities or other hedging arrangement or any leasing
transaction of the type required to be capitalized in accordance with GAAP;

(f) agreements with respect to Liens;

(g) any material agreement not made in the ordinary course of Target's
business;

(h) any agreement which provides for the restraint or restriction of
Target's right to compete with any person in the conduct of its business;

(i) any confidentiality, secrecy or non disclosure agreement with any
party which is currently in effect;

(j) any distributor, reseller, agency or manufacturer's representative
contract;

(k) any contract to support or maintain Target's products, that
expires or may be renewed at the option of any person other than Target so
as to expire more than one year after the date of this Agreement;

(l) any agreement of guarantee, support, assumption or endorsement of,
or any similar commitment with respect to, the obligations, Liabilities
(whether accrued, absolute, contingent or otherwise) or indebtedness of any
other person;

(m) any agreement pursuant to which Target has deposited or is
required to deposit with an escrow holder or any other person or entity,
all or part of the source code (or any algorithm or documentation contained
in or relating to any source code) of any Target Intellectual Property;

A-25
<PAGE> 249

(n) any agreement to indemnify, hold harmless or defend any other
person with respect to any assertion of personal injury, damage to property
or Intellectual Property infringement, misappropriation or violation or
warranting the lack thereof, other than indemnification provisions
contained in a customary purchase orders/purchase agreements/product
licenses arising in the ordinary course of business and consistent with
past practice;

(o) any employment, consulting and/or agency agreement;

(p) any joint venture agreements and shareholder's agreements;

(q) any agreement with any labor union;

(r) any lease of real or personal property with annual rentals in
excess of $25,000;

(s) any contract, extension of credit, business arrangement, or other
relationship of any kind with any of the following persons: (a) any officer
or director of Target; (b) any shareholder owning five (5%) percent or more
of the outstanding capital stock of Target; or (c) any Affiliate of the
foregoing persons or any business in which any of the foregoing persons is
an officer, director, employee, or five (5%) percent or greater equity
owner; and

(t) any other agreement with any person with whom Target does not deal
at arm's length.

Target has performed all of the obligations required to be performed by it,
and is not in default under any Material Contract. Each of the Material
Contracts is (as to Target) in full force and effect and there exists no default
or event of default or event, occurrence, condition or act, with respect to
Target or to Target's knowledge with respect to the other contracting party, or
otherwise that, with or without the giving of notice, the lapse of the time or
the happening of any other event or conditions, would reasonably be expected to
(a) become a default or event of default under any Material Contract, or (b)
result in the loss or expiration of any material right or option by Target (or
the gain thereof by any third party to the detriment of Target) under any
Material Contract. True, correct and complete copies of all Material Contracts
have been delivered to the Acquiror.

2.18 TARGET 911 BUSINESS REGULATORY COMPLIANCE AND CONTRACTS

(a) (i) Target has complied with, is in compliance with, and has not
received any notices of violation with respect to, any law, judgment, order,
decree, directive, consent agreement, memoranda of understanding, permit,
concession, grant, franchise, license, and other Governmental Entity
authorization or approval applicable to Target's 911 business, contracts and
relations (the "TARGET 911 BUSINESS"); and (ii) all permits, concessions,
grants, franchises, licenses, and other Governmental Entity authorizations and
approvals necessary for the conduct of the Target 911 Business as now conducted
or as proposed to be conducted have been duly obtained and are in full force and
effect, and there are no proceedings pending or, to Target's knowledge,
threatened which may result in the revocation, cancellation, suspension, or
materially adverse modification of any thereof, except in the case of (i) or
(ii) where such event would not have a Material Adverse Effect on Target,
individually or in the aggregate.

A-26
<PAGE> 250

(b) Each contract entered into by Target with carriers and other entities
in its Target 911 Business is set forth on Schedule 2.18(b) of the Target
Disclosure Schedule and a true and complete copy of such contracts has been
provided to Acquiror.

2.19 THIRD-PARTY CONSENTS

(a) Section 2.19(a) of the Target Disclosure Schedule lists all contracts
that require a novation or consent to assignment, as the case may be, prior to
the Effective Time so that the Surviving Corporation shall be made a party in
place of Target or as assignee.

(b) Section 2.19(b) of the Target Disclosure Schedule sets forth every
contract which, if no novation occurs to make Acquiror or the Surviving
Corporation a party thereto or if no consent to assignment is obtained, would
have a Material Adverse Effect on Acquiror's or the Surviving Corporation's
ability to operate the business in the same manner as the business was operated
by Target prior to the Effective Time.

2.20 INSURANCE

Section 2.20 of the Target Disclosure Schedule lists all policies of
insurance and bonds, and the respective amounts of such policies and bond,
carried by Target. There is no claim pending under any of such policies or bonds
as to which coverage has been questioned, denied or disputed by the underwriters
of such policies or bonds. All premiums due and payable under all such policies
and bonds have been paid and Target is otherwise in compliance with the terms of
such policies and bonds. Target has no knowledge of any threatened termination
of, or material premium increase with respect to, any of such policies, and no
such policies (or any other policies) are subject to any retroactive premium or
rate adjustments or self insurance provisions.

2.21 COMPLIANCE WITH LAWS; GOVERNMENTAL AUTHORIZATIONS

Target has complied with, is in compliance with, and has not received any
notices of violation with respect to, any federal, state, local or foreign
statute, law, statutes, ordinance, rule, regulation (collectively, "LAW(S)")
judgment, order, decree, directive, consent agreement, memoranda of
understanding, permit, concession, grant, franchise, license, and other
Governmental Entity authorizations or approvals applicable to it, or any of its
properties, except for such violations or failure to comply as will not,
individually or in the aggregate, have a Material Adverse Effect on Target; and
(ii) all permits, concessions, grants, franchises, licenses, and other
Governmental Entity authorizations and approvals necessary for the conduct of
the business Target's as now conducted or as proposed to be conducted
(collectively, the "TARGET AUTHORIZATIONS") have been duly obtained and are in
full force and effect except where the failure to obtain or have any such Target
Authorizations would have a Material Adverse Effect on Target, and there are no
proceedings pending or, to Target's knowledge, threatened which may result in
the revocation, cancellation, suspension, or materially adverse modification of
any thereof.

2.22 BROKERS' AND FINDERS' FEES

Except as expressly provided in the letter agreement dated July 14, 2000,
between Target and Broadview International, LLC, a true and complete copy of
which has been furnished to Acquiror, no agent, broker, investment banker,
person or firm acting directly or indirectly on behalf of Target or under the
authority of Target is or will be entitled to

A-27
<PAGE> 251

any broker's or finder's fee or any other commission or similar fee directly or
indirectly from any of the parties hereto in connection with any of the
transactions contemplated hereby.

2.23 TARGET AGREEMENTS

As of the date hereof, each of the Target Principal Shareholders identified
in Section 2.23 of the Target Disclosure Schedules have executed and delivered
to the Acquiror a Voting Agreement in the form attached hereto as Exhibit A.

2.24 BOARD APPROVAL; SHAREHOLDER APPROVAL REQUIRED

(a) The Board of Directors of Target has unanimously:

(i) approved this Agreement and the Merger;

(ii) determined that in its opinion the Merger is advisable and in the
best interests of the shareholders of Target; and

(iii) recommended that the shareholders of Target approve this
Agreement and the Merger.

(b) The following affirmative vote of the holders of the shares of Target
Capital Stock outstanding on the record date set for the determination of
shareholders entitled to vote on or consent to the Merger is necessary to
approve this Agreement and the Merger:

(i) the affirmative vote of a majority of the shares of the Series A
Preferred Stock, the Series B Preferred Stock, the Series C Preferred
Stock, the Series D Preferred Stock and the Series E Preferred Stock
(collectively, the "PREFERRED STOCK"), voting as a separate class; and

(ii) the affirmative vote of a majority of the shares of the Preferred
Stock, (on an as converted basis), the Series X Preferred (on an as
converted basis) and the Common Stock, voting as a single class.

2.25 MINUTE BOOKS

The minute books of Target made available to Acquiror contain an accurate
summary of all resolutions adopted and all other material actions taken at all
meetings of directors and shareholders and all actions by written consent since
the time of incorporation of Target through the date of this Agreement.

2.26 EXPORT CONTROL LAWS AND FOREIGN CORRUPT PRACTICES ACT

(a) Target (i) does not export any products or services, and (ii) has not
participated in any export transactions that would subject Target to any
provisions of the United States export control laws and regulations.

(b) Target and its employees are in compliance with the U.S. Foreign
Corrupt Practices Act, as amended, including without limitation, the books and
records provisions thereof.

A-28
<PAGE> 252

2.27 REPRESENTATIONS COMPLETE

None of the representations or warranties made by Target herein or in any
Schedule hereto, including the Target Disclosure Schedule, or certificate
furnished by Target pursuant to this Agreement, when all such documents are read
together in their entirety, contains or will contain at the Effective Time any
untrue statement of a material fact, or omits or will omit at the Effective Time
to state any material fact necessary in order to make the statements contained
herein or therein, in the light of the circumstances under which made, not
misleading.

2.28 REGISTRATION RIGHTS

Except as set forth in Section 2.28 of the Disclosure Schedule, there is no
agreement of Target to register under the Securities Act any shares of Target
capital stock or any shares of Target capital stock issuable upon the exercise
of Common Options, except pursuant to agreements that will be terminated or that
will terminate pursuant to their terms at or prior to the Closing.

2.29 BENEFICIAL OWNERSHIP OF ACQUIROR STOCK

As of the date hereof, neither Target, nor to Target's knowledge, any of
the Target Principal Shareholders, beneficially own any shares of Acquiror
Common Stock or have any option, warrant, or right of any kind to acquire the
beneficial ownership of any Acquiror Common Stock, except pursuant to the terms
of this Agreement.

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND MERGER SUB

Acquiror and Merger Sub represent and warrant to Target that the statements
contained in this Article III are true and correct, except as set forth in the
disclosure schedule delivered by Acquiror to Target immediately prior to the
execution and delivery of this Agreement (the "ACQUIROR DISCLOSURE SCHEDULE").
The Acquiror Disclosure Schedule shall be arranged in paragraphs corresponding
to the numbered Sections contained in this Article III, and the disclosure in
any Section shall qualify only the corresponding Section in this Article III
unless it is reasonably apparent that the disclosure in one Section should apply
to one or more other Sections.

3.1 ORGANIZATION, STANDING AND POWER

Each of Acquiror and its subsidiaries, including Merger Sub, is a
corporation duly organized, validly existing and in good standing under the laws
of its jurisdiction of organization. Each of Acquiror and its subsidiaries has
the corporate power to own its properties and to carry on its business as now
being conducted and is duly qualified to do business and is in good standing in
each jurisdiction in which the failure to be so qualified and in good standing
would have a Material Adverse Effect on Acquiror. Acquiror has delivered a true
and correct copy of the Articles of Incorporation and Bylaws or other charter
documents, as applicable, of Acquiror and Merger Sub, each as amended to date,
to Target. Neither Acquiror nor Merger Sub is in violation of any of the
provisions of its Articles of Incorporation or Bylaws or equivalent
organizational documents.

A-29
<PAGE> 253

3.2 CAPITAL STRUCTURE

The authorized capital stock of Acquiror consists of 225,000,000 shares of
Acquiror Common Stock and 75,000,000 shares of Class B common stock, par value
$0.01 per share. As of September 30, 2000, there were issued and outstanding
13,632,585 shares of Acquiror Common Stock and 10,787,671 shares of Class B
common stock. The authorized capital stock of Merger Sub consists of 1,000
shares of common stock, par value $0.01 per share, all of which are issued and
outstanding and held by Acquiror. All outstanding shares of Acquiror and Merger
Sub have been duly authorized, validly issued, fully paid and are nonassessable
and free of any Liens other than any Liens created by or imposed upon the
holders thereof. All of the issued and outstanding securities of Acquiror have
been offered, issued and sold by Acquiror in compliance with applicable federal
and state securities laws. The shares of Acquiror Common Stock to be issued
pursuant to the Merger will be, upon issuance, duly authorized, validly issued,
fully paid and nonassessable, and no stockholder of Acquiror will have any
preemptive right of subscription or purchase in respect thereof. The Acquiror
has reserved sufficient shares of Acquiror Common Stock for issuance pursuant to
the Merger.

3.3 AUTHORITY

(a) Acquiror and Merger Sub have all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Acquiror and Merger Sub, and,
subject to the provisions of Section 5.14, no approval by the shareholders of
Acquiror is required. This Agreement has been duly executed and delivered by
Acquiror and Merger Sub and constitutes the valid and binding obligations of
Acquiror and Merger Sub enforceable against Acquiror and Merger Sub in
accordance with its terms.

(b) The execution and delivery of this Agreement do not, and the
consummation of the transactions contemplated hereby will not, conflict with, or
result in any violation of, or default under (with or without notice or lapse of
time, or both), or give rise to a right of termination, cancellation or
acceleration of any obligation or loss of a benefit under (a) any provision of
the Articles of Incorporation or Bylaws of Acquiror or Merger Sub, as amended,
or (b) any mortgage, indenture, lease, contract or other agreement or
instrument, permit, concession, franchise, license, judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to Acquiror or any of its
subsidiaries or their properties or assets, except where such conflict,
violation, default, termination, cancellation or acceleration with respect to
the foregoing provisions of clause (b) would not, individually, or in the
aggregate, have a Material Adverse Effect on Acquiror.

(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity, is required on the part of
Acquiror or Merger Sub in connection with the execution and delivery of this
Agreement by Acquiror and Merger Sub or the consummation by Acquiror and Merger
Sub of the Merger and the other transactions contemplated hereby, except for (u)
the filing of the Articles of Merger, (v) any filings as may be required under
applicable federal and state securities laws, (w) the filing with the NASDAQ
National Market of a Notification Form for Listing of Additional Shares with
respect to the shares of Acquiror Common Stock issuable upon conversion of the
Target Capital Stock in the Merger and upon exercise of the Common
A-30
<PAGE> 254

Options, Target Warrants and New Options assumed by Acquiror, (x) such filings
as may be required under HSR, and (y) such other consents, authorizations,
filings, approvals and registrations which, if not obtained or made, would not
have a Material Adverse Effect on Acquiror and would not prevent, materially
alter or delay any of the transactions contemplated by this Agreement.

3.4 SEC DOCUMENTS; FINANCIAL STATEMENTS

As of their respective filing dates, each statement, report, registration
statement (with the prospectus in the form filed pursuant to Rule 424(b) of the
Securities Act), and other filing filed with the SEC by Acquiror since June 30,
2000 (collectively, the "ACQUIROR SEC DOCUMENTS") complied in all material
respects with the applicable requirements of the Securities Exchange Act of 1934
(the "EXCHANGE ACT") and the Securities Act, and none of the Acquiror SEC
Documents contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances in which they were made,
not misleading, except to the extent corrected by a subsequently filed Acquiror
SEC Document. The financial statements of Acquiror, included in the Acquiror SEC
Documents (the "ACQUIROR FINANCIAL STATEMENTS") were complete and correct in all
material respects as of their respective dates, and were prepared in accordance
with GAAP (except that the unaudited financial statements do not have notes
thereto) applied on a consistent basis throughout the periods indicated and with
each other (except as may be indicated in the notes thereto). The Acquiror
Financial Statements fairly present in all material respects the consolidated
financial condition and operating results of Acquiror as of the dates, and for
the periods, indicated therein, subject to normal year-end audit adjustments.
Acquiror maintains and will continue to maintain a standard system of accounting
established and administered in accordance with GAAP. The Acquiror Financial
Statements complied as to form in all material respects with applicable
accounting requirements and with the published rules and regulations of the SEC
with respect thereto as of their respective dates. There has been no change in
Acquiror's accounting policies except as described in the notes to the Acquiror
Financial Statements.

3.5 DISCLOSURE DOCUMENTS

None of the written information supplied or to be supplied by Acquiror and
Merger Sub for inclusion in and that is actually included in the Registration
Statement (as defined in Section 5.4), will contain any untrue statement of a
material fact or omits or will omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading or will contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances in which they were made, not misleading.

3.6 ABSENCE OF CERTAIN CHANGES

Since the Acquiror's September 30, 2000 quarterly report on Form 10-Q,
Acquiror has conducted its business in the ordinary course consistent with past
practice and there has not occurred (a) any change, event, condition or
development of a state of circumstances or facts (whether or not covered by
insurance) that has resulted in, or would result in, a Material Adverse Effect
on Acquiror; (b) any material change in accounting methods or

A-31
<PAGE> 255

practices by Acquiror (unless required by GAAP) or any revaluation by Acquiror
of any of its assets; (c) any declaration, setting aside, or payment of a
dividend or other distribution with respect to the capital stock of Acquiror, or
any direct or indirect redemption, purchase or other acquisition by Acquiror of
any of its capital stock; (d) any amendment or termination of, or default under,
any contract to which Target is a party or by which it is bound which would
reasonably be expected to have a Material Adverse Effect on Acquiror.

3.7 BROKERS' AND FINDERS' FEES

Except as expressly provided in the letter agreement dated November 9,
2000, between Acquiror and Chase Securities, Inc., no agent, broker, investment
banker, person or firm acting directly or indirectly on behalf of Acquiror or
under the authority of Acquiror is or will be entitled to any broker's or
finder's fee or any other commission or similar fee directly or indirectly from
any of the parties hereto in connection with any of the transactions
contemplated hereby.

3.8 REPRESENTATIONS COMPLETE

None of the representations, warranties or statements made by Acquiror
herein or in any Schedule hereto, including the Acquiror Disclosure Schedule, or
certificate furnished by Acquiror pursuant to this Agreement, when all such
documents are read together in their entirety, contains or will contain at the
Effective Time any untrue statement of a material fact, or omits or will omit at
the Effective Time to state any material fact necessary in order to make the
statements contained herein or therein, in the light of the circumstances under
which made, not misleading.

3.9 LITIGATION

There is no private or Governmental Entity action, suit, proceeding, claim,
arbitration or investigation pending before any agency, court or tribunal,
foreign or domestic, or, to Acquiror's knowledge, threatened against Acquiror or
any of its properties or any of its officers or directors (in their capacities
as such) that, individually or in the aggregate, would reasonably be expected to
have a Material Adverse Effect on Acquiror. Further, there are no material
actions, suits, proceedings, claims, arbitrations or investigations initiated by
Acquiror or that Acquiror intends to initiate. Acquiror is not aware of any fact
or condition now existing that may give rise to any action, suit, proceeding,
claim, arbitration or investigation against Acquiror or any of its properties or
any of its officers or directors (in their capacities as such) that,
individually or in the aggregate, would reasonably be expected to have a
Material Adverse Effect on Acquiror. There is no judgment, decree or order
against Acquiror or, to the knowledge of Acquiror, any of its directors or
officers (in their capacities as such), that will prevent, enjoin, or materially
alter or delay any of the transactions contemplated by this Agreement.

3.10 TAX MATTERS

Neither Acquiror nor any of its subsidiaries nor, to the knowledge of
Acquiror, any of their respective affiliates or agents is aware of any
agreement, plan or other circumstance that would prevent the Merger from
constituting a transaction under Section 368(a) of the Code.

A-32
<PAGE> 256

ARTICLE IV

COVENANTS OF TARGET

Except as otherwise consented to in writing by Acquiror after the date of
this Agreement, Target covenants to and agrees with Acquiror and Merger Sub as
follows:

4.1 INFORMATION

(a) Target shall, upon reasonable notice, give to Acquiror and to its
officers, accountants, counsel, financial advisors, and other representatives,
reasonable access during Target's normal business hours throughout the period
prior to the Effective Date to all of their properties, books, contracts,
commitments, and shareholder lists and records. Target will, at its own expense,
furnish Acquiror during such period with all such information concerning their
affairs as Acquiror may reasonably request, including information for use in
determining if the conditions of Article VI have been satisfied, information
necessary to prepare the regulatory filings or applications to be filed with
Governmental Entities to obtain the approvals referred to in Section 4.2, and
information for use in any other necessary filings to be made with appropriate
Governmental Entities. No information or knowledge obtained in any investigation
pursuant to this Section 4.1 shall affect or be deemed to modify any
representation or warranty contained herein or the conditions to the obligations
of the parties to consummate the Merger.

(b) Target acknowledges that information received by it concerning Acquiror
and its operations is subject to the Mutual Non-Disclosure Agreement dated
September 6, 2000 between Acquiror and Target (the "CONFIDENTIALITY AGREEMENT").

4.2 REGULATORY APPROVALS; CONSENTS

(a) Target will, as promptly as practicable, make any filings necessary to
obtain all regulatory approvals of the transactions contemplated by this
Agreement, including filings required for HSR approval, and will use all
commercially reasonable efforts to secure favorable action on such filings and
applications, including without limitation efforts to pursue an appeal of a
denial of a regulatory approval.

(b) Target will use commercially reasonable efforts to obtain any consents,
approvals, or waivers from third parties required to be obtained by Target in
connection with the transactions contemplated hereunder, including such consents
and approvals identified pursuant to Section 2.19 hereof.

4.3 CONDUCT OF BUSINESS

After the date of this Agreement and pending the Effective Date, Target
shall not do, cause or permit any of the following, without the prior written
consent of Acquiror: (a) effect any change, supplement or amendment in its
articles of incorporation or bylaws; (b) except with respect to Target stock
options, warrants or other convertible or exercisable securities outstanding on
the date of this Agreement which are or may become subject to exercise according
to their terms as existing on the date of this Agreement, change its authorized,
issued, or outstanding capital stock or issue, deliver or sell or authorize or
propose the issuance, delivery or sale of, or purchase or propose the purchase
of, any shares of its capital stock or securities convertible into, or
subscriptions, rights, warrants or options to acquire, or other agreements or
commitments of any character

A-33
<PAGE> 257

obligating it to issue any such shares or other convertible securities;
provided, however, Target may issue options for shares of Target's Common Stock,
in an aggregated amount not to exceed 250,000, for the sole purpose of hiring
new employees, under the Target Stock Plans in individual award amounts and on
terms consistent with prior practices (the "NEW OPTIONS"); (c) declare or pay
any cash or other dividends in respect of any shares of its capital stock; (d)
increase employee compensation or benefit levels (except for annual increases
not in excess of amounts established by its regular past practices), establish
or make any increase in any employment, compensation, bonus, pension, option,
incentive or deferred compensation, retirement, death, profit sharing, or
similar agreements or benefits of any of its past, present, or future officers
or employees, or modify the existing employment agreements with any officers or
employees; (e) make any change in any of its accounting policies or practices
unless required by GAAP; (f) incur or commit to incur any indebtedness for
borrowed money in excess of $25,000 or guarantee any such indebtedness in excess
of $25,000 or issue or sell any debt securities or guarantee any debt securities
of others; (g) obligate itself to make or undertake to make any capital
expenditure in excess of $25,000 in the aggregate; (h) enter into any material
contract, agreement, license or commitment, or violate, amend or otherwise
modify or waive any of the terms of any of its material contracts, agreements or
licenses; (i) transfer to or license any person or entity or otherwise extend,
amend or modify any rights to Target Intellectual Property; (j) revalue any of
its assets, including without limitation writing down the value of inventory or
writing off notes or accounts receivable; (k) sell, lease, license or otherwise
dispose of or encumber any of Target's properties or assets (other than sales of
assets in the ordinary course of business consistent with past practice); (l)
terminate or waive any right which would have a Material Adverse Effect on
Target; (m) commence a lawsuit or arbitration proceeding other than (i) for the
routine collection of bills, (ii) in such cases where it in good faith
determines that failure to commence suit would result in the material impairment
of a valuable asset of its business, provided that it consults with Acquiror
prior to the filing of such a suit, or (iii) for a breach of this Agreement; (n)
acquire or agree to acquire by merging or consolidating with, or by purchasing a
substantial portion of the assets of, or by any other manner, any business or
any corporation, partnership, association or other business organization or
division thereof, or otherwise acquire or agree to acquire any material amount
of assets; (o) make any Tax election, change any Tax election, adopt any Tax
accounting method, change any Tax accounting method, enter into any closing
agreement, settle any Tax claim or assessment or consent to any Tax claim or
assessment; (p) accelerate, amend or change the period of exercisability or
vesting of options or other rights granted under its stock plans or authorize
cash payments in exchange for any options or other rights granted under any of
such plans; (q) enter into or amend any agreements pursuant to which any other
party is granted exclusive marketing, manufacturing or other exclusive rights of
any type or scope with respect to any of Target's products or technology; (r)
pay, discharge or satisfy in an amount in excess of $25,000 in any one case or
$50,000 in the aggregate, any claim, liability or obligation (absolute, accrued,
asserted or unasserted, contingent or otherwise), other than (i) arising in the
ordinary course of business and consistent with past practice and (ii) the
payment, discharge or satisfaction of liabilities reflected or reserved against
in the Target Financial Statements; (s) take or agree in writing or otherwise to
take, any of the actions described in above, or any action which would make any
of its representations or warranties contained in this Agreement untrue or
incorrect or

A-34
<PAGE> 258

prevent it from performing or cause it not to perform its covenants hereunder,
and (u) engage in any related party transactions.

Furthermore, pending the Effective Date, Target shall (a) conduct its
business only in the ordinary course and use commercially reasonable efforts
consistent with past practice and policies to preserve intact its present
business organizations, keep available the services of its present officers and
key employees and preserve its relationships with customers, suppliers,
distributors, licensors, licensees and others having business dealings with it,
to the end that its goodwill and ongoing business shall be unimpaired at the
Effective Time, (b) continue in effect the present method of conducting its
business, (c) give all notices and other information required to be given to the
employees of Target, any collective bargaining unit representing any group of
employees of Target, and any applicable Government Entity under the National
Labor Relations Act, the Code, the Consolidated Omnibus Budget Reconciliation
Act, and other applicable law in connection with the transactions provided for
in this Agreement, and (d) consult with Acquiror as to making decisions or
actions in material matters other than those in the ordinary course of business.

4.4 APPROVAL OF SHAREHOLDERS OF TARGET; DOCUMENT PREPARATION

(a) Target will duly call and convene a meeting of its shareholders to act
upon the transactions contemplated hereby as soon as practicable after the
Registration Statement referred to in Section 5.4 has been declared effective
and is available for distribution to its Shareholders, or, in lieu thereof, will
take any necessary steps to seek such shareholder approval through a consent
solicitation in conformity with applicable law. Target and its Board of
Directors will recommend approval of this Agreement and the Merger to its
shareholders, and will use commercially reasonable efforts to obtain a favorable
vote thereon. The calling and holding of such meeting or the use of such a
consent solicitation and all notices, transactions, documents, and information
related thereto will be in material compliance with all applicable laws.

(b) Target shall furnish Acquiror with such information concerning Target
as is necessary to comply with Section 5.4. Target agrees promptly to advise
Acquiror if at any time prior to the Target shareholders' meeting or completion
of such consent solicitation, any information provided by Target becomes
incorrect or incomplete in any material respect and to provide Acquiror with the
information needed to correct such inaccuracy or omission.

(c) If appropriate, Target shall promptly furnish Acquiror with such
information regarding the Target shareholders as Acquiror requires to enable it
to determine what filings are required under applicable state securities laws.
Target authorizes Acquiror to utilize in such filings the information concerning
Target provided to Acquiror.

4.5 CURRENT INFORMATION; ADVICE OF CHANGES

Between the date of this Agreement and the Effective Time, Target shall
promptly advise Acquiror, by written update to the Target Disclosure Schedule,
of (a) the occurrence or non-occurrence of any event which would be likely to
cause any condition to the obligations of Acquiror to effect the Merger and the
other transactions contemplated by this Agreement not to be satisfied, or (b)
the failure of Target to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by it

A-35
<PAGE> 259

pursuant to this Agreement which would be likely to result in any condition to
the obligations of Acquiror to effect the Merger and the other transactions
contemplated by this Agreement not to be satisfied. The delivery of any notice
pursuant to this Section 4.5 shall not cure any breach of any representation or
warranty requiring disclosure of such matter prior to the date of this Agreement
or otherwise limit or affect the remedies available hereunder to Acquiror.

4.6 NO SOLICITATION OF OTHER OFFERS

(a) From and after the date of this Agreement until the earlier of the
termination of this Agreement or the Effective Time, Target agrees that neither
it nor any of its officers, directors, or employees shall, and Target shall
direct and use commercially reasonable efforts to cause its agents and
representatives (including, without limitation, any investment banker, attorney,
or accountant retained by them) not to, directly or indirectly, take any action
to solicit or initiate any inquiries or the making of any offer or proposal
(including without limitation any proposal to shareholders of Target) with
respect to a merger, consolidation, business combination, liquidation,
reorganization, sale or other disposition of any significant portion of assets,
sale of shares of capital stock, or similar transactions involving Target (any
such inquiry, offer, or proposal, an "ACQUISITION PROPOSAL"), or, except in the
opinion of outside counsel to Target as may be legally required to comply with
the duties the Board of Directors of Target under applicable law and upon
receipt of confidentiality agreement with terms not materially less favorable to
Target than those contained in the Confidentiality Agreement, engage in any
negotiations concerning, or provide any confidential information or data to, or
have any discussions with, any person relating to an Acquisition Proposal.

(b) Target, its officers, directors, or employees will immediately cease
and cause to be terminated any and all existing discussions, negotiations,
exchanges of information and other activities with respect to any Acquisition
Proposal. Promptly following the execution and delivery of this Agreement,
Target shall (i) inform each of its representatives of the obligations
undertaken in this Section 4.6 and (ii) request each person that had heretofore
executed a confidentiality or non-disclosure agreement in connection with an
Acquisition Proposal to return to Target all confidential information heretofore
furnished to such person by or on behalf of it. Target shall promptly notify
Acquiror orally and in writing of, and keep it fully and currently informed on,
any Acquisition Proposal or any inquiries with respect thereto, such written
notification to include the identity of the person making such inquiry or
Acquisition Proposal and such other information with respect thereto as is
reasonably necessary to apprise Acquiror of the material terms of such
Acquisition Proposal. Target shall give Acquiror contemporaneous written notice
upon engaging in discussions or negotiations with, or providing any information
regarding Target to, any such person regarding an Acquisition Proposal.

4.7 PUBLIC ANNOUNCEMENTS

Between the date of this Agreement and the Effective Date, Target will
consult with Acquiror before issuing any press release or otherwise making any
public statements with respect to this Agreement and the transactions
contemplated hereby and shall not issue any such press release or make any such
public statement prior to such consultation, except as counsel may advise is
required by law.

A-36
<PAGE> 260

4.8 ESCROW AGREEMENT

At the Closing, Target shall execute and deliver the Escrow Agreement in
substantially the form attached hereto as Exhibit D.

4.9 STOCK RESTRICTION AGREEMENT

At the Closing, a sufficient number of shareholders, option holders and
warrant holders of the Target who have not executed a Voting Agreement shall
execute and deliver the Stock Restriction Agreement, substantially in the form
of Exhibit C hereto, such that together with those parties who have executed a
Voting Agreement, at least 90% of the fully diluted issued and outstanding
common stock of Target (assuming full conversion of all Target capital stock and
exercise of all options and warrants) have entered into agreements to be bound
by the provisions set forth in the Stock Restriction Agreement.

4.10 COOPERATION AND CONDITIONS

Target shall use its commercially reasonable efforts to ensure that the
conditions specified in Articles VI and VII have been satisfied on a prompt
basis. Target agrees to use its commercially reasonable efforts to take, or
cause to be taken, all action and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement,
including cooperating fully with the other party, including by provision of
information.

4.11 TAX FREE REORGANIZATION

Target will not, either before or after consummation of the Merger, take
any action or fail to take any action which would cause the Merger to fail to
constitute a "reorganization" within the meaning of Code Section 368 and the
Target will use commercially reasonable efforts not to permit any of their
directors, officers, employees, shareholders, agents, consultants, or other
representatives to take any such action.

4.12 CAPITALIZATION

For the period commencing on the Execution Date and ending on the Effective
Date, Target shall not (i) issue any additional Target Capital Stock, or (ii)
take any action which would cause Target's representation in Section 2.2 hereof
to become incorrect if made as of the Closing Date, except, in each case, for
issuances or changes resulting from holders exercising or converting Target
Capital Stock, Target Warrants, Common Options or New Options for Target Common
Stock or Target Preferred Stock, as the case may be.

A-37
<PAGE> 261

ARTICLE V

COVENANTS OF ACQUIROR AND MERGER SUB

Except as otherwise consented to in writing by Target after the date of
this Plan, Acquiror covenants to and agrees with Target as follows:

5.1 INFORMATION

(a) Acquiror will, at its own expense, furnish Target during such period
with all such information concerning their affairs as Target may reasonably
request, including information for use in determining if the conditions of
Article VII have been satisfied and for use in any necessary filings to be made
by Target with appropriate Governmental Entities. No information or knowledge
obtained in any investigation pursuant to this Section 5.1 shall affect or be
deemed to modify any representation or warranty contained herein or the
conditions to the obligations of the parties to consummate the Merger.

(b) Acquiror acknowledges that information received by it concerning Target
and its operations is subject to the Confidentiality Agreement.

5.2 APPLICATIONS TO GOVERNMENTAL ENTITIES

(a) Acquiror and Merger Sub will, as promptly as practicable, make any
filings necessary to obtain all regulatory approvals of the transactions
contemplated by this Agreement, including filings required for HSR approval, and
will use all commercially reasonable efforts to secure favorable action on such
filings and applications, including without limitation efforts to pursue an
appeal of a denial of a regulatory approval.

(b) Acquiror and Merger Sub will use commercially reasonable efforts to
obtain any consents, approvals, or waivers from third parties required to be
obtained by Acquiror or Merger Sub in connection with the transactions
contemplated hereunder.

5.3 ACQUIROR COMMON STOCK

At the Effective Date, the Acquiror Common Stock to be issued in exchange
for the Target Capital Stock pursuant to the terms of this Agreement shall be
duly authorized, validly issued, fully paid, and non-assessable, free of
preemptive rights and free and clear of all Liens created by or through
Acquiror, with no personal liability attaching to the ownership thereof. The
Acquiror Common Stock to be issued upon exchange for the Target Capital Stock
pursuant to the terms of this Agreement will be issued in all material respects
in accordance with applicable state and federal laws, rules, and regulations.

5.4 REGISTRATION OF SHARES

Acquiror, with the assistance of Target and its representatives, will
promptly file a Registration Statement on Form S-4 (the "REGISTRATION
STATEMENT") with the Securities and Exchange Commission (the "SEC") and a
prospectus which shall satisfy all applicable requirements of applicable state
and federal laws, including the Securities Act, the Exchange Act, and applicable
state securities laws and the rules and regulations thereunder. The Registration
Statement shall also include any information required under applicable law in
connection with the shareholders' meeting or consent solicitation Target will
hold or conduct pursuant to Section 4.4 hereof. The number of shares to be
registered will be an amount sufficient to allow all of the shares of the
Acquiror Common Stock

A-38
<PAGE> 262

issued to holders of the Target Capital Stock pursuant to this Agreement to be
registered under the Securities Act. Acquiror will use commercially reasonable
efforts to secure the effectiveness of the Registration Statement and, after the
Registration Statement has been declared effective to make the Registration
Statement available for mailing to the shareholders of the Target. Acquiror may
rely upon all information expressly provided to it by Target and its
representatives for inclusion in the preparation of the Registration Statement,
any post-effective amendment thereto and shall not be liable for any untrue
statement of a material fact or any omission to state a material fact in the
Registration Statement, the post-effective amendment, if such statement is made
in reliance upon any information expressly provided to it by Target or by any of
its officers or representatives for inclusion in the Registration Statement.
Acquiror shall promptly take all such actions as may be necessary or appropriate
in order to comply in all material respects with all applicable securities laws
of any state having jurisdiction over the transactions contemplated by this
Agreement and the Merger. Acquiror shall furnish Target with copies of all such
filings and keep Target advised of the status thereof. Acquiror shall promptly
notify Target of all communications, oral or written, with the SEC concerning
the Registration Statement. Prior to the Effective Time, Acquiror shall file
with the NASDAQ Stock Market a Notification Form for Listing of Additional
Shares with respect to the shares of Acquiror Common Stock issuable upon
conversion of the Target Capital Stock in the Merger, and in respect of the
Common Options and Target Warrants and New Options being assumed by Acquiror.

5.5 CURRENT INFORMATION; ADVICE OF CHANGES; CONDUCT OF BUSINESS

Between the date of this Agreement and the Effective Time, Acquiror shall
promptly advise Target, by written update to the Acquiror Disclosure Schedule,
of (a) the occurrence or non-occurrence of any event which would be likely to
cause any condition to the obligations of Target to effect the Merger and the
other transactions contemplated by this Agreement not to be satisfied, or (b)
the failure of Acquiror to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by it pursuant to this Agreement
which would be likely to result in any condition to the obligations of Target to
effect the Merger and the other transactions contemplated by this Agreement not
to be satisfied. The delivery of any notice pursuant to this Section 5.5 shall
not cure any breach of any representation or warranty requiring disclosure of
such matter prior to the date of this Agreement or otherwise limit or affect the
remedies available hereunder to Target. Without the approval and consent of
Target, Acquiror and its subsidiaries will not agree to acquire by merging or
consolidating with, by purchasing an equity interest in, or a portion of the
assets of, or by any other manner, any business or any corporation, partnership,
association or other business organization or division thereof if any such
business or assets to be acquired includes products that could reasonably be
considered to be competitive with Target's business in any material respect (a
"COMPETITIVE BUSINESS") and would reasonably be likely delay or prolong the
waiting period under the HSR Act with respect to the Merger at any time before
the applicable waiting period with respect to the Merger under the HSR Act shall
have expired or have been earlier terminated, unless in connection with that
acquisition Acquiror agrees with the applicable Governmental Entity to hold
separate such Competitive Business or take similar actions that would cause such
Governmental Entity to permit promptly the expiration or termination of the
waiting period under the HSR Act with respect to the Merger.

A-39
<PAGE> 263

5.6 PUBLIC ANNOUNCEMENTS

Between the date of this Agreement and the Effective Date, Acquiror will
consult with Target before issuing any press release or otherwise making any
public statements with respect to this Agreement and the transactions
contemplated hereby and shall not issue any such press release or make any such
public statement prior to such consultation, except as counsel may advise is
required by law.

5.7 ESCROW AGREEMENT

Acquiror shall execute and deliver the Escrow Agreement in substantially
the form attached hereto as Exhibit D.

5.8 COOPERATION AND CONDITIONS

Acquiror shall use commercially reasonable efforts to ensure that the
conditions specified in Articles VI and VII have been satisfied on a prompt
basis. Acquiror agrees to use commercially reasonable efforts to take, or cause
to be taken, all action and to do, or cause to be done, all things necessary,
proper or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement, including cooperating
fully with the other party, including by provision of information.

5.9 FORM S-8 REGISTRATION STATEMENT

Acquiror agrees to file, no later than 30 days after the Closing, a
Registration Statement on Form S-8 (or any successor or other appropriate forms)
that will register the shares of Acquiror Common Stock issuable pursuant to
outstanding options under the Target Stock Option Plan assumed by Acquiror to
the extent permitted by federal securities laws; provided, that Acquiror has
received not less than ten business days prior to such projected filing date,
all option documentation relating to the outstanding options; and provided
further, that such options qualify for registration on such Form S-8 (or any
successor or other appropriate forms). Acquiror shall use its commercially
reasonable efforts to maintain the effectiveness of such registration statement
or registration statements (and maintain the current status of the prospectus or
prospectuses contained therein) for so long as such options remain outstanding.
In addition, Acquiror shall use its commercially reasonable efforts to cause the
Acquiror Common Stock subject to Common Options to be listed on The NASDAQ
National Market and such exchanges as Acquiror shall determine.

5.10 TAX FREE REORGANIZATION

Each of Acquiror and Merger Sub will not, either before or after
consummation of the Merger, take any action or fail to take any action which
would cause the Merger to fail to constitute a "reorganization" within the
meaning of Code Section 368 and the Acquiror and Merger Sub will each use
commercially reasonable efforts not to permit any of its directors, officers,
employees, stockholders, agents, consultants, or other representatives to take
any such action. Acquiror and Merger Sub each agree to file their respective
federal and state income tax returns consistent with treatment of the Merger as
a reorganization.

A-40
<PAGE> 264

5.11 EMPLOYEE BENEFITS MATTERS

To the extent that service is relevant for eligibility, vesting and (except
as would result in duplication of benefits) benefit accruals under any employee
benefit plan, program or arrangement maintained by Acquiror or any subsidiary of
Acquiror, such plan, program or arrangement shall credit each employee of Target
(a "TARGET EMPLOYEE") who participates therein for service on or prior to the
Effective Time with Target or any affiliate or predecessor of any of them.
Acquiror agrees to offer to Target Employees benefits commensurate with those
benefits conferred to Acquiror employees similarly situated. In addition,
Acquiror shall (i) waive limitations on benefits relating to any pre-existing
conditions under any Acquiror or subsidiary of Acquiror welfare benefit plan in
which Target Employees may participate and (ii) recognize, for purposes of
annual deductible and out-of- pocket limits under its medical and dental plans,
deductible and out-of-pocket expenses paid by Target Employees and their
respective dependents under Target's medical, dental and other healthcare plans
in the calendar year in which the Effective Time occurs. In the event any Target
Employee is terminated from employment prior to participation in a health
benefit plan of Acquiror or an Acquiror subsidiary and is eligible for COBRA
continuation coverage under a Target Benefit Plan, prior to termination of such
Target Benefit Plan Acquiror shall assure that such Target Employee's COBRA
continuation coverage shall be provided under a health benefit plan of Acquiror
or an Acquiror subsidiary for so long as such Target Employee would be eligible
for such COBRA coverage but for the termination of the Target Benefit Plan.

Acquiror also confirms its intent and plan to grant options to purchase
Acquiror Common Stock to management and employees after the Effective Date in
amounts sufficient to cause management and employees of Target to have options
on a number of shares of Acquiror Common Stock generally consistent with the
option levels held by comparable level employees of Acquiror (taking into
account Common Options and New Options assumed by Acquiror).

5.12 TARGET OFFICERS AND DIRECTORS

(a) Acquiror agrees that all rights to indemnification (including
advancement of expenses) existing on the date hereof in favor of the present or
former officers and directors of Target (collectively, the "TARGET INDEMNIFIED
PARTIES") with respect to actions taken in their capacities as officers and
directors prior to the Effective Time as provided in Target's Articles of
Incorporation or Bylaws and indemnification agreements, shall survive the Merger
and continue in full force and effect for a period of six years following the
Effective Time and shall be guaranteed by Acquiror.

(b) Acquiror shall cause the Surviving Corporation to maintain in effect
the current policy of officers' and directors' liability insurance, for acts and
omissions occurring prior to the Effective Time, maintained by Target provided
that Acquiror may substitute therefor (i) policies of at least the same coverage
and amounts containing terms and conditions which are no less advantageous in
any material respect to the Target Indemnified Parties and (ii) coverage under
Acquiror's directors' and officers' liability insurance coverage for acts and
omissions occurring prior to the Effective Time, for a period of six (6) years
after the Effective Time; provided, Acquiror shall not be required to pay an
annual premium for such insurance in excess of 100% of the last annual premium
paid by Target prior to the date hereof (as adjusted for inflation), but in such
case shall

A-41
<PAGE> 265

provide as much coverage as possible for such amount. The last annual premium
paid by Target was $28,000.00.

(c) This Section 5.12 shall survive the consummation of the Merger at the
Effective Time, and is intended to be for the benefit of, and shall be
enforceable by, the Target Indemnified Parties, their heirs and personal
representatives and shall be binding on the Surviving Corporation and its
respective successors and assigns.

5.13 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934

With a view to making available to the Target stockholders the benefits of
Rule 144 promulgated under the Securities Act of 1933, as amended (the "ACT"),
and any other rule or regulation of the SEC that may at any time permit such
Target stockholders to sell securities of Acquiror to the public, Acquiror
agrees, for a period of two years from the Effective Date, to:

(a) use reasonably commercial efforts to make and keep public
information available, as those terms are understood and defined in SEC
Rule 144, at all times so long as Acquiror remains subject to the periodic
reporting requirements under Sections 13 or 15(d) of the Exchange Act;

(b) file with the SEC in a timely manner all reports and other
documents required of Acquiror under the Act and the Exchange Act of 1934,
as amended (the "EXCHANGE ACT"); and

(c) furnish to any Target stockholder, so long as the Target
stockholder owns any shares of Acquiror Common Stock, forthwith upon
request (i) a written statement by Acquiror that it has complied with the
reporting requirements of SEC Rule 144, the Act and the Exchange Act, (ii)
a copy of the most recent annual or quarterly report of Acquiror and such
other reports and documents so filed by Acquiror, and (iii) such other
information related to compliance with Rule 144 as may be reasonably
requested by a Target stockholder.

5.14 ACQUIROR OR SHAREHOLDER APPROVAL

Acquiror has requested confirmation from NASDAQ that approval by its
shareholders is not required in connection with the Merger. If such confirmation
is not received, Acquiror will include in the Registration Statement such
information as may be necessary, and shall take such other action as may be
necessary, to cause the Merger to be submitted to its shareholders for approval.
If shareholder approval is required, the obligations of Acquiror and Target
hereunder shall be conditioned on receipt of such approval.

A-42
<PAGE> 266

ARTICLE VI

CONDITIONS TO ACQUIROR'S AND MERGER SUB'S OBLIGATIONS

Unless waived in writing by Acquiror in its sole discretion, all
obligations of Acquiror and Merger Sub hereunder shall be subject to the
fulfillment prior to or at the Effective Date of the following conditions:

6.1 REPRESENTATIONS, WARRANTIES, AND COVENANTS

Except as disclosed in the Target Disclosure Schedule dated the date of
this Agreement, (i) the representations and warranties of Target in this
Agreement shall be true and correct in all material respects (except for such
representations and warranties that are qualified by their terms by a reference
to materiality, which representations and warranties as so qualified shall be
true in all respects) on and as of the Effective Time as though such
representations and warranties were made on and as of such time (except that
representations and warranties which by their express terms are made on and as
of a specified earlier date shall be made only on and as of such specified
earlier date) and (ii) Target shall have performed and complied in all material
respects with all covenants, obligations and conditions of this Agreement
required to be performed and complied with by them as of the Effective Time.
Acquiror shall have received from Target a certificate in such detail as
Acquiror may reasonably request, dated the Effective Date and signed by its
Chief Executive Officer, to the foregoing effect.

6.2 SHAREHOLDER APPROVAL

(a) This Agreement and the Merger shall have been approved by the
shareholders of the Target at a meeting duly called and held pursuant to Section
4.4 hereof or a consent solicitation completed in accordance with Section 4.4
hereof in accordance with Washington Law and the Target Articles of
Incorporation and Bylaws.

(b) Any agreements or arrangements of Target or any affiliate of Target
that may result in the payment of any amount that would be treated as a
"parachute payment" within the meaning of Section 280G(b)(2) of the Code
(determined without regard to the provision of Section 280G(b)(5) of the Code)
shall have been approved by the Shareholders of Target in a manner that complies
with the shareholder approval requirements of Section 3280G(b)(5)(B) of the
Code.

(c) The amendment to Target's Articles of Incorporation attached hereto as
Exhibit H shall have been approved by the requisite majorities of the
shareholders of Target.

6.3 OTHER EVIDENCE

Target shall have delivered to Acquiror such further certificates and
documents evidencing due action in accordance with this Agreement, including
certified copies of all applicable proceedings of shareholders and directors of
Target pertaining to the transactions under this Agreement, as Acquiror shall
reasonably request.

6.4 NO ADVERSE PROCEEDINGS, EVENTS, OR REGULATORY REQUIREMENTS

A-43
<PAGE> 267

tion of the Merger shall be in effect, nor shall any action or proceeding,
seeking any of the foregoing be pending; nor shall there be any action taken, or
any statute, rule, regulation or order enacted, entered, enforced or deemed
applicable to the Merger, which makes the consummation of the Merger illegal.
Target shall have procured all other regulatory approvals, consents, waivers, or
administrative actions of Governmental Entities or other persons or agencies
that are necessary or appropriate to be procured by Target prior to the
consummation of the transactions contemplated by this Agreement, and no such
approvals, consents, waivers, or administrative actions shall have included any
condition or requirement that would result in a Material Adverse Effect,
individually or in the aggregate, on Acquiror or Target.

6.5 CONSENTS, ETC.

All requisite consents, approvals, waivers, undertakings, memoranda,
agreements, exercises, and terminations by third parties which Target has
covenanted to use commercially reasonable efforts to obtain under Section 4.2
shall have been obtained by Target or waived by Acquiror.

6.6 OPINION OF TAX COUNSEL

Acquiror shall have received the written opinion of Acquiror's legal
counsel, in form and substance reasonably satisfactory to Acquiror, and dated on
or about the Closing Date, to the effect that the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code, and such
opinion shall not have been withdrawn. In rendering such opinion, Acquiror's
legal counsel shall be entitled to rely upon, among other things, reasonable
assumption as well as representations of Acquiror, Merger Sub and Target.

6.7 OPINION OF COUNSEL

Acquiror shall have received an opinion of counsel to Target, dated the
Effective Date, in form and substance reasonably satisfactory to Acquiror,
covering the matters set forth in Exhibit E.

6.8 ESCROW AGREEMENT

Acquiror, the Shareholders Representative and the Escrow Agent shall have
executed and delivered the Escrow Agreement in substantially the form attached
hereto as Exhibit D.

6.9 SECURITIES MATTERS

The Registration Statement filed with the SEC under the Securities Act by
the Acquiror, pertaining to the shares of Acquiror Common Stock to be issued to
the shareholders of Target pursuant to this Agreement and the Merger shall have
become effective and there shall not be in effect a stop order with respect
thereto. The Acquiror Common Stock issuable in the Merger shall have been
approved for listing on the NASDAQ National Market.

6.10 280G AGREEMENTS

Acquiror shall have received executed and delivered copies Section 280G
Agreements substantially in the form of Exhibit F hereto from each person
identified by Target or

A-44
<PAGE> 268

Acquiror as receiving excess parachute payments, as defined in Section 280G of
the Code, in connection with the Merger.

6.11 RESIGNATION OF DIRECTORS AND OFFICERS

The directors and officers of Target in office immediately prior to the
Effective Time shall have resigned as directors and officers of Target effective
as of the Effective Time and duly executed resignation letters shall have been
delivered to Acquiror from each such director and officer.

6.12 STOCK RESTRICTION AGREEMENT

Acquiror shall have received executed and delivered copies of Stock
Restriction Agreements, substantially in the form of Exhibit C hereto, from each
of the shareholders, option holders and Warrant holders of the Target other than
shareholders who have executed the Voting Agreement.

6.13 TERMINATION OF PENSION PLAN

If notified by Acquiror in writing at least 20 days prior to the Closing
Date, Target shall, at least one day prior to the Closing Date and conditioned
on the Closing occurring, terminate Target's 401(k) Plan (the "401(k) PLAN") and
no further contributions shall be made to the 401(k) Plan, provided that as a
condition of such termination Target's employees shall be eligible to
participate in Acquiror's 401(k) plan as soon as administratively feasible
following the Closing Date. Target shall provide to Acquiror (i) executed
resolutions by the Board of Directors of Target authorizing the termination and
(ii) an executed amendment to the 401(k) Plan sufficient to assure compliance
with all applicable requirements of the Code and regulations thereunder so that
the tax-qualified status of the 401(k) Plan will be maintained at the time of
termination. Target shall file a Form 5310 with the Internal Revenue Service and
obtain a favorable determination letter upon plan termination.

ARTICLE VII

CONDITIONS TO TARGET'S OBLIGATIONS

Unless waived in writing by Target in its sole discretion, all obligations
of Target a hereunder shall be subject to the fulfillment prior to or at the
Effective Date of the following conditions:

7.1 REPRESENTATIONS, WARRANTIES, AND COVENANTS

Except as disclosed in the Acquiror Disclosure Schedule dated the date of
this Agreement, (i) the representations and warranties of Acquiror and Merger
Sub in this Agreement shall be true and correct in all material respects (except
for such representations and warranties that are qualified by their terms by a
reference to materiality, which representations and warranties as so qualified
shall be true in all respects) on and as of the Effective Time as though such
representations and warranties were made on and as of such time (except that
representations and warranties which by their express terms are made on and as
of a specified earlier date shall be made only on and as of such specified
earlier date) and (ii) Acquiror and Merger Sub shall have

A-45
<PAGE> 269

performed and complied in all material respects with all covenants, obligations
and conditions of this Agreement required to be performed and complied with by
them as of the Effective Time. Target shall have received from Acquiror an
officer's certificate in such detail as Target may reasonably request, dated the
Effective Date and signed by its Chief Executive Officer and its Secretary, to
the foregoing effects.

7.2 SHAREHOLDER APPROVAL

This Agreement and the Merger shall have been approved by the Shareholders
of the Target at a meeting duly called and held pursuant to Section 4.4 hereof
or a consent solicitation completed in accordance with Section 4.4 hereof in
accordance with Washington Law and the Target Articles of Incorporation and
Bylaws.

7.3 OTHER EVIDENCE

Acquiror shall have delivered to Target such further certificates and
documents evidencing due action in accordance with this Agreement, including
certified copies of all applicable proceedings of stockholders and directors of
Acquiror pertaining to the transactions under this Agreement, as Target shall
reasonably request.

7.4 NO ADVERSE PROCEEDINGS, EVENTS, OR REGULATORY REQUIREMENTS

No action or proceeding, including but not limited to any temporary
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal or regulatory restraint or
prohibition, preventing the consummation of the Merger shall be in effect, nor
shall any action or proceeding brought by a Governmental Entity seeking any of
the foregoing be pending; nor shall there be any action taken, or any statute,
rule, regulation or order enacted, entered, enforced or deemed applicable to the
Merger, which makes the consummation of the Merger illegal. Acquiror shall have
procured all other regulatory approvals, consents, waivers, or administrative
actions of Governmental Entities or other persons or agencies that are necessary
or appropriate to be procured by Acquiror prior to the consummation of the
transactions contemplated by this Agreement, and no such approval, consent,
waiver, or administrative action shall have included any condition or
requirement that would result in a Material Adverse Effect on Acquiror or
Target.

7.5 OPINION OF TAX COUNSEL

Target shall have received the written opinion of Target's legal counsel,
in form and substance reasonably satisfactory to Target, and dated on or about
the Closing Date, to the effect that the Merger will constitute a reorganization
within the meaning of Section 368(a) of the Code, and such opinion shall not
have been withdrawn. In rendering such opinion, Target's legal counsel shall be
entitled to rely upon, among other things, reasonable assumption as well as
representations of Acquiror, Merger Sub and Target.

7.6 OPINION OF COUNSEL

Target shall have received an opinion of counsel to Acquiror, dated the
Effective Date, in form and substance reasonably satisfactory to Target,
covering the matters set forth in Exhibit G.

A-46
<PAGE> 270

7.7 SECURITIES MATTERS

The Registration Statement filed with the SEC under the Securities Act by
the Acquiror, pertaining to the shares of Acquiror Common Stock to be issued to
the shareholders of Target pursuant to this Agreement and the Merger, shall have
become effective and there shall not be in effect a stop order with respect
thereto. The Acquiror Common Stock issuable in the Merger shall have been
approved for listing on the NASDAQ National Market.

7.8 ESCROW AGREEMENT

Acquiror, the Shareholders Representative and the Escrow Agent shall have
executed and delivered the Escrow Agreement in substantially the form attached
hereto as Exhibit D.

ARTICLE VIII

TERMINATION, EXPENSES, AMENDMENT AND WAIVER

8.1 TERMINATION

This Agreement may be terminated at any time prior to the Effective Time,
whether before or after approval of the matters presented in connection with the
Merger by the stockholders of Target or Acquiror, in the following manner:

(a) by mutual consents duly authorized by the Boards of Directors of
Acquiror and Target;

(b) by either Acquiror or Target, if (i) without fault of the
terminating party, the Closing shall not have occurred on or before March
31, 2001 (provided, that a later date may be agreed upon in writing by the
parties hereto, and provided further, that the right to terminate this
Agreement under this clause (b)(i) shall not be available to any party
whose action or willful failure to act has been a principal cause of or
resulted in the failure of the Closing to occur on or before such date and
such action or failure to act constitutes a breach of this Agreement), or
(ii) any permanent injunction or other order of a court or other competent
authority preventing the consummation of the Merger shall have become final
and nonappealable;

(c) by Acquiror, if (i) any representation or warranty of Target, not
qualified by its terms to materiality, set forth in this Agreement shall
have been untrue when made in any material respect (or any representation
or warranty qualified as to materiality shall have been untrue in any
respect when made), or (ii) Target shall materially breach any obligation
or agreement hereunder in a manner causing conditions precedent to the
Closing not to be satisfied and such breach of a representation, warranty
or covenant shall not have been cured within 30 days of receipt by Target
of written notice of such breach; provided, that the right to terminate
this Agreement by Acquiror under subparts (i) and (ii) of this paragraph
(c) shall not be available to Acquiror where Acquiror is at that time in
material breach of this Agreement;

(d) by Target, if (i) any representation or warranty of Acquiror, not
qualified by its terms to materiality, set forth in this Agreement shall
have been untrue when made in any material respect (or any representation
or warranty qualified as to materiality

A-47
<PAGE> 271

shall have been untrue in any respect when made), or (ii) if Acquiror shall
materially breach any obligation or agreement hereunder in a manner causing
conditions precedent to the Closing not to be satisfied, and such breach of
a representation, warranty or covenant shall not have been cured within 30
days of receipt by Acquiror of written notice of such breach; provided,
that the right to terminate this Agreement by Target under this paragraph
(d) shall not be available to Target where Target is at that time in
material breach of this Agreement;

(e) by Acquiror, in accordance with Section 1.6(f); or

(f) by Acquiror, if Target has not delivered Voting Agreements from
shareholders of Target sufficient to approve the matters required to be
approved by the shareholders to satisfy the condition set forth in Section
6.2 within fifteen (15) days of the Execution Date.

8.2 EFFECT OF TERMINATION

In the event of termination of this Agreement as provided in Section 8.1,
this Agreement shall forthwith become void and there shall be no liability or
obligation on the part of Acquiror or Target or their respective officers,
directors, stockholders or affiliates, except to the extent that such
termination results from the breach by a party hereto of any of its
representations, warranties or covenants set forth in this Agreement; provided
that the provisions of Sections 4.1(b) and 5.1(b), this Section 8.2, Section 8.3
and Articles IX and X shall remain in full force and effect and survive any
termination of this Agreement.

8.3 EXPENSE

(a) Subject to paragraphs (b) and (c) below, whether or not the Merger is
consummated, all costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby (including, without limitation, the
fees and expenses of advisers, accountants and legal counsel) shall be paid by
the party incurring such expense and Acquiror shall pay any filing fees in
respect of any regulatory approvals required in order to consummate the Merger;
provided, however, that if the Closing occurs, the expenses incurred by Target
in connection with this Agreement and the transactions contemplated hereby
(including, without limitation, the fees and expenses of its advisors,
accountants, brokers and legal counsel), shall not exceed $2,000,000. Any such
expenses incurred by Target in connection with this Agreement and the
transactions contemplated hereby (including, without limitation, the fees and
expenses of its advisors, accountants and legal counsel) which cause the
aggregate amount of such expenses to exceed $2,000,000 shall be subject to
Acquiror's claim against the Escrow Fund, without regard to, or limited by, the
Threshold Amount (as defined herein below). Acquiror shall pay the registration
fee of the SEC, filing fees in respect of state "blue sky" laws, and the fee
payable to The National Association of Securities Dealers, Inc. in respect of
the listing on the NASDAQ National Market of the shares of Acquiror Common Stock
to be issued pursuant to this Agreement.

(b) In the event that Acquiror shall terminate this Agreement pursuant to
Section 8.1(c) or pursuant to Section 8.1(b) because of a failure of Target to
satisfy the conditions set forth in Section 6.1, and without limiting any other
rights Acquiror may have, Target shall reimburse Acquiror for all of the
out-of-pocket fees and expenses

A-48
<PAGE> 272

incurred by Acquiror in connection with this Agreement and the transactions
contemplated hereby (including, without limitation, the fees and expenses of its
advisors, accountants and legal counsel).

(c) In the event that Acquiror shall terminate this Agreement pursuant to
Section 8.1(f) or because the condition set forth in Section 6.2 is not
satisfied, and without limiting any other rights Acquiror may have, Target shall
reimburse Acquiror for all of the out-of-pocket fees and expenses incurred by
Acquiror in connection with this Agreement and the transactions contemplated
hereby (including, without limitation, the fees and expenses of its advisors,
accountants and legal counsel) up to the maximum amount of $300,000.

(d) In the event that Target shall terminate this Agreement pursuant to
Section 8.1(d) or pursuant to Section 8.1(b) because of a failure of Acquiror to
satisfy the conditions set forth in Section 7.1, and without limiting any other
rights Target may have, Acquiror shall reimburse Target for all of the
out-of-pocket fees and expenses incurred by Target in connection with this
Agreement and the transactions contemplated hereby (including, without
limitation, the fees and expenses of its advisors, accountants and legal
counsel).

8.4 EXTENSION; WAIVER

At any time prior to the Effective Time any party hereto may, to the extent
legally allowed, (i) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (ii) waive any
inaccuracies in the representations and warranties made to such party contained
herein or in any document delivered pursuant hereto and (iii) waive compliance
with any of the agreements or conditions for the benefit of such party contained
herein. Any agreement on the part of a party hereto to any such extension or
waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party.

ARTICLE IX

ESCROW AND INDEMNIFICATION

9.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS

All the representations, covenants, agreements and warranties set forth in
this Agreement shall survive the Effective Time until the date one year after
the Effective Time; provided, however, that claims related to actual fraud or
willful misconduct shall survive indefinitely. The covenants and agreements of
the parties shall survive until the expiration of the time period for their
performance as provided herein. The termination of any representation or
warranty, however, shall not affect the right to indemnification for breach of
such representation or warranty if written notice of such breach is given prior
to such termination.

9.2 INDEMNIFICATION

(a) From and after the Effective Time, and subject to the limitations set
forth in this Article IX, the shareholders of Target will indemnify and hold
harmless Acquiror and its officers, directors, agents and employees, and each
person, if any, who controls or may

A-49
<PAGE> 273

control Acquiror within the meaning of the Securities Act (hereinafter referred
to individually as an "INDEMNIFIED PERSON" and collectively as "INDEMNIFIED
PERSONS") from and against any and all losses, costs, damages, liabilities and
expenses arising from claims, demands, actions, causes of action, including,
without limitation, reasonable legal fees, net of any recoveries by Acquiror
under existing insurance policies or indemnities from third parties
(collectively, "DAMAGES") resulting from (i) any failure of any of the
representations and warranties made by Target under this Agreement to be true
and accurate at the time which they were made (including, if applicable, as of
the Closing Date) or (ii) any breach or default by Target of any covenant or
agreement made by Target in this Agreement, the Target Disclosure Schedule or
any exhibit or schedule to this Agreement and which is required to be performed
by Target at or prior to the Effective Time. The Escrow Fund shall be the sole
security for this indemnity obligation subject to the limitations in this
Agreement.

(b) From and after the Effective Time, and subject to the limitations set
forth in this Article IX, Acquiror will indemnify and hold harmless Target
Shareholders from and against any and all Damages resulting from any
misrepresentation or breach of or default in connection with any representation,
warranty or covenant of Acquiror in this Agreement.

(c) "Damages" as used herein is not limited to matters asserted by third
parties, but includes Damages incurred or sustained in the absence of claims by
a third party. In determining the amount of any Damages resulting from any
misrepresentation, breach or default or whether a misrepresentation, breach or
default has occurred, any materiality standard contained in the applicable
representation, warranty or covenant shall be disregarded.

9.3 ESCROW FUND

Subject to Section 9.6, sole and exclusive security for the indemnity
provided for in Section 9.2(a), the Escrow Shares shall be registered in the
name of, and, be deposited with an escrow agent selected by Acquiror with the
consent of the Shareholders' Agent (which consent shall not be unreasonably
withheld) (the "ESCROW AGENT"), such deposit to constitute an escrow fund to be
governed by the terms set forth in the Escrow Agreement, in substantially the
form attached hereto as Exhibit D (the "ESCROW AGREEMENT").

9.4 CERTAIN LIMITATIONS

(a) Acquiror's right to indemnification for Damages under Section 9.2 shall
accrue only if the aggregate of all such Damages exceeds $150,000 (the
"THRESHOLD AMOUNT") and then only to the extent of any excess Damages over such
$150,000 amount.

(b) No Indemnifying Party shall be liable for any Damages pursuant to this
Article IX unless a written claim for indemnification in accordance with Section
9.5 is given by the Indemnified Party to the Indemnifying Party with respect
thereto and received by the Indemnifying Party on or before 5:00 p.m.,
Baltimore, Maryland time on the first anniversary of the Closing Date (the
"EXPIRATION DATE").

(c) Subject to Section 9.6, the Parties hereby agree that the maximum
liability of a particular shareholder of the Target under this Article for
Damages shall in no event exceed the value of the Acquiror Common Stock held in
escrow for such Target

A-50
<PAGE> 274

shareholder pursuant to the Escrow Agreement valued as provided in the Escrow
Agreement.

9.5 CERTAIN PROCEDURAL MATTERS

(a) A party seeking indemnification (the "INDEMNIFIED PARTY") shall give
prompt written notice to the party from whom indemnification will be sought (the
"INDEMNIFYING PARTY") of any claim for indemnification hereunder and shall
provide to the Indemnifying Party as soon as practicable thereafter all
information and documentation necessary to support and verify the claim asserted
(or which would be asserted if not below the Threshold Amount), and the
Indemnifying Party and his or its representatives shall be given access to all
personnel, properties, books and records that the Indemnifying Party reasonably
determines to be related thereto.

(b) If any legal proceeding is instituted or any claim or demand is
asserted by any person in respect of which an Indemnified Party may seek to
assert a claim for indemnification hereunder, the Indemnified Party shall
promptly cause written notice of the assertion of any such legal proceeding,
claim or demand to be made to the Indemnifying Party; provided that the failure
to so notify the Indemnifying Party shall not reduce or adversely affect the
right of the Indemnified Party to assert a claim for indemnification hereunder
with respect to such legal proceeding, claim or demand except to the extent that
the Indemnifying Party is materially prejudiced thereby.

(c) The Indemnifying Party shall have the right at any time, at his or its
option and expense, to participate in the defense of any such legal proceeding,
claim or demand (including without limitation the right to participate in
negotiations and settlement discussions). The Indemnified Party and the
Indemnifying Party shall cooperate fully with each other in connection with the
defense, negotiation and settlement of any such legal proceeding, claim or
demand, and the Indemnifying Party shall be given access to all personnel,
properties, books and records that the Indemnifying Party reasonably determines
to be related thereto. No such legal proceeding, claim or demand may be settled
or compromised (nor shall any agreement be entered into or commitment made with
respect to any settlement or compromise) without the written consent of the
Indemnifying Party, which shall not be unreasonably withheld.

9.6 EXCLUSIVE REMEDY

If the Merger is consummated and notwithstanding any other provision of
this Agreement or the exhibits hereto to the contrary, recovery from the Escrow
Fund pursuant to the terms set forth in this Article IX shall be the exclusive
remedy available to Acquiror for Damages under this Agreement. The limitations
contained in this Article IX, however, shall not limit the liability of any
Indemnifying Party with respect to any actual fraud or willful misconduct of
such party.

9.7 RESOLUTION OF CONFLICTS; ARBITRATION

(a) In case an Indemnifying Party shall object to any indemnification claim
or claims by an Indemnified Party, the Indemnifying Party and the Indemnified
Party shall attempt in good faith for thirty (30) days to agree upon the rights
of the respective parties with respect to each of such claims.

A-51
<PAGE> 275

(b) If no such agreement can be reached after good faith negotiation,
either the Indemnifying Party or the Indemnified Party may, by written notice to
the other, demand arbitration of the matter unless the amount of the Damages is
at issue pending litigation with a third party, in which event arbitration shall
not be commenced until such amount is ascertained or both the Indemnifying Party
and the Indemnified Party agree to arbitration; and in such event the matter
shall be settled by arbitration conducted by a single arbitrator. The
Indemnifying Party and the Indemnified Party shall jointly select an arbitrator.
If the Indemnifying Party and the Indemnified Party fail to agree upon an
arbitrator within ten (10) days, an arbitrator shall be selected for them by the
American Arbitration Association ("AAA"). The decision of the arbitrator so
selected as to the validity and amount of any indemnification claim shall be
binding and conclusive upon the parties to this Agreement.

(c) Judgment upon any award rendered by the arbitrators may be entered in
any court having jurisdiction. Any such arbitration shall be held in Chicago,
Illinois under the commercial rules then in effect of the American Arbitration
Association. The Non-Prevailing Party to an arbitration shall pay its own
expenses, the fees of each arbitrator, the administrative fee of the American
Arbitration Association, and the expenses, including without limitation,
attorneys' fees and costs reasonably incurred by the other party to the
arbitration.

9.8 SHAREHOLDERS' AGENT

(a) Joseph Manzinger is hereby appointed as agent and attorney-in-fact (the
"SHAREHOLDERS' AGENT") for each Target shareholder, for and on behalf of the
Target shareholders, (i) to assert, prosecute or respond to any claims for
indemnification hereunder on behalf of all or any Target shareholders (and is
hereby designated as the Indemnifying Party to act on behalf of the Target
shareholders under this Article IX), (ii) to give and receive notices and
communications to authorize delivery to Acquiror of shares of Acquiror Common
Stock from the Escrow Fund in satisfaction of claims by Acquiror, to object to
such deliveries, to agree to, negotiate, enter into settlements and compromises
of, and demand arbitration and comply with orders of courts and awards of
arbitrators with respect to such claims, and to take all actions necessary or
appropriate in the judgment of the Shareholders' Agent for the accomplishment of
the foregoing, (iii) to endorse Certificates or stock powers therefor on behalf
of any Target shareholder, and (iv) to amend this Agreement at any time by
execution of an instrument in writing signed on behalf of each of the parties
hereto; provided that amendment shall not (a) alter or change the amount or kind
of consideration to be received on conversion of the Target Capital Stock, or
(b) alter or change any of the terms and conditions of this Agreement if such
alteration or change would materially adversely affect the holders of Target
Capital Stock. Such agency may be changed by the shareholders of Target from
time to time upon not less than thirty (30) days prior written notice to
Acquiror; provided, however, that the Shareholders' Agent may not be removed
unless holders of a two-thirds interest in the Escrow Fund agree to such removal
and to the identify of the substituted shareholders' agent. Any vacancy in the
position of the Shareholders' Agent may be filled by approval of the holders of
a majority in interest of the Escrow Fund. No bond shall be required of the
Shareholders' Agent, and the Shareholders' Agent shall not receive compensation
for his services. Notice or communications to or from the Shareholders' Agent
shall constitute notice to or from each of the shareholders of Target.

A-52
<PAGE> 276

(b) The Shareholders' Agent shall not be liable for any act done or omitted
hereunder or under the Escrow Agreement as Shareholders' Agent while acting in
good faith and in the exercise of reasonable judgment, and any act done or
omitted to the advice of counsel shall be conclusive evidence of such good
faith. The Target shareholders shall severally indemnify the Shareholders' Agent
and hold him harmless against any loss, liability or expense incurred without
gross negligence or bad faith on the part of the Shareholders' Agent and arising
out of our in connection with the acceptance or administration of his or her
duties hereunder, and shall reimburse the Shareholders' Agent for their pro rata
share of any expenses incurred by the Shareholders' Agent.

(c) The Shareholders' Agent shall have reasonable access to information
about Target and Acquiror and the reasonable assistance of Target" and Acquiror"
officers and employees for purposes of performing his duties and exercising his
rights hereunder; provided, that the Shareholders' Agent shall treat
confidentially and not disclose any nonpublic information from or about Target
or Acquiror to anyone (except on a need to know basis to individuals who agree
to treat such information confidentially).

9.9 ACTIONS OF SHAREHOLDERS' AGENT

A decision, act, consent or instruction of the Shareholders' Agent (as
such) shall constitute a decision of all Target shareholders on behalf of whom
he is acting and shall be final, binding and conclusive upon each such Target
shareholder, and the Escrow Agent and Acquiror may rely thereon.

ARTICLE X

GENERAL PROVISIONS

10.1 NOTICES

All notices and other communications hereunder shall be in writing and
shall be deemed given if delivered personally or by commercial delivery service,
or mailed by registered or certified mail (return receipt requested) or sent via
facsimile (with confirmation of receipt) to the parties at the following address
(or at such other address for a party as shall be specified by like notice):

(a) if to Acquiror or Merger Sub, to:

TeleCommunication Systems, Inc.
275 West Street
Annapolis, Maryland 21401
Attention: Thomas M. Brandt, Jr.
Donald C. Hubbard, Jr.
Facsimile No.: (410) 280-1048
Telephone No.: (410) 280-1001

A-53
<PAGE> 277

with a copy to:

Piper Marbury Rudnick & Wolfe LLP
6225 Smith Avenue
Baltimore, Maryland 21209-3600
Attention: Wilbert H. Sirota
R.W. Smith, Jr.
Facsimile No.: (410) 580-3001
Telephone No.: (410) 580-3000

(b) if to Target, to:

XYPOINT Corporation
2200 Alaskan Way
Second Floor
Seattle, Washington 98121
Attention: Kenneth A. Arneson
Facsimile No.: (206) 674-1080
Telephone No.: (206) 674-1000

with a copy to:

Venture Law Group
4750 Carillon Point
Kirkland, Washington 98033-7355
Attention: Craig Sherman
Facsimile No.: (425) 739-8750
Telephone No.: (425) 739-8700

10.2 INTERPRETATION

When a reference is made in this Agreement to Exhibits, such reference
shall be to an Exhibit to this Agreement unless otherwise indicated. The words
"include," "includes" and "including" when used herein shall be deemed in each
case to be followed by the words "without limitation." The phrases "the date of
this Agreement", "the date hereof", and terms of similar import, unless the
context otherwise requires, shall be deemed to refer to the Execution Date. The
table of contents and headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.

10.3 COUNTERPARTS

This Agreement may be executed in one or more counterparts, all of which
shall be considered one and the same agreement and shall become effective when
one or more counterparts have been signed by each of the parties and delivered
to the other parties, it being understood that all parties need not sign the
same counterpart.

10.4 ENTIRE AGREEMENT; THIRD PARTY BENEFICIARIES

This Agreement and the documents and instruments and other agreements
specifically referred to herein or delivered pursuant hereto, including the
Exhibits, the Schedules, the Target Disclosure Schedule and the Acquiror
Disclosure Schedule (a) constitute the entire agreement among the parties with
respect to the subject matter hereof and supersede all

A-54
<PAGE> 278

prior agreements and understandings, both written and oral, among the parties
with respect to the subject matter hereof, except for the Confidentiality
Agreement, which shall continue in full force and effect, and shall survive any
termination of this Agreement or the Closing, in accordance with its terms and
(b) are not intended to confer upon any other person any rights or remedies
hereunder.

10.5 SEVERABILITY

In the event that any provision of this Agreement, or the application
thereof, becomes or is declared by a court of competent jurisdiction to be
illegal, void or unenforceable, the remainder of this Agreement will continue in
full force and effect and the application of such provision to other persons or
circumstances will be interpreted so as reasonably to effect the intent of the
parties hereto. The parties further agree to replace such void or unenforceable
provision of this Agreement with a valid and enforceable provision that will
achieve, to the extent possible, the economic, business and other purposes of
such void or unenforceable provision.

10.6 REMEDIES CUMULATIVE

Except as otherwise provided herein, any and all remedies herein expressly
conferred upon a party will be deemed cumulative with and not exclusive of any
other remedy conferred hereby, or by law or equity upon such party, and the
exercise by a party of any one remedy will not preclude the exercise of any
other remedy.

10.7 GOVERNING LAW

This Agreement shall be governed by and construed in accordance with the
laws of the State of Maryland without regard to applicable principles of
conflicts of law or, to the extent applicable, the federal laws of the United
States of America. THE PARTIES HERETO HEREBY KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVE THE RIGHT ANY OF THEM MAY HAVE TO A TRIAL BY JURY IN RESPECT
OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH
THIS AGREEMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER
VERBAL OR WRITTEN) OR ACTIONS OF THE PARTIES HERETO. THIS PROVISION IS A
MATERIAL INDUCEMENT FOR ACQUIROR TO ENTER INTO THIS AGREEMENT.

10.8 ASSIGNMENT; AMENDMENT; BINDING EFFECT

Neither this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by any of the parties hereto (whether by operation
of law or otherwise) without the prior written consent of the other parties. The
parties hereto may cause this Agreement to be amended at any time by execution
of an instrument in writing signed on behalf of each of the parties hereto and,
in the case of Acquiror and Target, approved by their respective Boards of
Directors; provided that an amendment made subsequent to adoption of this
Agreement by the shareholders of Target shall not (a) alter or change the amount
or kind of consideration to be received on conversion of the Target Common Stock
or alter or change any of the terms and conditions of this Agreement if such
alteration or change would materially adversely affect the holders of Target
Common Stock. Subject to the preceding sentence, this Agreement will be binding
upon, inure to

A-55
<PAGE> 279

the benefit of and be enforceable by the parties and their respective successors
and permitted assigns.

10.9 RULES OF CONSTRUCTION

The parties hereto agree that they have been represented by counsel during
the negotiation, preparation and execution of this Agreement and, therefore,
waive the application of any law, regulation, holding or rule of construction
providing that ambiguities in an agreement or other document will be construed
against the party drafting such agreement or document.

[SIGNATURE PAGE FOLLOWS]

A-56
<PAGE> 280

IN WITNESS WHEREOF, TeleCommunication Systems, Inc., Merger Corp., and
XYPOINT Corporation have caused this Agreement to be executed and delivered, by
their respective officers thereunto duly authorized in the case of corporate
parties as the case may be, all as of the date first written above.

<TABLE>
<S> <C> <C>
TELECOMMUNICATION SYSTEMS, INC.
By: /s/ RICHARD A. YOUNG (SEAL)
----------------------------------------------------
Name: Richard A. Young
Title: Executive Vice President

WINDWARD ACQUISITION CORP.
By: /s/ RICHARD A. YOUNG (SEAL)
----------------------------------------------------
Name: Richard A. Young
Title: Executive Vice President

XYPOINT CORPORATION
By: /s/ KENNETH ARNESON (SEAL)
----------------------------------------------------
Name: Kenneth Arneson
Title: President
</TABLE>

A-57
<PAGE> 281

EXHIBIT A

VOTING AGREEMENT

THIS VOTING AGREEMENT (this "AGREEMENT") is made and entered into as of
November , 2000, by and among TeleCommunication Systems, Inc., a Maryland
corporation ("ACQUIROR"), and ("SHAREHOLDER"). Shareholder is a
shareholder of XYPOINT Corporation, a Washington State corporation ("TARGET").

RECITALS

A. Concurrently with the execution of this Agreement, Acquiror, Windward
Acquisition Corp., a wholly owned subsidiary of Acquiror ("MERGER SUB"), and
Target are entering into an Agreement and Plan of Reorganization (the
"REORGANIZATION AGREEMENT") providing for the merger of Target with and into
Merger Sub (such merger, or any alternative merger structure adopted pursuant to
the Reorganization Agreement, the "MERGER"), on the terms and subject to the
conditions set forth therein (which has been provided to Shareholder).
Capitalized terms used in this Agreement but not otherwise defined herein shall
have the respective meanings given to such terms in the Reorganization
Agreement.

B. Shareholder is the record holder and beneficial owner of such number and
class of shares of the outstanding capital stock of Target as is indicated on
the final page of this Agreement (the "SHARES").

C. As a material inducement to enter into the Reorganization Agreement,
Acquiror and Merger Sub are requiring, among other things, that Shareholder
agree, and Shareholder is willing to agree (a) to vote the Shares and any other
shares of capital stock of Target hereafter acquired by it so as to facilitate
consummation of the Merger, and (b) not to engage in certain solicitation
activities relating to an Acquisition Proposal.

NOW, THEREFORE, in consideration of these premises and the mutual
agreements, covenants and provisions herein contained, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound, agree as
follows:

1. Representations and Warranties of Shareholder. Shareholder hereby
represents and warrants to Acquiror and Merger Sub as follows:

1.1 Shareholder is the record and beneficial owner of and has the sole
right, power and authority to (a) vote, or direct the voting of, (b)
dispose, or direct the disposal of, and (c) convert, demand appraisal
rights with respect to, and agree to all of the matters set forth in this
Agreement with respect to, the Shares. Shareholder has good and marketable
title to the Shares. The Shares are free and clear of any Lien, claim,
option, subscription, warrant, put, call, charge, right of first refusal,
proxy or voting restrictions, rights of conversion or exchange, or other
encumbrance or restriction. Other than pursuant to this Agreement (and, as
applicable, the Amended and Restated Right of First Refusal Agreement by
and among Kenneth A. Arneson, William Clise, Jill Crowson, certain other
shareholders of Target and Target dated as of August 18, 2000 and the
Amended and Restated Stock Option Agreement by and among Target, Kenneth A.
Arneson, William Clise, Amy Clise, Jill Crowson and

A-A-1
<PAGE> 282

Michael Crowson dated as of April 15, 1997), Shareholder is not obligated
under any agreement or understanding of any character, to transfer or sell
any Shares or any New Shares (as defined below). Shareholder will transfer
and deliver to Acquiror immediately upon Closing valid title to the Shares
and any New Shares then owned by Shareholder free and clear of any Lien,
claim, option, subscription, warrant, put, call, charge, right of first
refusal, proxy or voting restrictions, rights of conversion or exchange, or
other encumbrance or restriction, and together with all rights now or
hereafter attaching to such Shares and any New Shares.

1.2 Shareholder does not own, either beneficially or of record, or
manage or control, any shares of capital stock of Target, or any securities
or other interests convertible into or exercisable or exchangeable for, any
shares of capital stock of Target, other than the Shares. For the purposes
of this Agreement, beneficial ownership has the meaning set forth in Rule
13d-3 of the Exchange Act.

1.3 Shareholder has full legal capacity, power and authority to make,
enter into and carry out the terms of this Agreement. If Shareholder is a
corporation, Shareholder is duly organized and validly existing in good
standing under the laws of the jurisdiction of its incorporation, and has
all corporate powers required to carry on its business as now conducted.
The execution and delivery of this Agreement by Shareholder, the
performance by Shareholder of its obligations hereunder, and the
consummation of the transactions contemplated hereby, have been duly and
validly authorized by all necessary action on the part of Shareholder
(corporate or otherwise), and no other proceedings on the part of
Shareholder are necessary or advisable, and, assuming due authorization,
execution and delivery hereof by Acquiror, this Agreement constitutes a
legal, valid and binding obligation of Shareholder, enforceable against
Shareholder in accordance with its terms.

1.4 The execution and delivery of this Agreement by Shareholder does
not, and the performance of Shareholder's obligations hereunder will not,
conflict with, violate, result in any breach of or constitute a default (or
an event that with notice or lapse of time or both would become a default)
under, or give to others any right to terminate, amend, accelerate or
cancel any right or obligation under, or result in the creation of any Lien
on any Shares or New Shares (as hereinafter defined) pursuant to, the
articles of incorporation, bylaws or analogous documents of Shareholder or
any agreement, voting trust, pledge agreement, loan or credit agreement,
note, bond, mortgage, indenture, contract, lease, or any other agreement,
concession, license, permit, franchise or other instrument or obligation to
which Shareholder is a party or by which Shareholder or the Shares or New
Shares are or will be bound or affected, or violate any judgment, order,
notice, decree, statute, law, ordinance, rule or regulation applicable to
Shareholder or any of its assets.

1.5 There is no action, suit, investigation or proceeding pending
against, or to the knowledge of Shareholder, threatened against Shareholder
or any of its properties, before any Governmental Entity which in any
manner challenges or seeks to prevent, enjoin, alter or materially delay
the Merger or any of the other transactions contemplated by this Agreement.

2. Covenants of Shareholder.

2.1 Agreement to Vote Shares. Shareholder hereby agrees that during
the time this Agreement is in effect, at any meeting of the shareholders of
Target, however

A-A-2
<PAGE> 283

called (whether annual, special or adjourned), and in any action by written
consent of the shareholders of Target, Shareholder shall vote or cause to
be voted its Shares, any New Shares (as hereinafter defined), any Shares or
New Shares over which Shareholder has a valid proxy to vote such Shares
("Other Shares") and any other equity interests in Target over which
Shareholder has the sole or joint right, to vote or control the voting: (i)
in favor of (A) approval and adoption of the Reorganization Agreement and
the Merger, and (B) any matter or transaction that is reasonably required
to effect the Merger and the other transactions contemplated by the
Reorganization Agreement, and (ii) against any Acquisition Proposal, and
against any other matter which could reasonably be expected to facilitate
any Acquisition Proposal, including, without limitation, any change in
Target's board of directors, except as otherwise agreed to in writing by
Acquiror. Shareholder shall be present, in person or by proxy, at all
meetings of shareholders of Target or at any adjournment or adjournments
thereof so that all Shares and New Shares are counted for the purpose of
determining the presence of a quorum at such meetings.

2.2 New Shares. Shareholder agrees that any shares of capital stock
or other equity interest of Target or any other interest convertible into
or exercisable or exchangeable therefor that Shareholder purchases (with
the prior written consent of Acquirer) or with respect to which Shareholder
otherwise acquires record or beneficial ownership (including, without
limitation, by stock split or dividend, by exercise or grant of options,
warrants or other convertible or derivative securities, by exchange or
conversion of other instruments, or otherwise) after the execution of this
Agreement and prior to the termination of this Agreement ("NEW SHARES")
shall be subject to the terms and conditions of this Agreement to the same
extent as if they constituted Shares.

2.3 Prohibition Against Transfer.

(i) Shareholder agrees that it shall not, and shall not permit any
affiliate or associate, or any company, trust or other entity controlled
in whole or in part by it, to (a) transfer (except as may be
specifically required by court order or by operation of law, in which
case any such transferee shall agree to be bound hereby), tender,
assign, sell, exchange, pledge, hypothecate, or offer to transfer or
sell or otherwise dispose of or encumber or create or suffer to exist
any Lien, claim, option, subscription, warrant, put, call, charge, right
of first refusal, proxy or voting restrictions, rights of conversion or
exchange, or other encumbrance or restriction, or grant any proxy or
power of attorney, deposit into a voting trust or enter into a voting
agreement, understanding or arrangement with respect to, any Shares or
any New Shares, or to make any offer or agreement relating thereto, at
any time prior to the termination of this Agreement, or (b) take any
action that would have the effect of preventing, delaying or disabling
Shareholder from performing its obligations under this Agreement.

(ii) Shareholder understands and agrees that if Shareholder
attempts to transfer, vote or provide any other person with the
authority to transfer or vote any of the Shares or New Shares other than
in compliance with this Agreement, Target shall not, and Shareholder
hereby unconditionally and irrevocably instructs Target to not, permit
any such transfer on its books and records, issue a new certificate
representing any of the Shares or New Shares or record such vote

A-A-3
<PAGE> 284

unless and until Shareholder shall have complied with the terms of this
Agreement.

2.4 Grant of Irrevocable Proxy; Appointment of Proxy.

(i) Shareholder hereby irrevocably grants to, and appoints, Thomas
M. Brandt, Jr., Donald C. Hubbard, Jr., and Bruce White, or any of them,
in their respective capacities as representatives of Acquiror or Merger
Sub, and each of them individually, Shareholder's proxy and
attorney-in-fact (with full power of substitution), for and in the name,
place and stead of Shareholder, to vote the Shares, any New Shares and
any Other Shares in favor of the Merger and other transactions
contemplated by the Reorganization Agreement, against any Acquisition
Proposal, and otherwise as contemplated by Section 2.1 above.

(ii) Shareholder represents that, except as set forth on Schedule
2.4 attached hereto, any proxies heretofore given and in effect on the
date hereof in respect of the Shares are revocable, and Shareholder
hereby revokes any and all such proxies.

(iii) Shareholder understands and acknowledges that Acquiror is
entering into the Reorganization Agreement in reliance upon
Shareholder's execution and delivery of this Agreement. Shareholder
hereby affirms that the irrevocable proxy set forth in this Section 2.4
is given in connection with the execution of the Reorganization
Agreement, and that such irrevocable proxy is given to secure the
performance of the duties of Shareholder under this Agreement consistent
with Shareholder's duties as a shareholder of Target and in accordance
with the terms of the Reorganization Agreement. Shareholder hereby
further affirms that the irrevocable proxy is coupled with an interest
and may under no circumstances be revoked. Shareholder hereby ratifies
and confirms all that such irrevocable proxy may lawfully do or cause to
be done by virtue hereof. Such irrevocable proxy is executed and
intended to be irrevocable in accordance with the provisions of Section
23B.07.220 of the Washington Business Corporation Act. Shareholder also
acknowledges that the covenants of this section are applicable to any
proxies it may have with respect to the Other Shares and that all such
proxies are valid and binding under Washington Law.

2.5 Commercially Reasonable Efforts. Shareholder hereby agrees to use
its commercially reasonable effort to take, or cause to be taken, all
actions, and to do, or cause to be done, all things reasonably necessary,
proper or advisable under applicable laws and regulations to consummate and
make effective the transactions contemplated by this Agreement and the
Reorganization Agreement. Shareholder shall promptly consult with Acquiror
and provide any necessary information and materials with respect to all
filings made by Shareholder with any Governmental Entity in connection with
this Agreement and the Reorganization Agreement and the transactions
contemplated hereby and thereby.

2.6 No Solicitation. Shareholder agrees that neither it nor any of
its officers, directors, or employees (as applicable) shall, and
Shareholder shall direct and use commercially reasonable efforts to cause
its associates, agents and representatives (including, without limitation,
any investment banker, attorney, or accountant retained by Shareholder) not
to, directly or indirectly, take any action to solicit, encourage,
entertain, review, initiate or participate in any Acquisition Proposal, or
engage in any negotiations concerning, or provide any confidential
information or data

A-A-4
<PAGE> 285

to, or have any discussions with, any person relating to an Acquisition
Proposal. As of the date hereof, Shareholder is not engaged in any
negotiations or discussions relating to an Acquisition Proposal, and is not
assisting, cooperating with or encouraging any Acquisition Proposal.
Shareholder shall promptly notify Acquiror orally and in writing of, and
keep it fully and currently informed on, any Acquisition Proposal or any
inquiries with respect thereto, such written notification to include the
identity of the person making such inquiry or Acquisition Proposal and such
other information with respect thereto as is reasonably necessary to
apprise Acquiror of the material terms of such Acquisition Proposal.
Shareholder shall give Acquiror contemporaneous written notice upon
engaging in discussions or negotiations with, or providing any information
to, any such person regarding an Acquisition Proposal. Each party to this
Agreement acknowledges that this Section 2.6 was a significant inducement
for Acquiror to enter into this Agreement and the Reorganization Agreement
and the absence of such provision would have resulted in either (i) a
material reduction in the Merger consideration to be paid to Shareholder
and the other shareholders of Target or (ii) a failure to induce Acquiror
to enter into this Agreement or the Reorganization Agreement.

2.7 Waiver of Appraisal Rights. Shareholder hereby waives any and all
rights of appraisal or rights to dissent from the Merger that it may have
under Washington Law, and Shareholder will take such further actions, if
any, as are necessary to waive any rights Shareholder may have under
Washington Law to make a demand for appraisal with respect to the Shares or
New Shares it owns.

2.8 Appointment of Shareholder Agent. Shareholder hereby consents to
the appointment of Joseph Manzinger as its agent and attorney-in-fact in
accordance with the terms of the Reorganization Agreement.

2.9 Registration Rights Agreement. Shareholder hereby agrees to amend
the Target's Amended and Restated Registration Rights Agreement dated
August 18, 2000 (the "RIGHTS AGREEMENT"), pursuant to Section 18(g)
thereof, to state that the Rights Agreement will terminate in its entirety
upon the consummation of the Merger.

3. Restrictions on Transfer.

3.1 In order to induce the Acquiror and the Merger Sub to enter into
the Reorganization Agreement, the Shareholder hereby irrevocably agrees
that, except as provided in Section 3.2 below, he, she or it will not,
directly or indirectly, sell, offer, contract to sell, transfer the
economic risk of ownership in, make any short sale, pledge or otherwise
dispose of any shares of Acquiror Common Stock or any securities
convertible into or exchangeable or exercisable for or any other rights to
purchase or acquire shares of Acquiror Common Stock, without the prior
written consent of Acquiror, for a period of 240 days following the
Effective Date of the Merger;

3.2 Notwithstanding the foregoing:

(i) on or after the 120th day anniversary of the Effective Date of
the Merger, the Shareholder shall be entitled to sell up to one-third
(1/3) of the shares of Acquiror Common Stock acquired by such
Shareholder in the Merger;

(ii) in addition to subsection 3.2(i) above, on or after the 180th
day anniversary of the Effective Date of the Merger, the Shareholder
shall be entitled

A-A-5
<PAGE> 286

to sell up to one-third (1/3) of the shares of Acquiror Common Stock
acquired by such Shareholder in the Merger;

(iii) if the Shareholder is an individual, he or she may transfer
any shares of Acquiror Common Stock or securities convertible into or
exchangeable or exercisable for Acquiror Common Stock either during his
or her lifetime or on death by will or intestacy to his or her immediate
family or to a trust the beneficiaries of which are exclusively the
Shareholder and/or a member or members of his or her immediate family;
provided, however, that prior to any such transfer each transferee shall
execute an agreement, reasonably satisfactory to Acquiror, pursuant to
which each transferee shall agree to receive and hold such shares of
Acquiror Common Stock, or securities convertible into or exchangeable or
exercisable for the Acquiror Common Stock, subject to the provisions
hereof, and there shall be no further transfer except in accordance with
the provisions hereof. For the purposes of this paragraph, "immediate
family" shall mean spouse, lineal descendant, step children, father,
mother, brother or sister of the transferor or the transferor's spouse;

(iv) the restrictions in this Agreement shall not apply to shares
of Acquiror Common Stock to be sold or otherwise transferred in
connection with a Change of Control of the Acquiror. For purposes of
this Agreement, the term "Change of Control" shall mean (i) the sale of
all or substantially all of the assets of the Acquiror, (ii) the sale of
more than fifty percent (50%) of the outstanding shares of Acquiror
Common Stock in a non-public sale, (iii) the dissolution or liquidation
of the Acquiror, or (iv) any merger or consolidation of the Acquiror if
immediately after such transaction either (A) persons who were members
of the Board of Directors of the Acquiror immediately prior to such
transaction do not constitute at least a majority of the Board of
Directors of the surviving entity, or (B) persons who hold a majority of
the outstanding shares of common stock of the surviving entity are not
persons who held shares of Acquiror Common Stock immediately prior to
such transaction; and

(v) the restrictions in this Agreement shall not apply to shares of
Acquiror Common Stock or securities exercisable for or convertible into
shares of Acquiror Common Stock as to which the Shareholder acquires
ownership, directly or beneficially, in the public trading markets.

3.3 The Shareholder understands that the agreements of the Shareholder
in this Section 3 are irrevocable and shall be binding upon the
Shareholder's heirs, legal representatives, successors and assigns. The
Shareholder agrees and consents to the entry of stop transfer instructions
with the Acquiror's transfer agent against the transfer of shares of
Acquiror Common Stock or other securities of the Acquiror held by the
Shareholder except in compliance with the terms of this Section 3.

4. Restrictive Legend. Any and all shares of Acquiror Common Stock or New
Shares held by the Shareholder shall be endorsed with the following restrictive
legend:

"The securities represented by this certificate are subject to certain
restrictions and agreements contained in a Voting Agreement by and between
the shareholder and TeleCommunication Systems, Inc. A copy of the Voting
Agreement and all applicable amendments thereto will be furnished by
TeleCommunication Systems, Inc. to the

A-A-6
<PAGE> 287

record holder of this certificate without charge upon written request to
TeleCommunication Systems, Inc. at its principal place of business or
registered office."

"The shares represented by this certificate are held by a person who may be
deemed to be an affiliate of the issuer for purposes of Rule 144
promulgated under the Securities Act of 1933, as amended."

5. Consent and Waiver. Shareholder hereby gives any consents or waivers,
without the payment of any premium, payments, penalties or other payment of any
consideration of any kind whatsoever or triggering of any change of control or
other rights, that are required for the consummation of the Merger under the
terms of any agreements to which Shareholder is a party or pursuant to any other
rights Shareholder may have.

6. Termination. This Agreement shall terminate in the event of a
termination of the Reorganization Agreement as provided for in Section 8.1
thereof.

7. Miscellaneous.

7.1 Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
void or unenforceable, then the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated. The
parties further agree to replace such void or unenforceable provision of
this Agreement with a valid and enforceable provision that will achieve, to
the extent possible, the economic, business and other purposes of such void
or unenforceable provision.

7.2 Interpretation. The words "include," "includes," and "including"
when used herein shall be deemed in each case to be followed by the words
"without limitation."

7.3 Binding Effect and Assignment. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the
parties hereto and their respective heirs, personal representatives,
successors and permitted assigns, but, except as otherwise specifically
provided herein, neither this Agreement nor any of the rights, interests or
obligations of the parties hereto may be assigned by any parties hereto
(whether by operation of law or otherwise) without prior written consent of
the other parties hereto.

7.4 Amendments and Modification. This Agreement may not be modified,
amended, altered or supplemented except upon the execution and delivery of
a written agreement executed by the parties hereto.

7.5 Specific Performance; Injunctive Relief. The parties hereto
acknowledge that Acquiror will be irreparably harmed and that there will be
no adequate remedy at law for a violation of any of the covenants or
agreements of Shareholder set forth herein. Therefore, it is agreed that,
in addition to any other remedies that may be available to Acquiror upon
any such violation, Acquiror shall have the right to enforce such covenants
and agreements by specific performance, injunctive relief or by any other
means available to Acquiror at law or in equity and Shareholder hereby
waives any and all defenses which could exist in its favor in connection
with such enforcement and waives any requirement for the security or
posting of any bond in connection with such enforcement.

A-A-7
<PAGE> 288

7.6 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and deemed to be sufficient if
delivered in person, by telecopy or sent by mail (registered or certified
mail, postage prepaid, return receipt requested) or nationally-recognized
courier (prepaid) to the respective parties as follows:

IF TO ACQUIROR:

TeleCommunication Systems, Inc.
275 West Street
Annapolis, Maryland 21401
Attention: Thomas M. Brandt, Jr.
Donald C. Hubbard, Jr.
Facsimile No.: (410) 280-1048
Telephone No.: (410) 280-1001

With a copy to:

Piper Marbury Rudnick & Wolfe LLP
6225 Smith Avenue
Baltimore Maryland 21209-3600
Attention: R.W. Smith, Jr.
Wilbert H. Sirota
Facsimile No.: (410) 580-3001
Telephone No.: (410) 580-3000

IF TO SHAREHOLDER:

To the address for notice set forth on the last page hereof.

WITH A COPY TO:

Venture Law Group
2200 Alaskan Way
Second Floor
Seattle, Washington 98121
Attention: Craig Sherman
Facsimile No.: (425) 739-8750
Telephone No.: (425) 739-8700

or to such other address as any party may have furnished to the other in
writing in accordance herewith, except that notices of change of address
shall only be effective upon receipt.

7.7 Governing Law; Waiver of Jury Trial. This Agreement shall be
governed by, and construed and enforced in accordance with, the internal
laws of the State of Maryland without giving effect to any choice of law or
conflict of law provision or rule (whether of the State of Maryland or any
other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Maryland. Each of the parties hereto
irrevocably consents to the jurisdiction of any court located within the
State of Maryland, in connection with any matter based upon or arising out
of this Agreement or the Reorganization Agreement or the matters
contemplated herein, agrees that process may be served upon them in any
manner authorized by the laws of the State of Maryland for such persons and
waives and covenants not to assert or plead any objection which they might
otherwise have to such jurisdiction and such process. THE PARTIES HERETO
HEREBY KNOWINGLY, VOLUNTARILY

A-A-8
<PAGE> 289

AND INTENTIONALLY WAIVE THE RIGHT ANY OF THEM MAY HAVE TO A TRIAL BY JURY
IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN
CONNECTION WITH THIS AGREEMENT, OR ANY COURSE OF CONDUCT, COURSE OF
DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE PARTIES
HERETO. THIS PROVISION IS A MATERIAL INDUCEMENT FOR ACQUIROR TO ENTER INTO
THIS AGREEMENT.

7.8 Entire Agreement. This Agreement contains the entire
understanding of the parties hereto in respect of the subject matter
hereof, and supersedes all prior negotiations, agreements and
understandings, both written and oral, between the parties with respect to
such subject matter. This Agreement is not intended to confer upon any
third party any rights or remedies hereunder.

7.9 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement
and shall become effective when one or more counterparts have been signed
by each of the parties and delivered to the other parties, it being
understood that all parties need not sign the same counterpart.

7.10 Effect of Headings. The section headings herein are for
convenience only and shall not affect the construction or interpretation of
this Agreement.

7.11 Remedies Cumulative. Except as otherwise provided herein, any
and all remedies herein expressly conferred upon a party will be deemed
cumulative with and not exclusive of any other remedy conferred hereby, or
by law or equity upon such party, and the exercise by a party of any one
remedy will not preclude the exercise of any other remedy.

7.12 Rules of Construction. The parties hereto agree that they have
been represented by counsel during the negotiation, preparation and
execution of this Agreement and, therefore, waive the application of any
law, regulation, holding or rule of construction providing that ambiguities
in an agreement or other document will be construed against the party
drafting such agreement or document.

[SIGNATURES BEGIN ON THE FOLLOWING PAGE]

A-A-9
<PAGE> 290

IN WITNESS WHEREOF, the parties have caused this Voting Agreement to be
duly executed under seal on the date and year first above written.

Shareholder:

--------------------------------(SEAL)

Name:
--------------------------------------

--------------------------------------
Street Address

--------------------------------------
City, State and Zip

--------------------------------------
Telephone Number/Telecopy Number

--------------------------------------
Tax Identification Number

Number and Class(es) of Shares Held Beneficially or of Record by Shareholder:

COMMON STOCK: ________ SHARES OWNED BENEFICIALLY AND ________ SHARES OWNED OF
RECORD.

SERIES X PREFERRED STOCK: ________ SHARES OWNED BENEFICIALLY AND ________
SHARES OWNED OF RECORD.

SERIES A PREFERRED STOCK: ________ SHARES OWNED BENEFICIALLY AND ________
SHARES OWNED OF RECORD.

SERIES B PREFERRED STOCK: ________ SHARES OWNED BENEFICIALLY AND ________
SHARES OWNED OF RECORD.

SERIES C PREFERRED STOCK: ________ SHARES OWNED BENEFICIALLY AND ________
SHARES OWNED OF RECORD.

SERIES D PREFERRED STOCK: ________ SHARES OWNED BENEFICIALLY AND ________
SHARES OWNED OF RECORD.

SERIES E PREFERRED STOCK: ________ SHARES OWNED BENEFICIALLY AND ________
SHARES OWNED OF RECORD.

<TABLE>
<S> <C>
ATTEST: ACQUIROR:

TeleCommunication Systems, Inc.
----------------------------------------------------- By: -------------------------------------------------

Name: --------------------------------------------- Name: ---------------------------------------------
Secretary
Title: ----------------------------------------------
</TABLE>

A-A-10
<PAGE> 291
<TABLE>
<S> <C>
ATTEST: MERGER SUB:

Windward Acquisition Corp.

----------------------------------------------------- By: -------------------------------------------------

Name: ---------------------------------------------- Name: ---------------------------------------------
Secretary
Title: ----------------------------------------------
</TABLE>

A-A-11
<PAGE> 292

EXHIBIT B

ARTICLES OF MERGER

XYPOINT CORPORATION
A WASHINGTON CORPORATION

WITH AND INTO

WINDWARD ACQUISITION CORP.
A WASHINGTON CORPORATION

In accordance with RCW 23B.11.050, the undersigned, , being the
of Windward Acquisition Corp., a Washington corporation, and
, being the of XYPOINT Corporation, a Washington
corporation, do hereby certify as follows:

(1) The constituent corporations in the merger (the "Merger") are
Windward Acquisition Corp., a Washington corporation, and XYPOINT
Corporation, a Washington corporation; the name of the surviving
corporation is Windward Acquisition Corp., a Washington corporation.

(2) An Agreement and Plan of Merger dated as of November 15, 2000 (the
"Merger Agreement") has been approved, adopted, and executed by each of the
constituent corporations in accordance with RCW 23B.11.010. The Merger
Agreement is attached hereto as Exhibit A and incorporated herein by
reference.

(3) The Merger was duly approved by the shareholders of each of the
constituent corporations in accordance with Section 23B.011.030 of the
Washington Business Corporation Act.

The Merger shall become effective on the later of , 2001 or the
date on which these Articles of Merger are filed with the Secretary of State of
the State of Washington.

IN WITNESS WHEREOF, the parties hereto have caused these Articles of Merger
to be duly executed as of this day of .

<TABLE>
<S> <C>
WINDWARD ACQUISITION CORP., XYPOINT CORPORATION,
a Washington corporation a Washington corporation

By: By:
--------------------------------------------- ---------------------------------------------

Its: Its:
--------------------------------------------- ---------------------------------------------
</TABLE>

A-B-1
<PAGE> 293
]
EXHIBIT C

November , 2000

---------------------------------------
---------------------------------------
---------------------------------------
---------------------------------------

Ladies and Gentlemen:

The undersigned is a shareholder, option holder and/or warrant holder of
XYPOINT Corporation (the "Target") and wishes to facilitate the proposed merger
(the "Merger") of the Target with and into Windward Acquisition Corp. (the
"Merger Sub"), a wholly owned subsidiary of TeleCommunication Systems, Inc. (the
"Acquiror"), upon the terms and conditions set forth in the Agreement and Plan
of Reorganization dated November 15, 2000 (the "Merger Agreement") by and among
the Acquiror, the Merger Sub, and the Target. Capitalized terms used in this
letter agreement but not otherwise defined herein shall have the respective
meanings given to such terms in the Merger Agreement.

In consideration of the foregoing, and in order to induce the Acquiror and
the Merger Sub to enter into the Merger Agreement, the undersigned hereby
irrevocbly agrees that, except as provided below, he, she or it will not,
directly or indirectly, sell, offer, contract to sell, transfer the economic
risk of ownership in, make any short sale, pledge or otherwise dispose of any
shares of Acquiror Common Stock or any securities convertible into or
exchangeable or exercisable for or any other rights to purchase or acquire
shares of Acquiror Common Stock, without the prior written consent of Acquiror,
for a period of 240 days following the Effective Date of the Merger.

Notwithstanding the foregoing:

(1) On or after the 120th day anniversary of the Effective Date of
the Merger, the Shareholder shall be entitled to sell up to one-third (1/3)
of the shares of Acquiror Common Stock acquired by such Shareholder in the
Merger.

(2) In addition to subsection (1) above, on or after the 180th day
anniversary of the Effective Date of the Merger, the Shareholder shall be
entitled to sell up to one-third (1/3) of the shares of Acquiror Common
Stock acquired by such Shareholder in the Merger.

(3) if the undersigned is an individual, he or she may transfer any
shares of Acquiror Common Stock or securities convertible into or
exchangeable or exercisable for Acquiror Common Stock either during his or
her lifetime or on death by will or intestacy to his or her immediate
family or to a trust the beneficiaries of which are exclusively the
undersigned and/or a member or members of his or her immediate family;
provided, however, that prior to any such transfer each transferee shall
execute an agreement, reasonably satisfactory to Acquiror, pursuant to
which each transferee shall agree to receive and hold such shares of
Acquiror Common Stock, or securities convertible into or exchangeable or
exercisable for the Acquiror Common Stock, subject to the provisions
hereof, and there shall be no further transfer except in accordance with
the provisions hereof. For the purposes of this paragraph, "immediate
family" shall mean spouse, lineal descendant, step children, father,
mother, brother or sister of the transferor or the transferor's spouse;

A-C-1
<PAGE> 294

(4) the restrictions in this letter agreement shall not apply to
shares of Acquiror Common Stock to be sold or otherwise transferred in
connection with a Change of Control of the Acquiror. For purposes of this
letter agreement, the term "Change of Control" shall mean (i) the sale of
all or substantially all of the assets of the Acquiror, (ii) the sale of
more than fifty percent (50%) of the outstanding shares of Acquiror Common
Stock in a non-public sale, (iii) the dissolution or liquidation of the
Acquiror, or (iv) any merger or consolidation of the Acquiror if
immediately after such transaction either (A) persons who were members of
the Board of Directors of the Acquiror immediately prior to such
transaction do not constitute at least a majority of the Board of Directors
of the surviving entity, or (B) persons who hold a majority of the
outstanding shares of common stock of the surviving entity are not persons
who held shares of Acquiror Common Stock immediately prior to such
transaction; and

(5) the restrictions in this letter agreement shall not apply to
shares of Acquiror Common Stock or securities exercisable for or
convertible into shares of Acquiror Common Stock as to which the
undersigned acquires ownership, directly or beneficially, in the public
trading markets.

In addition to the foregoing, the undersigned hereby further agrees as
follows:

(1) the undersigned hereby consents to the appointment of Joseph
Manzinger as its agent and attorney-in-fact in accordance with the terms of
the Merger Agreement;

(2) the undersigned hereby agrees to amend the Target's Amended and
Restated Registration Rights Agreement dated August 18, 2000 (the "Rights
Agreement"), pursuant to Section 18(g) thereof, to state that the Rights
Agreement will terminate in its entirety upon the consummation of the
Merger; and

(3) the undersigned hereby waives any and all rights of appraisal or
rights to dissent from the Merger that it may have under Washington Law,
and the undersigned will take such further actions, if any, as are
necessary to waive any rights the undersigned may have under Washington Law
to make a demand for appraisal with respect to any Target Capital Stock or
other securities of Target that are now owned or hereafter acquired by the
undersigned.

The undersigned understands that the agreements of the undersigned are
irrevocable and shall be binding upon the undersigned's heirs, legal
representatives, successors and assigns. The undersigned agrees and consents to
the entry of stop transfer instructions with the Acquiror's transfer agent
against the transfer of shares of Acquiror Common Stock or other securities of
the Acquiror held by the undersigned except in compliance with this agreement.

Very truly yours,

<TABLE>
<S> <C>
Dated: ------------------------------------
-----------------------------------------------------
Signature

-----------------------------------------------------
Printed Name and Title
</TABLE>

A-C-2
<PAGE> 295

EXHIBIT D

ESCROW AGREEMENT

THIS ESCROW AGREEMENT (this "Agreement") is dated as of , 2000
by and among (the "Escrow Agent"), TeleCommunication Systems, Inc., a
Maryland corporation (the "Acquiror"), and Joseph Manzinger (the "Shareholders'
Agent"), as agent of, and attorney-in-fact for, the former shareholders (each a
"Shareholder" and collectively the "Shareholders") of XYPOINT Corporation, a
Washington corporation ("Target").

RECITALS

A. The Acquiror, Windward Acquisition Corp. (the "Subsidiary"), Target and
certain of the Shareholders have entered into an Agreement and Plan of
Reorganization dated as of November 15, 2000 (the "Merger Agreement"), providing
for the merger of Target with and into Subsidiary (the "Merger"). The
Subsidiary, as the surviving corporation after the Merger is hereinafter
sometimes referred to as the "Surviving Corporation."

B. This Agreement is being entered into as a condition precedent to the
closing of the Merger, for the purpose of securing the indemnification and other
obligations of the Shareholders under the Merger Agreement. The parties are
hereby establishing an escrow fund (the "Escrow Fund"), consisting of 400,000
shares of Acquiror Common Stock, for the purpose of securing such obligations.

C. Pursuant to the Merger Agreement, Joseph Manzinger has been appointed
the Shareholders' Agent in connection with the Merger.

D. The Escrow Agent is willing to act as escrow agent in respect of the
Escrow Fund upon the terms and conditions hereinafter set forth.

NOW, THEREFORE, in consideration of the foregoing premises and other good
and valuable consideration, the receipt, adequacy, and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:

1. Defined Terms. Capitalized terms used in this Agreement (including,
without limitation, the Recitals set forth above) but not otherwise defined
herein shall have the respective meanings given to such terms in the Merger
Agreement (a copy of which has been provided to the Escrow Agent).

2. Appointment of Escrow Agent. is hereby appointed to act as
Escrow Agent hereunder and agrees to act as such.

3. Shares to be Placed in Escrow. Upon the Closing of the Merger (the
"Closing Date"), the Acquiror shall issue a certificate for 400,000 shares of
Acquiror Common Stock (the "Escrow Shares"). Such certificate shall be issued in
the name of the Escrow Agent or its nominee evidencing the Escrow Shares to be
held in the Escrow Fund. Such certificate shall be promptly delivered by the
Acquiror to the Escrow Agent along with a certificate informing the Escrow Agent
of the Closing Date. The Escrow Fund shall be held as a trust fund and shall not
be subject to any lien, attachment, trustee process or any other judicial
process of any creditor of any party hereto. The Escrow Agent agrees to accept
delivery of and to hold the Escrow Shares in escrow, subject to the terms and

A-D-1
<PAGE> 296

conditions of this Agreement. Attachment A hereto sets forth the name and
address of each Shareholder, the number of Escrow Shares beneficially owned by
each Shareholder, and each Shareholder's percentage interest in the Escrow Fund
(the "Percentage Interest").

4. Voting of Shares. Each Shareholder shall have the right to direct the
vote of the number of whole shares obtained by multiplying (a) such
Shareholder's Percentage Interest, by (b) the total number of Escrow Shares held
by the Escrow Agent on the record date for the applicable vote. In the event of
a meeting or written action of Shareholders of the Acquiror during the term of
this Agreement, the Acquiror hereby undertakes to furnish all notices, proxies
and proxy materials related to such meeting or written action of Shareholders
directly to the Shareholders and to cooperate with the Shareholders and the
Escrow Agent to facilitate the exercise by the Shareholders of voting rights in
the Escrow Shares. On any matter brought before the shareholders of the Acquiror
for a vote, the Escrow Agent shall vote the Escrow Shares as directed in writing
by the Shareholders individually. The Escrow Agent shall have no obligation to
vote any shares of a Shareholder unless the Escrow Agent has received written
directions from such Shareholder.

5. Distributions. Any cash dividend, dividends payable in securities or
other distribution of any kind (but excluding any shares of Acquiror capital
stock received upon a stock split or nontaxable (for federal income tax purposes
under Section 305 of the Code) stock dividend of Acquiror Common Stock) shall be
distributed by the Escrow Agent to the beneficial holder of the Escrow Shares to
which such distribution relates. Any shares of Acquiror capital stock received
by the Escrow Agent upon a stock split or nontaxable (for federal income tax
purposes under Section 305 of the Code) stock dividend made in respect of any
securities in the Escrow Fund shall be added to the Escrow Fund and become a
part of, and be treated in the same manner as, the Escrow Shares to which it
relates.

6. Transferability. The interests of the Shareholders in the Escrow Fund
and in the Escrow Shares held in the Escrow Fund shall not be assignable or
transferable, other than by operation of law. No transfer of any of such
interests by operation of law shall be recognized or given effect until the
Acquiror shall have received written notice of such transfer and has so informed
the Escrow Agent in writing. Any such transfer by operation of law shall not
release the Escrow Shares from the Escrow Fund or the terms and conditions of
the Merger Agreement or this Agreement.

7. Escrow Fund. Except as otherwise provided in this Agreement, the Escrow
Agent will hold the Escrow Shares in its possession until instructed hereunder
to deliver such Escrow Shares or any specified portion thereof as follows:

(a) Payments. Any payments to be made by the Escrow Agent to an
Indemnified Person from the Escrow Fund pursuant to this Agreement shall be
made in shares of Acquiror Common Stock. For purposes of this Agreement and
the making of all payments hereunder, each share of Acquiror Common Stock
shall be valued at $ per share. Whenever a payment is to be made to an
Indemnified Person from the Escrow Fund, the Escrow Agent shall submit a
certificate for a sufficient number of shares of Acquiror Common Stock to
the Acquiror's transfer agent with instructions to deliver (i) to such
Indemnified Person a certificate for a number of shares of Acquiror Common
Stock having a value equal to the amount of the payment to be

A-D-2
<PAGE> 297

made and (ii) to the Escrow Agent a certificate for the number of shares of
Acquiror Common Stock remaining after such payment. All share amounts under
this Agreement shall be rounded to the nearest whole share. All Damages
shall be allocated among the Shareholders in accordance with their
respective Percentage Interests.

(b) Claims. Subject to the provisions of Article IX of the Merger
Agreement, each claim for Damages by an Indemnified Person (each a "Claim")
shall be satisfied solely from the Escrow Fund.

(c) Procedure. An Indemnified Person may submit a notice to the
Escrow Agent and the Shareholders' Agent of any Claim for which it is
entitled to recover pursuant to the provisions of the Merger Agreement,
specifying in reasonable detail (i) the nature of the Claim, (ii) the
section or sections of the Merger Agreement under which the Claim is being
made, and (iii) the amount of Damages in respect of such Claim (which may
be a good faith estimate of the maximum amount of such damages if a
definitive amount cannot be identified). If, within 30 days after receipt
of such Claim, no Objection Notice (as that term is defined below) has been
filed by the Shareholders' Agent in accordance with the provisions of
Section 7(d) below, the Escrow Agent shall promptly make payment to such
Indemnified Person of such Claim out of the Escrow Fund in accordance with
Section 7(a) above. If an Objection Notice is filed with respect to such
Claim, then the Escrow Agent shall promptly make payment to the Indemnified
Person from the Escrow Fund of the amount of such Claim that is not in
dispute in accordance with Section 7(a) above, and shall treat the Disputed
Claim (as that term is defined below) in the manner prescribed in Section
7(d) below.

(d) Objection Notice. If, within the 30-day period following the
notification of the Shareholders' Agent and the Escrow Agent of a Claim,
each of the Acquiror and the Escrow Agent receive from the Shareholders'
Agent a written notice of objection relating to such Claim, specifying the
amount of the Claim to which the Shareholders' Agent objects and describing
such objection in reasonable detail (an "Objection Notice"), then the
portion of such Claim that is the subject of the Objection Notice shall
become a "Disputed Claim." If the question of whether the Indemnified
Person shall be entitled to payment in connection with the Disputed Claim
shall not have been resolved by joint written instructions of the
Shareholders' Agent and the Acquiror to the Escrow Agent within 15 days of
the Acquiror's and the Escrow Agent's receipt of the Objection Notice, then
the Escrow Agent shall retain in the Escrow Fund shares of Acquiror Common
Stock (to the extent such shares of Acquiror Common Stock are available in
the Escrow Fund) with a value equal to the amount of the Disputed Claim,
until the Disputed Claim has been resolved (i) by an agreement in writing
executed by the Acquiror and the Shareholders' Agent, or (ii) in accordance
with Section 9.7 of the Merger Agreement.

8. Release of Escrow. Promptly upon the expiration of the period ending 12
months after the Closing Date, the Escrow Agent shall release to the
Shareholders the Escrow Shares that remain in the Escrow Fund, except for any
Escrow Shares that have been retained by the Escrow Agent under Section 7(d)
above in connection with a Disputed Claim or that are otherwise subject to an
outstanding claim. If any Escrow Shares are to be released to the Shareholders,
then the Escrow Agent shall promptly submit to the

A-D-3
<PAGE> 298

Acquiror's transfer agent a certificate for the total number of Escrow Shares to
be released, together with instructions to deliver certificates for such shares
to the Shareholders in accordance with their respective Percentage Interests as
set forth on Attachment A hereto, at their addresses set forth on Attachment A
hereto (unless otherwise directed by a Shareholder to the Escrow Agent in
writing).

9. Escrow Agent.

(a) The Escrow Agent shall be entitled to fees for its services
hereunder as set forth in Attachment B hereto and shall be reimbursed for
all reasonable expenses, disbursements, and advances incurred or made by
the Escrow Agent in performance of his duties hereunder, which compensation
and expenses shall be paid by the Acquiror.

(b) The Escrow Agent may resign and be discharged from its duties
hereunder at any time by giving written notice of such resignation to the
Shareholders' Agent and the Acquiror specifying a date (not less than 30
days after giving of such notice) when such resignation shall take effect.
Upon such notice, the Acquiror and the Shareholders' Agent shall appoint a
new Escrow Agent who shall replace the resigning Escrow Agent hereunder
upon the resignation date specified in such notice. If the Acquiror and the
Shareholders' Agent are unable to agree upon a successor escrow agent
within 30 days after such notice, the Escrow Agent shall be entitled to
appoint its successor. The Shareholders' Agent and the Acquiror shall have
the right at any time upon their mutual consent to substitute a new Escrow
Agent by giving notice thereof to the Escrow Agent then acting.

(c) The Escrow Agent shall have no duties or responsibilities
whatsoever with respect to the Escrow Fund except as are specifically set
forth herein and may conclusively rely, and shall be protected in acting or
refraining from acting, on any written notice, instrument, request,
consent, certificate, document, letter, telegram, order, resolution or
signature believed by the Escrow Agent to be genuine and to have been
signed or presented by the proper party or parties duly authorized to do
so. The Escrow Agent shall have no responsibility for the contents of any
such writing contemplated herein and may rely without any liability upon
the contents thereof.

(d) The Escrow Agent shall not be liable for any action taken or
omitted by it in good faith and believed by it to be authorized hereby or
within the rights or powers conferred upon it hereunder, nor for action
taken or omitted to be taken by it in good faith, or if taken or omitted to
be taken in accordance with advice of counsel (which counsel may be of the
Escrow Agent's own choosing), and shall not be liable for any mistake of
fact or error of judgment or for any acts or omissions of any kind except
for its own fraud, willful misconduct or gross negligence.

(e) The Acquiror agrees to indemnify the Escrow Agent and hold it
harmless against any and all losses, liabilities or expenses (including
reasonable attorneys' fees and expenses) incurred by it hereunder, except
in either case for liabilities incurred by the Escrow Agent resulting from
its own fraud, willful misconduct or gross negligence; provided however,
that to the extent such losses, liabilities or expenses were caused by the
fraud, willful misconduct or gross negligence of the Shareholders' Agent,
then the Shareholders' Agent agrees to so indemnify the Escrow Agent.

A-D-4
<PAGE> 299

10. Shareholders' Agent.

(a) The Shareholders' Agent has been constituted and appointed as
agent for and on behalf of the Shareholders to act on their behalf under
this Agreement, to give and receive notices and communications, to
authorize delivery to Indemnified Persons of Acquiror Common Stock or other
property from the Escrow Fund in satisfaction of claims by such Indemnified
Persons, to object to such deliveries, to agree to, negotiate, enter into
settlements and compromises of, and demand arbitration and comply with
orders of courts and awards of arbitrators with respect to such claims, and
to take all actions necessary or appropriate in the judgment of the
Shareholders' Agent for the accomplishment of the foregoing. Such agency
may be changed by the holders of a majority in interest of the Escrow Fund
from time to time upon not less than 15 days' prior written notice to the
Acquiror, the Shareholders' Agent and the Escrow Agent. No bond shall be
required of the Shareholders' Agent, and the Shareholders' Agent shall
receive no compensation for his services. Notices or communications to or
from the Shareholders' Agent shall constitute notice to or from each
Shareholder.

(b) The Shareholders' Agent shall not be liable for any act done or
omitted hereunder as Shareholders' Agent while acting in good faith and in
the exercise of reasonable judgment and any act done or omitted pursuant to
the advice of counsel shall be conclusive evidence of such good faith. The
Shareholders shall severally indemnify the Shareholders' Agent and hold him
harmless against any loss, liability or expense incurred without gross
negligence or bad faith on the part of the Shareholders' Agent and arising
out of or in connection with the acceptance or administration of his duties
hereunder.

(c) The Shareholders' Agent shall have reasonable access to
information about the Surviving Corporation and the reasonable assistance
of the Surviving Corporation's officers and employees for purposes of
performing his duties and exercising his rights hereunder, provided that
the Shareholders' Agent shall treat confidentially and not disclose any
nonpublic information from or about the Surviving Corporation to anyone
(except on a need to know basis to individuals who agree in writing to
treat such information confidentially). The Shareholders' Agent will not be
entitled to receive any compensation from Acquiror or the Shareholders in
connection with this Agreement. Any fees and expenses incurred by
Shareholders' Agent in connection with actions taken pursuant to the terms
of this Agreement will be paid by the Shareholders to the Shareholders'
Agent. Such fees and expenses shall first be satisfied from any Escrow
Shares not subject to a Claim by an Indemnified Person and remaining
available for release to the Shareholders on the final release date. Prior
to any payment to the Shareholders' Agent for such fees and expenses from
the Escrow Fund, the Shareholders' Agent shall deliver to the Escrow Agent
a written statement of such fees and expenses.

(d) The Shareholders' Agent represents and warrants to the Escrow
Agent that he has irrevocable right, power and authority (i) to enter into
and perform this Agreement and (ii) to give and receive directions and
notices hereunder.

(e) A decision, act, consent or instruction of the Shareholders' Agent
shall constitute a decision of all Shareholders for whom shares of Acquiror
Common Stock otherwise issuable to them are deposited in the Escrow Fund
and shall be final,

A-D-5
<PAGE> 300

binding and conclusive upon each such Shareholder. The Escrow Agent and the
Acquiror may rely upon any decision, act, consent or instruction of the
Shareholders' Agent as being the decision, act, consent or instruction of
each and every such Shareholder. The Escrow Agent and the Acquiror are
hereby relieved from any liability to any Shareholder or any other
individual or entity for any acts done by them in accordance with such
decision, act, consent or instruction of the Shareholders' Agent.

11. Termination of Agreement. This Agreement shall terminate upon the
final disposition of all of the Escrow Shares from the Escrow Fund, provided
that the rights of the Escrow Agent pursuant to Section 9(e) above, the rights
of the Shareholders' Agent pursuant to Section 10(b) above and the rights of the
Escrow Agent and the Acquiror pursuant to Section 10(e) above shall survive such
termination.

12. Miscellaneous.

(a) This Agreement shall be governed by and construed in accordance
with the internal laws of the State of Maryland, without giving effect to
its conflicts of laws provisions. This Agreement shall be binding upon and
shall inure to the benefit of the heirs, executors, administrators,
successors and assigns of the parties hereto. This Agreement may be
executed in one or more counterparts, but all such counterparts shall
constitute but one and the same instrument. This Agreement shall be
effective only upon execution by all parties hereto. Section headings
contained in this Agreement have been inserted for reference purposes only,
and shall not be construed as part of this Agreement.

(b) This Agreement constitutes the entire agreement of the parties
hereto with respect to the subject matter hereof, and supersedes all prior
agreements and understandings (whether oral or written) among the parties
hereto concerning the matters contained herein. This Agreement may not be
amended, waived, discharged, or terminated other than by a written
instrument signed by the party against whom enforcement of any such
amendment, waiver, discharge, or termination is sought.

(c) All notices, requests, demands, and other communications hereunder
shall be in writing and shall be deemed to have been duly given, when
delivered personally, or transmitted by telecopies, receipt acknowledged,
or in the case of documented overnight delivery service or registered or
certified mail, return receipt requested, postage prepaid, on the date
shown on the receipt therefor, to the parties at the following addresses
(or at such other address for a party as shall be specified in like
notice):

<TABLE>
<S> <C>
IF TO THE ACQUIROR, TO: WITH A COPY TO:
TeleCommunication Systems, Inc. Piper Marbury Rudnick & Wolfe LLP
275 West Street 6225 Smith Avenue
Annapolis, Maryland 21401 Baltimore, Maryland 21209-3600
Attention: Thomas M. Brandt, Jr. Attention: Wilbert H. Sirota
Donald C. Hubbard, Jr. R.W. Smith, Jr.
Facsimile No.: (410) 280-1048 Facsimile No.: (410) 580-3001
Telephone No.: (410) 280-1001 Telephone No.: (410) 580-3000
</TABLE>

A-D-6
<PAGE> 301

<TABLE>
<S> <C>
IF TO THE SHAREHOLDERS' AGENT: WITH A COPY TO:
Joseph Manzinger Venture Law Group
4750 Carillon Point
Kirkland, Washington 98033-7355
----------------------------------- Attention: Craig Sherman
Facsimile No.: (425) 739-8750
----------------------------------- Telephone No.: (425) 739-8700

-----------------------------------
</TABLE>

<TABLE>
<S> <C>
IF TO THE ESCROW AGENT: WITH A COPY TO:

----------------------------------- -----------------------------------

----------------------------------- -----------------------------------
</TABLE>

(d) Each of the rights, powers, and remedies of the Acquiror hereunder
shall be cumulative and concurrent, and shall be in addition to every other
right, power, or remedy provided for hereunder or under the Merger
Agreement or otherwise existing at law or in equity or by statute or
otherwise, and any exercise or beginning of the exercise by the Acquiror of
any one or more of such rights, powers, or remedies shall not preclude the
simultaneous or later exercise by the Acquiror of any or all such other
rights, powers, and remedies.

[SIGNATURES APPEAR ON THE FOLLOWING PAGE]

A-D-7
<PAGE> 302

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered under seal on the date first above written.

<TABLE>
<S> <C>
WITNESS: Acquiror:

TeleCommunications Systems, Inc.

By: ---------------------------------

Name: ------------------------------

Title: -------------------------------

Escrow Agent:

Shareholders' Agent:
</TABLE>

A-D-8
<PAGE> 303

ATTACHMENT A
(SHAREHOLDER INFORMATION)

Capitalized terms used in this Attachment A but not otherwise defined
herein shall have the respective meanings given to such terms in the foregoing
Escrow Agreement.
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
NUMBER OF ESCROW SHARES PERCENTAGE
NAME AND ADDRESS BENEFICIALLY OWNED INTEREST
<S> <C> <C>
------------------------------------------ ------------------------------------------
------------------------------------------ ------------------------------------------
------------------------------------------ ------------------------------------------
</TABLE>

A-D-9
<PAGE> 304

ATTACHMENT B
(ESCROW FEES)

Fee Schedule for Escrow Agent Services:

Annual Fee: $

A-D-10
<PAGE> 305

EXHIBIT E

FORM OF LEGAL OPINION OF
VENTURE LAW GROUP

(1) The Target has been duly incorporated and is validly existing under the
laws of the State of Washington, and has all corporate power and authority
necessary to own or hold under lease its properties and assets and to conduct
its business as, to our knowledge, as it is presently conducted, except where
the failure to be so authorized, qualified or validly existing will not, when
taken together with all other such failures, result in a Material Adverse
Effect.

(2) The Target has the corporate power and authority to execute and deliver
the Agreement and to perform its obligations thereunder, and to consummate the
transactions contemplated thereby. The execution and delivery of the Agreement
by the Target and the consummation by the Target of the transactions
contemplated thereby have been duly authorized by the Target and no other
proceeding on the part of the Target is necessary to authorize the execution,
delivery and performance of the Agreement and the transactions contemplated
thereby.

(3) The Agreement has been duly executed and delivered by the Target and
constitutes the legal, valid and binding obligation of the Target, enforceable
against the Target in accordance with its terms, subject to customary bankruptcy
and equity exceptions.

(4) Neither the execution or delivery of the Agreement by the Target nor
the consummation by the Target of the transactions contemplated thereby will (i)
violate any statute, regulation, rule, injunction, judgment, order, decree,
ruling, restriction known to us of Washington or federal law to which the Target
is a party or to which it is bound or subject, (ii) to our knowledge, violate
any statute, regulation, rule, injunction, judgment, order, decree, ruling or
restriction of any Governmental Entity (other than Washington or federal law) to
which the Target is a party or to which it is bound or subject, (iii) to our
knowledge, except as set forth in the Target Disclosure Schedule, conflict with
or result in a breach of, or give rise to a right of termination of, or
accelerate the performance required by, any terms of any agreement or contract
listed on Schedule 2.17 of the Agreement, or constitute a default in any respect
thereunder, or (iii) violate any of the provisions of the Target's Articles of
Incorporation or Bylaws, in each case which would be reasonably expected to
result in a Material Adverse Effect.

(5) No consent, waiver, approval, permit, authorization of, declaration to
or filing with any third party or Governmental Entity on the part of the Target
is required in connection with the execution and delivery of the Agreement or
the consummation of the transactions contemplated thereby, except for (a) the
filing of the Articles of Merger, (b) any filings as may be required under
applicable federal and state securities laws and (c) any filings or approvals
required by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, which, if not obtained.

(6) The authorized capital stock of Target consists of 70,000,000 shares of
Target Common Stock and 54,279,877 shares of Target Preferred Stock, of which
5,000,000 shares have been designated Series A Preferred Stock, 13,000,000
shares have been designated Series X Junior Preferred Stock, 7,000,000 shares
have been designated Series B Preferred

A-E-1
<PAGE> 306

Stock, 12,500,000 shares have been designated Series C Preferred Stock, 546,110
shares have been designated Series D Preferred Stock and 16,233,767 shares have
been designated Series E Preferred Stock. To our knowledge, the issued and
outstanding capital stock of Target consists of 480,230 shares of Target Common
Stock, 5,000,000 shares of Series A Preferred Stock, 11,150,732 shares of Series
X Junior Preferred Stock, 6,389,229 shares of Series B Preferred Stock,
9,506,431 shares of Series C Preferred Stock, 546,110 shares of Series D
Preferred Stock and 6,507,274 shares of Series E Preferred Stock. To our
knowledge, all of the issued and outstanding shares of capital stock of the
Target are owned by the Persons and in the amounts set forth on Schedule 1.6(a)
of the Agreement. All of the issued and outstanding shares of capital stock of
the Target have been duly authorized and validly issued, are fully paid and
non-assessable.

(7) To our knowledge, except as identified on Schedule 1.6(b) of the
Agreement, there are no outstanding options, rights (preemptive or otherwise),
warrants, calls, convertible securities or commitments or any other arrangements
to which the Target is a party obligating the Target to issue, sell or transfer
of any equity securities of the Target or any securities convertible directly or
indirectly into equity securities of the Target, or evidencing the right to
subscribe for any equity securities of the Target. To our knowledge, except as
identified on Schedule 1.6(b) of the Agreement, Target is not a party to any
voting agreements, voting trusts or other agreements (included cumulative voting
rights), commitments or understandings with respect to the voting of the capital
stock of the Target.

A-E-2
<PAGE> 307

EXHIBIT F

SECTION 280G AGREEMENT

THIS SECTION 280G AGREEMENT (this "AGREEMENT") is entered into as of
November , 2000 by and between TeleCommunication Systems, Inc., a Maryland
corporation ("ACQUIROR"), and the undersigned service provider or Disqualified
Person (the "DISQUALIFIED PERSON") of XYPOINT Corporation, a Washington
corporation ("TARGET").

RECITALS

A. Acquiror, Windward Acquisition Corp., a Maryland corporation ("MERGER
SUB"), Target, and certain of Target Principal Stockholders have entered into an
Agreement and Plan of Reorganization dated as of November 15, 2000 (the
"REORGANIZATION AGREEMENT"), pursuant to which Target will be merged with and
into Merger Sub (the "MERGER").

B. Upon or following the consummation of the Merger and in connection
therewith, the undersigned Disqualified Person may receive certain payments that
are considered to be "parachute payments" under Section 280G of the Internal
Revenue Code of 1986, as amended (the "CODE"). Parachute payments include cash
payments, such as bonus and severance payments, as well as accelerated vesting
of options and restricted stock.

C. Section 4999 of the Code imposes a 20% excise tax on any excess
parachute payments received in connection with a change in control of a company.
The excise tax is a withholding tax that is automatically collected at the time
of payment with respect to any parachute payments that are considered to be
wages.

D. Pursuant to the Reorganization Agreement, the parties agreed that on or
before the consummation of the Merger, Target would cause each Disqualified
Person to execute and deliver a Section 280G Agreement containing the terms and
conditions set forth in an exhibit to the Reorganization Agreement.

NOW, THEREFORE, in consideration of the promises and the mutual agreements,
provisions and covenants set forth in the Reorganization Agreement and in this
Agreement, it is hereby agreed as follows:

1. Agreement to Pay Excise Tax. To the extent any payment or benefit to
which the Disqualified Person becomes entitled in connection with the Merger is
determined by Acquiror's independent auditors, pursuant to written calculations
provided to the Disqualified Person, to constitute an excess parachute payment
under Code Section 280G and with respect to which no withholding taxes have been
collected, such Disqualified Person hereby covenants and agrees to pay to the
Internal Revenue Service, on or before April 15th of the year following the year
in which each such excess parachute payment occurred, the excise tax imposed
under Code Section 4999 upon that excess parachute payment, and the Disqualified
Person shall provide Acquiror with appropriate proof of such payment. Acquiror
shall issue a Form W-2 or a Form 1099, as appropriate, for the amount of such
excess parachute payment no later than January 31st of the year following the
year in which such excess parachute payment occurred.

2. Acknowledgement of Code Section 83(b) Filings. The Disqualified Person
has filed on a timely basis with the appropriate Internal Revenue Service Center
an Internal

A-F-1
<PAGE> 308

Revenue Code Section 83(b) election with respect to any restricted stock awards
or other unvested securities or property such individual has received from
Target or its affiliates so that such Disqualified Person shall not recognize
any taxable income under Internal Revenue Code Section 83 at the time such
restricted stock or other securities or property vests.

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the date first written above.

<TABLE>
<S> <C>
ACQUIROR DISQUALIFIED PERSON

By: --------------------------------------------
--------------------------------------------
(Signature)

Name: --------------------------------------------
----------------------------------------
(Print Name)

Title: --------------------------------------------
------------------------------------------
(Print Address)

--------------------------------------------
(Print Address)

--------------------------------------------
(Print Telephone Number)

--------------------------------------------
(Social Security or Tax I.D. Number)
</TABLE>

A-F-2
<PAGE> 309

EXHIBIT G

FORM OF LEGAL OPINION OF
PIPER MARBURY RUDNICK & WOLFE LLP

(1) The Acquiror has been duly incorporated and is validly existing and in
good standing under the laws of the State of Maryland.

(2) The Merger Subsidiary has been duly incorporated and is validly
existing and in good standing under the laws of the State of Washington. All of
the outstanding shares of capital stock of the Merger Subsidiary are validly
issued, fully paid and non-assessable and are held of record by the Acquiror.

(3) Each of the Acquiror and the Merger Subsidiary has the corporate power
and authority to enter into the Agreement, to perform its obligations thereunder
and to consummate the transactions contemplated thereby. The execution and
delivery of the Agreement by each of the Acquiror and the Merger Subsidiary and
the consummation by each of the Acquiror and the Merger Subsidiary of the
transactions contemplated thereby have been duly authorized by all necessary
corporate action on the part of the Acquiror and the Merger Subsidiary, and no
other proceeding on the part of the Acquiror or the Merger Subsidiary is
necessary to authorize the execution, delivery and performance of the Agreement
and the transactions contemplated thereby.

(4) The Agreement has been duly executed and delivered by each of the
Acquiror and the Merger Subsidiary and constitutes the legal, valid and binding
obligation of each of the Acquiror and the Merger Subsidiary, enforceable
against it in accordance with their respective terms, subject to customary
bankruptcy and equity exceptions.

(5) Neither the execution or delivery of the Agreement by the Acquiror or
the Merger Subsidiary nor the consummation of the transactions contemplated
thereby will (i) violate any statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge or restriction known to us of any Governmental
Entity, or court to which the Acquiror or the Merger Subsidiary is a party or to
which any of them is bound or subject, or (ii) the provisions of the Charter or
Bylaws of the Acquiror or the Merger Subsidiary.

(6) No consent, waiver, approval, permit, authorization of, declaration to
or filing with any third party or Governmental Entity on the part of the
Acquiror or the Merger Subsidiary is required in connection with the execution
and delivery of the Agreement or the consummation of the transactions
contemplated thereby, except for (a) the filing of the Articles of Merger, (b)
any filings as may be required under applicable federal and state securities
laws and (c) any filings or approvals required by the Hart-Scott-Rodino Act.

(7) The shares of Acquiror Common Stock to be delivered pursuant to the
Agreement, when issued by the Acquiror as provided in the Agreement, will be
validly issued, fully paid and non-assessable. A sufficient number of shares of
Acquiror Common Stock have been duly and validly reserved for issuance upon
exercise of the Warrants and Outstanding Options being assumed by the Acquiror
pursuant to the Agreement and such reserved shares, when issued in accordance
with the terms of such Warrants or Outstanding Options, will be validly issued,
fully paid and non-assessable.

A-G-1
<PAGE> 310

EXHIBIT H

AMENDMENT TO AMENDED AND RESTATED ARTICLES OF INCORPORATION

The following Articles of Amendment to Amended and Restated Articles of
Incorporation are executed by the undersigned, a Washington corporation:

1. The name of the corporation is XYPOINT Corporation.

2. Effective upon filing of these Articles of Amendment with the
Secretary of State of Washington, a new paragraph shall be added to the
Amended and Restated Articles of Incorporation at the end of Section 2.3(a)
(immediately prior to Section 2.4(b)) which shall read as follows:

"In the event of a Sale, if the consideration received by the
corporation is other than cash, its value will be deemed its fair market
value at the time of the execution of a definitive agreement related to
such Sale. Any securities shall be valued as follows: if traded on a
national securities exchange or The Nasdaq Stock Market, the value shall
be the average of the closing prices of the securities on such exchange
or Nasdaq over the forty-five day period ending three days prior to
execution of a definitive agreement related to such Sale; and in all
other cases, the value shall be the fair market value thereof, as
determined in good faith by the Board of Directors of the corporation."

3. These Articles of Amendment were unanimously adopted by the Board
of Directors on November 13, 2000.

4. These Articles of Amendment were approved by the holders of (1) a
majority of the capital stock of the corporation and (2) a majority of the
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock and Series E Preferred Stock of the
corporation (voting together as a class) on , 2000 in
accordance with the provisions of RCW 23B.10.030 and RCW 23B.10.040 of the
Washington Business Corporation Act.

5. The amendment does not provide for the exchange, reclassification
or cancellation of issued shares.

A-H-1
<PAGE> 311

APPENDIX B

DISSENTERS' RIGHTS STATUTE

Washington Business Corporation Act, 23B.13

SECTIONS

23B.13.010 Definitions.

23B.13.020 Right to dissent.

23B.13.030 Dissent of nominees and beneficial owners.

23B.13.200 Notice of dissenters' rights.

23B.13.210 Notice of intent to demand payment.

23B.13.220 Dissenters' notice.

23B.13.230 Duty to demand payment.

23B.13.240 Share restrictions.

23B.13.250 Payment.

23B.13.260 Failure to take action

23B.13.270 After-acquired shares.

23B.13.280 Procedure if shareholder dissatisfied with payment or offer.

23B.13.300 Court action.

23B.13.310 Court costs and counsel fees.

RCW 23B.13.010 DEFINITIONS.

As used in this chapter:

(1) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action, or the surviving or acquiring corporation by merger or
share exchange of that issuer.

(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under RCW 23B.13.020 and who exercises that right when and in
the manner required by RCW 23B.13.200 through 23B.13.280.

(3) "Fair value," with respect to a dissenter's shares, means the value of
the shares immediately before the effective date of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.

(4) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair and
equitable under all the circumstances.

(5) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.

B-1
<PAGE> 312

(6) "Beneficial shareholder" means the person who is a beneficial owner of
shares held in a voting trust or by a nominee as the record shareholder.

(7) "Shareholder" means the record shareholder or the beneficial
shareholder.

RCW 23B.13.020 RIGHT TO DISSENT.

(1) A shareholder is entitled to dissent from, and obtain payment of the
fair value of the shareholder's shares in the event of, any of the following
corporate actions:

(a) Consummation of a plan of merger to which the corporation is a
party (i) if shareholder approval is required for the merger by RCW
23B.11.030, 23B.11.080, or the articles of incorporation and the
shareholder is entitled to vote on the merger, or (ii) if the corporation
is a subsidiary that is merged with its parent under RCW 23B.11.040;

(b) Consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired, if the
shareholder is entitled to vote on the plan;

(c) Consummation of a sale or exchange of all, or substantially all,
of the property of the corporation other than in the usual and regular
course of business, if the shareholder is entitled to vote on the sale or
exchange, including a sale in dissolution, but not including a sale
pursuant to court order or a sale for cash pursuant to a plan by which all
or substantially all of the net proceeds of the sale will be distributed to
the shareholders within one year after the date of sale;

(d) An amendment of the articles of incorporation that materially
reduces the number of shares owned by the shareholder to a fraction of a
share if the fractional share so created is to be acquired for cash under
RCW 23B.06.040; or

(e) Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the board
of directors provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.

(2) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this chapter may not challenge the corporate action
creating the shareholder's entitlement unless the action fails to comply with
the procedural requirements imposed by this title, RCW 25.10.900 through
25.10.955, the articles of incorporation, or the bylaws, or is fraudulent with
respect to the shareholder or the corporation.

(3) The right of a dissenting shareholder to obtain payment of the fair
value of the shareholder's shares shall terminate upon the occurrence of any one
of the following events:

(a) The proposed corporate action is abandoned or rescinded;

(b) A court having jurisdiction permanently enjoins or sets aside the
corporate action; or

B-2
<PAGE> 313

RCW 23B.13.030 DISSENT OF NOMINEES AND BENEFICIAL OWNERS.

(1) A record shareholder may assert dissenters' rights as to fewer than all
the shares registered in the shareholder's name only if the shareholder dissents
with respect to all shares beneficially owned by any one person and notifies the
corporation in writing of the name and address of each person on whose behalf
the shareholder asserts dissenters' rights. The rights of a partial dissenter
under this subsection are determined as if the shares as to which the dissenter
dissents and the dissenter's other shares were registered in the names of
different shareholders.

(2) A beneficial shareholder may assert dissenters' rights as to shares
held on the beneficial shareholder's behalf only if:

(a) The beneficial shareholder submits to the corporation the record
shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights; and

(b) The beneficial shareholder does so with respect to all shares of
which such shareholder is the beneficial shareholder or over which such
shareholder has power to direct the vote.

RCW 23B.13.200 NOTICE OF DISSENTERS' RIGHTS.

(1) If proposed corporate action creating dissenters' rights under RCW
23B.13.020 is submitted to a vote at a shareholders' meeting, the meeting notice
must state that shareholders are or may be entitled to assert dissenters' rights
under this chapter and be accompanied by a copy of this chapter.

(2) If corporate action creating dissenters' rights under RCW 23B.13.020 is
taken without a vote of shareholders, the corporation, within ten days after the
effective date of such corporate action, shall notify in writing all
shareholders entitled to assert dissenters' rights that the action was taken and
send them the dissenters' notice described in RCW 23B.13.220.

RCW 23B.13.210 NOTICE OF INTENT TO DEMAND PAYMENT.

(1) If proposed corporate action creating dissenters' rights under RCW
23B.13.020 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights must (a) deliver to the corporation before
the vote is taken written notice of the shareholder's intent to demand payment
for the shareholder's shares if the proposed action is effected, and (b) not
vote such shares in favor of the proposed action.

(2) A shareholder who does not satisfy the requirements of subsection (1)
of this section is not entitled to payment for the shareholder's shares under
this chapter.

RCW 23B.13.220 DISSENTERS' NOTICE.

(1) If proposed corporate action creating dissenters' rights under RCW
23B.13.020 is authorized at a shareholders' meeting, the corporation shall
deliver a written dissenters' notice to all shareholders who satisfied the
requirements of RCW 23B.13.210.

B-3
<PAGE> 314

(2) The dissenters' notice must be sent within ten days after the effective
date of the corporate action, and must:

(a) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;

(b) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;

(c) Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of the
proposed corporate action and requires that the person asserting
dissenters' rights certify whether or not the person acquired beneficial
ownership of the shares before that date;

(d) Set a date by which the corporation must receive the payment
demand, which date may not be fewer than thirty nor more than sixty days
after the date the notice in subsection (1) of this section is delivered;
and

(e) Be accompanied by a copy of this chapter.

RCW 23B.13.230 DUTY TO DEMAND PAYMENT.

(1) A shareholder sent a dissenters' notice described in RCW 23B.13.220
must demand payment, certify whether the shareholder acquired beneficial
ownership of the shares before the date required to be set forth in the
dissenters' notice pursuant to RCW 23B.13.220(2)(c), and deposit the
shareholder's certificates in accordance with the terms of the notice.

(2) The shareholder who demands payment and deposits the shareholder's
share certificates under subsection (1) of this section retains all other rights
of a shareholder until the proposed corporate action is effected.

(3) A shareholder who does not demand payment or deposit the shareholder's
share certificates where required, each by the date set in the dissenters'
notice, is not entitled to payment for the shareholder's shares under this
chapter.

RCW 23B.13.240 SHARE RESTRICTIONS.

(1) The corporation may restrict the transfer of uncertificated shares from
the date the demand for their payment is received until the proposed corporate
action is effected or the restriction is released under RCW 23B.13.260.

(2) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until the
effective date of the proposed corporate action.

RCW 23B.13.250 PAYMENT.

(1) Except as provided in RCW 23B.13.270, within thirty days of the later
of the effective date of the proposed corporate action, or the date the payment
demand is received, the corporation shall pay each dissenter who complied with
RCW 23B.13.230 the amount the corporation estimates to be the fair value of the
shareholder's shares, plus accrued interest.

B-4
<PAGE> 315

(2) The payment must be accompanied by:

(a) The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen months before the date of payment, an income
statement for that year, a statement of changes in shareholders' equity for
that year, and the latest available interim financial statements, if any;

(b) An explanation of how the corporation estimated the fair value of
the shares;

(d) A statement of the dissenter's right to demand payment under RCW
23B.13.280; and

(e) A copy of this chapter.

RCW 23B.13.260 FAILURE TO TAKE ACTION.

(1) If the corporation does not effect the proposed action within sixty
days after the date set for demanding payment and depositing share certificates,
the corporation shall return the deposited certificates and release any transfer
restrictions imposed on uncertificated shares.

(2) If after returning deposited certificates and releasing transfer
restrictions, the corporation wishes to undertake the proposed action, it must
send a new dissenters' notice under RCW 23B.13.220 and repeat the payment demand
procedure.

RCW 23B.13.270 AFTER-ACQUIRED SHARES.

(1) A corporation may elect to withhold payment required by RCW 23B.13.250
from a dissenter unless the dissenter was the beneficial owner of the shares
before the date set forth in the dissenters' notice as the date of the first
announcement to news media or to shareholders of the terms of the proposed
corporate action.

(2) To the extent the corporation elects to withhold payment under
subsection (1) of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares, plus accrued interest, and shall
pay this amount to each dissenter who agrees to accept it in full satisfaction
of the dissenter's demand. The corporation shall send with its offer an
explanation of how it estimated the fair value of the shares, an explanation of
how the interest was calculated, and a statement of the dissenter's right to
demand payment under RCW 23B.13.280.

RCW 23B.13.280 PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER.

(1) A dissenter may notify the corporation in writing of the dissenter's
own estimate of the fair value of the dissenter's shares and amount of interest
due, and demand payment of the dissenter's estimate, less any payment under RCW
23B.13.250, or reject the corporation's offer under RCW 23B.13.270 and demand
payment of the dissenter's estimate of the fair value of the dissenter's shares
and interest due, if:

(a) The dissenter believes that the amount paid under RCW 23B.13.250
or offered under RCW 23B.13.270 is less than the fair value of the
dissenter's shares or that the interest due is incorrectly calculated;

B-5
<PAGE> 316

(b) The corporation fails to make payment under RCW 23B.13.250 within
sixty days after the date set for demanding payment; or

(c) The corporation does not effect the proposed action and does not
return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within sixty days after the date set for
demanding payment.

(2) A dissenter waives the right to demand payment under this section
unless the dissenter notifies the corporation of the dissenter's demand in
writing under subsection (1) of this section within thirty days after the
corporation made or offered payment for the dissenter's shares.

RCW 23B.13.300 COURT ACTION.

(1) If a demand for payment under RCW 23B.13.280 remains unsettled, the
corporation shall commence a proceeding within sixty days after receiving the
payment demand and petition the court to determine the fair value of the shares
and accrued interest. If the corporation does not commence the proceeding within
the sixty-day period, it shall pay each dissenter whose demand remains unsettled
the amount demanded.

(2) The corporation shall commence the proceeding in the superior court of
the county where a corporation's principal office, or, if none in this state,
its registered office, is located. If the corporation is a foreign corporation
without a registered office in this state, it shall commence the proceeding in
the county in this state where the registered office of the domestic corporation
merged with or whose shares were acquired by the foreign corporation was
located.

(3) The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unsettled, parties to the proceeding as in an
action against their shares and all parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.

(4) The corporation may join as a party to the proceeding any shareholder
who claims to be a dissenter but who has not, in the opinion of the corporation,
complied with the provisions of this chapter. If the court determines that such
shareholder has not complied with the provisions of this chapter, the
shareholder shall be dismissed as a party.

(5) The jurisdiction of the court in which the proceeding is commenced
under subsection (2) of this section is plenary and exclusive. The court may
appoint one or more persons as appraisers to receive evidence and recommend
decision on the question of fair value. The appraisers have the powers described
in the order appointing them, or in any amendment to it. The dissenters are
entitled to the same discovery rights as parties in other civil proceedings.

(6) Each dissenter made a party to the proceeding is entitled to judgment
(a) for the amount, if any, by which the court finds the fair value of the
dissenter's shares, plus interest, exceeds the amount paid by the corporation,
or (b) for the fair value, plus accrued interest, of the dissenter's
after-acquired shares for which the corporation elected to withhold payment
under RCW 23B.13.270.

B-6
<PAGE> 317

RCW 23B.13.310 COURT COSTS AND COUNSEL FEES.

(1) The court in a proceeding commenced under RCW 23B.13.300 shall
determine all costs of the proceeding, including the reasonable compensation and
expenses of appraisers appointed by the court. The court shall assess the costs
against the corporation, except that the court may assess the costs against all
or some of the dissenters, in amounts the court finds equitable, to the extent
the court finds the dissenters acted arbitrarily, vexatiously, or not in good
faith in demanding payment under RCW 23B.13.280.

(2) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:

(a) Against the corporation and in favor of any or all dissenters if
the court finds the corporation did not substantially comply with the
requirements of RCW 23B.13.200 through 23B.13.280; or

(b) Against either the corporation or a dissenter, in favor of any
other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith
with respect to the rights provided by chapter 23B.13 RCW.

(3) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited.

B-7