Telecommunication Systems (TSYS) 10-Q 2008 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended September 30, 2008

OR

TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission FileNo. 0-30821

TELECOMMUNICATION SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

MARYLAND
(State or Other Jurisdiction of
Incorporation or Organization)

275 West Street, Annapolis, MD
(Address of principal executive offices) 52-1526369
(I.R.S. Employer Identification No.)

21401
(Zip Code)

(410) 263-7616

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer þ Non-accelerated filer o
(Do not check if a smaller reporting company) Smaller reporting company o

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

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

	Shares outstanding
	as of September 30,
Title of Each Class	2008
Class A Common Stock, par value
$0.01 per share		36,963,106
Class B Common Stock, par value
$0.01 per share		7,076,334
Total Common Stock Outstanding		44,039,440

INDEX

TELECOMMUNICATION SYSTEMS, INC.

			Page
PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Consolidated Statements of Operations for the three- and nine-months ended September 30, 2008 and 2007 (Unaudited)		1
		Consolidated Balance Sheets as of September 30, 2008 (Unaudited) and December 31, 2007		2
		Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2008 (Unaudited)		3
		Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007 (Unaudited)		4
		Notes to Consolidated Financial Statements (Unaudited)		5
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		31
	Item 4.	Controls and Procedures		31
PART II. OTHER INFORMATION
	Item 1.	Legal Proceedings		32
	Item 1A.	Risk Factors		33
	Item 6.	Exhibits		34
SIGNATURES				35

TeleCommunication Systems, Inc.

Consolidated Statements of Operations
(amounts in thousands, except per share data)
(unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Revenue
Services	$	24,902		$	22,049		$	72,002		$	65,552
Systems		31,629			15,586			68,853			41,538
Total revenue		56,531			37,635			140,855			107,090
Direct costs of revenue
Direct cost of services revenue		15,486			12,889			43,323			39,487
Direct cost of systems revenue, including amortization of software development costs of $560, $396, $1,592 and $1,112, respectively		23,588			10,608			41,299			28,489
Total direct cost of revenue		39,074			23,497			84,622			67,976
Services gross profit		9,416			9,160			28,679			26,065
Systems gross profit		8,041			4,978			27,554			13,049
Total gross profit		17,457			14,138			56,233			39,114
Operating costs and expenses
Research and development expense		3,815			3,329			11,838			9,700
Sales and marketing expense		3,128			2,729			9,822			9,049
General and administrative expense		6,071			4,656			17,386			14,808
Depreciation and amortization of property and equipment		1,474			1,497			4,470			4,721
Amortization of acquired intangible assets		37			37			111			111
Total operating costs and expenses		14,525			12,248			43,627			38,389
Gain on sale of patent		—			—			8,060			—
Income from operations		2,932			1,890			20,666			725
Interest and financing expenses		(205	)		(328	)		(734	)		(1,432	)
Amortization of debt discount and debt issuance expenses		(27	)		(23	)		(173	)		(676	)
Write-off of unamortized debt discount and debt issuance expenses		—			—			—			(2,458	)
Other income/(expense), net		171			177			(105	)		330
Income/(loss) from continuing operations before income taxes		2,871			1,716			19,654			(3,511	)
Provision for income taxes		(114	)		—			(314	)		—
Income/(loss) from continuing operations		2,757			1,716			19,340			(3,511	)
Income/(loss) from discontinued operations		—			54			—			(215	)
Net income/(loss)	$	2,757		$	1,770		$	19,340		$	(3,726	)
Income/(loss) per share-basic
Income/(loss) per share from continuing operations	$	0.06		$	0.04		$	0.45		$	(0.08	)
Loss per share from discontinued operations		—			0.00			—			(0.01	)
Net income/(loss) per share-basic	$	0.06		$	0.04		$	0.45		$	(0.09	)
Income/(loss) per share-diluted
Income/(loss) per share from continuing operations	$	0.06		$	0.04		$	0.42		$	(0.08	)
Loss per share from discontinued operations		—			0.00			—			(0.01	)
Net income/(loss) per share-diluted	$	0.06		$	0.04		$	0.42		$	(0.09	)
Weighted average shares outstanding-basic		43,312			41,814			42,693			41,210
Weighted average shares outstanding-diluted		49,218			44,792			46,223			41,210

See accompanying Notes to Consolidated Financial Statements

1

TeleCommunication Systems, Inc.

Consolidated Balance Sheets

(amounts in thousands, except share data)

	September 30,			December 31,
	2008			2007
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	38,676		$	15,955
Accounts receivable, net of allowance of $257 in 2008 and $266 in 2007		26,391			20,424
Unbilled receivables		29,698			15,229
Inventory		4,190			5,373
Other current assets		5,778			5,561
Total current assets		104,733			62,542
Property and equipment, net of accumulated depreciation and amortization of $40,394 in 2008 and $35,969 in 2007		11,635			11,209
Software development costs, net of accumulated amortization of $6,312 in 2008 and $4,783 in 2007		3,255			4,406
Acquired intangible assets, net of accumulated amortization of $620 in 2008 and $509 in 2007		598			709
Goodwill		1,813			1,813
Other assets		1,221			1,445
Total assets	$	123,255		$	82,124
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and accrued expenses	$	25,385		$	12,459
Accrued payroll and related liabilities		9,612			4,915
Deferred revenue		4,709			4,685
Current portion of capital lease obligations and of notes payable		3,798			5,444
Total current liabilities		43,504			27,503
Capital lease obligations and notes payable, less current portion		8,343			10,657
Stockholders’ equity:
Class A Common Stock; $0.01 par value:
Authorized shares — 225,000,000; issued and outstanding shares of 36,963,106 in 2008 and 34,970,394 in 2007		369			349
Class B Common Stock; $0.01 par value:
Authorized shares — 75,000,000; issued and outstanding shares of 7,076,334 in 2008 and 7,301,334 in 2007		71			74
Additional paid-in capital		235,929			227,987
Accumulated other comprehensive income/(loss)		20			(125	)
Accumulated deficit		(164,981	)		(184,321	)
Total stockholders’ equity		71,408			43,964
Total liabilities and stockholders’ equity	$	123,255		$	82,124

See accompanying Notes to Consolidated Financial Statements

2

TeleCommunication Systems, Inc.

Consolidated Statement of Stockholders’ Equity
(amounts in thousands, except share data)
(unaudited)

								Accumulated
	Class A		Class B			Additional		Other
	Common		Common			Paid-In		Comprehensive			Accumulated
	Stock		Stock			Capital		Income/(Loss)			Deficit			Total
Balance at January 1, 2008	$	349	$	74		$	227,987	$	(125	)	$	(184,321	)	$	43,964
Options exercised for the purchase of 1,648,710 shares of Class A Common Stock		17		—			4,816		—			—			4,832
Issuance of 108,174 shares of Class A Common Stock under Employee Stock Purchase Plan		1		—			328		—			—			329
Conversion of 225,000 shares of Class B Common Stock to Class A Common Stock		2		(2	)		—		—			—			—
Stock compensation expense		—		—			2,798		—			—			2,798
Unrealized loss on securities and other		—		—			—		(363	)		—			(363	)
Realization of unrealized loss on securities		—		—			—		515			—			515
Foreign currency translation adjustment		—		—			—		(7	)		—			(7	)
Net income for the nine months ended September 30, 2008		—		—			—		—			19,340			19,340
Balance at September 30, 2008	$	369	$	71		$	235,929	$	20		$	(164,981	)	$	71,408

See accompanying Notes to Consolidated Financial Statements

3

TeleCommunication Systems, Inc.

Consolidated Statements of Cash Flows
(amounts in thousands)
(unaudited)

	Nine Months Ended
	September 30,
	2008			2007
Operating activities:
Net income/(loss)	$	19,340		$	(3,726	)
Less: Loss from discontinued operations		—			(215	)
Income/(loss) from continuing operations		19,340			(3,511	)
Adjustments to reconcile net income/(loss) from continuing operations to net cash provided by operating activities:
Depreciation and amortization of property and equipment		4,470			4,721
Non-cash stock compensation expense		2,798			3,121
Amortization of software development costs		1,529			1,112
Amortization of debt discount		—			480
Amortization of deferred financing fees		173			253
Impairment of marketable securities		699			—
Write-off of unamortized debt discount and debt issuance expenses		—			2,458
Amortization of acquired intangible assets		111			111
Other non-cash (income)/expense		54			(45	)
Changes in operating assets and liabilities:
Accounts receivable, net		(5,967	)		(4,857	)
Unbilled receivables		(14,469	)		(1,302	)
Inventory		1,183			(110	)
Other current assets		140			(1,408	)
Other assets		156			(488	)
Accounts payable and accrued expenses		12,926			4,262
Accrued payroll and related liabilities		4,697			(1,630	)
Deferred revenue		24			2,444
Net cash provided by operating activities of continuing operations		27,864			5,611
Net cash used in operating activities of discontinued operations		—			(3,280	)
Total net cash provided by operating activities		27,864			2,331
Investing activities:
Purchases of property and equipment		(2,152	)		(1,899	)
Capitalized software development costs		(381	)		(1,200	)
Net cash used in investing activities of continuing operations		(2,533	)		(3,099	)
Net cash provided by investing activities of discontinued operations		—			4,000
Total net cash (used in)/provided by investing activities		(2,533	)		901
Financing activities:
Payments on long-term debt and capital lease obligations		(6,704	)		(14,540	)
Proceeds from issuance of long-term debt		—			10,000
Proceeds from exercise of warrants		—			2,208
Proceeds from exercise of stock options and sale of stock		4,094			3,268
Total net cash (used in)/provided by financing activities		(2,610	)		936
Net increase in cash from continuing operations		22,721			3,448
Net increase in cash from discontinued operations		—			720
Total net increase in cash		22,721			4,168
Cash and cash equivalents at the beginning of the period		15,955			10,358
Cash and cash equivalents at the end of the period	$	38,676		$	14,526

See accompanying Notes to Consolidated Financial Statements

4

TeleCommunication Systems, Inc.

Notes to Consolidated Financial Statements
September 30, 2008
(amounts in thousands, except share and per share amounts)
(unaudited)

1.   Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation.  The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions toForm 10-Q and Article 10 ofRegulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three- and nine-months ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ended December 31, 2008. These consolidated financial statements should be read in conjunction with our audited financial statements and related notes included in our 2007 Annual Report onForm 10-K.

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

Investments in Marketable Securities and Note Receivable.  At September 30, 2008, the Company holds $181 of marketable securities and a $1,000 note receivable, which were obtained as partial consideration from three small divestitures during 2007. The marketable securities and note receivable are included in other current assets and the marketable securities are classified asavailable-for-sale in accordance with the provision of SFAS No. 115,Accounting for Certain Investments in Debt and Equity Securities. These securities are carried at fair market value based on a quoted market price. In the first and third quarters of 2008, the Company determined the decline in the fair market value of some of the securities held were considered other than temporary and wrote down the value of the shares by approximately $482 and $217, respectively, which are included in other expenses. Gains or losses on securities sold will be based on the specific identification method. The note receivable bears simple interest at 8.25% and is due in November of 2008.

Other Comprehensive Income/(Loss).  Other comprehensive income/(loss) includes changes in the equity of a business during a period from transactions and other events and circumstances from non-owner sources. Other comprehensive income/(loss) refers to revenue, expenses, gains and losses that under U.S. generally accepted accounting principles are included in comprehensive income, but excluded from net income. For operations outside the U.S. that are denominated in currencies other than the U.S. dollar, results of operations and cash flows are translated at average exchange rates during the period, and assets and liabilities are translated atend-of-period exchange rates. Translation adjustments for our European subsidiary are included as a component of our accumulated other comprehensive loss in stockholders’ equity. Also included are any unrealized gains or losses on marketable securities that are classified asavailable-for-sale.

Software Development Costs.  For the three- and nine-months ended September 30, 2008 we capitalized $75 and $381 of software development costs for certain software projects after the point of technological feasibility had been reached but before the products were available for general release. Accordingly, these costs have been capitalized as software development costs and will be amortized over their estimated useful lives beginning when the products are available for general release. The capitalized costs relate to our location-based software. For the three- and nine-months ended September 30, 2007, we capitalized $313 and $1,200 of software development costs.

5

TeleCommunication Systems, Inc.

Notes to Consolidated Financial Statements — (Continued)

Stock-Based Compensation.  We have two stock-based employee compensation plans: our Fifth Amended and Restated 1997 Stock Incentive Plan (the “Stock Incentive Plan”) and our Employee Stock Purchase Plan (the “ESPP”). We have also previously issued restricted stock to directors and certain key executives. We recorded compensation expense for all stock-based compensation plans using the fair value method prescribed by Financial Accounting Standards Board (FASB) Statement No. 123,Share Based Payment, as revised (SFAS 123(R)). Our non-cash stock compensation expense has been allocated to direct cost of revenue, research and development expense, sales and marketing expense, and general and administrative expense as detailed in Note 2.

Earnings per share.  Basic income/(loss) per common share is based upon the average number of shares of common stock outstanding during the period. Stock options to purchase approximately 1.8 million and 3.7 million shares for the three- and nine-months ended September 30, 2008 and 2.6 million and 5.1 million shares for the three- and nine-months ended September 30, 2007 were excluded from the computation of diluted net income per share because their inclusion would have been anti-dilutive. A reconciliation of basic to diluted weighted average common shares outstanding is as follows:

					Nine Months
	Three Months Ended				Ended
	September 30,				September 30,
	2008		2007		2008		2007
Basic weighted average common shares outstanding		43,312		41,814		42,693		41,210
Dilutive options outstanding		4,787		2,232		2,654		—
Dilutive warrants outstanding		1,119		746		876		—
Diluted weighted average common shares outstanding used in the calculation of diluted income/(loss)		49,218		44,792		46,223		41,210

Income Taxes.  The Company has a net deferred tax asset of approximately $49 million, against which it maintains a full valuation allowance. In accordance with requirements of FAS 109, the Company has considered criteria for determining whether it is more likely than not that its deferred tax assets will be realized, including the Company’s history of net operating losses.

Income tax amounts and balances are accounted for using the liability method of accounting for income taxes, and deferred income 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. Income tax expense of $114 and $314 was recorded for the three- and nine-months ended September 30, 2008, respectively, for alternative minimum taxes (AMT). Income tax expense is recorded based on a projected annual effective tax rate. The projected annual effective tax rate is calculated using alternative minimum taxes due on income for which a valuation allowance has been provided for the AMT tax credit carryfoward.

If the Company generates sustained future taxable income against which these tax attributes may be applied, some or all of the valuation allowance would be reversed. If the valuation allowance were reversed, a portion would be recorded as an increase to paid in capital and the remainder would be recorded as a reduction in income tax expense.

The Company adopted FIN 48 on January 1, 2007 for which there was no cumulative effect of applying its provisions. The Company classifies interest and penalties accrued on any unrecognized tax benefits as a component of the provision for income taxes. There were no interest or penalties recognized in the consolidated statement of income for the three- and nine-months ended September 30, 2008 and 2007, respectively. The Company does not currently anticipate that the total amounts of unrecognized tax

6

TeleCommunication Systems, Inc.

Notes to Consolidated Financial Statements — (Continued)

benefits will significantly increase within the next 12 months. The Company files income tax returns in U.S., state, and foreign jurisdictions. The Company is no longer subject to U.S. federal, state, and local tax examinations in major tax jurisdictions for periods before 2003.

Recent Accounting Pronouncements.

In September 2006, the FASB issued SFAS 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 was effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB decided to issue a final Staff Position to allow a one-year deferral of adoption of SFAS 157 for non-financial assets and non-financial liabilities that are recognized or disclosed at fair value in the financial statements on a non-recurring basis. The FASB also decided to amend SFAS 157 to exclude FASB Statement No. 13 and its related interpretive accounting pronouncements that address leasing transactions. The adoption of SFAS 157 for financial assets and liabilities in the first quarter of 2008 did not have an effect on the Company’s results of operations and financial position. The Company is evaluating the impact of the non-financial asset and liability provisions of this standard and does not expect the adoption of those provisions to have a material impact on its financial statements.

In February 2007, the FASB issued SFAS 159, “Fair Value Option for Financial Assets and Liabilities.” SFAS 159 allows companies to elect to measure certain assets and liabilities at fair value and is effective for fiscal years beginning after November 15, 2007. The Company did not elect the fair value measurement of SFAS 159.

In December 2007, the FASB issued SFAS 141(R), “Business Combinations.” This standard establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquired and the goodwill acquired. This statement also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective for us for acquisitions made after December 31, 2008. The Company is evaluating the impact of this standard. The adoption of SFAS 141(R) may have a material impact on the Company’s financial statements for business acquired post-adoption.

In December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (SFAS 160). SFAS 160 amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It also amends certain of ARB No. 51’s consolidation procedures for consistency with the requirements of SFAS 141(R). This statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The statement shall be applied prospectively as of the beginning of the fiscal year in which the statement is initially adopted. The adoption of SFAS 160 will not have a material impact on the Company’s financial statements.

In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement 133” (SFAS 161). SFAS 161 amends and expands the disclosure requirements of SFAS 133 with the intent to provide users of financial statements with an enhanced understanding of: (i) How and why an entity uses derivative instruments; (ii) How derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations and (iii) How derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company is evaluating the impact of this standard and does not expect the adoption of SFAS 161 to have a material impact on its financial statements.

7

TeleCommunication Systems, Inc.

Notes to Consolidated Financial Statements — (Continued)

In May 2008, the FASB issued SFAS 162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS 162). SFAS 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. This statement shall be effective 60 days following the Securities and Exchange Commissions approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles”. The Company is evaluating the impact of this standard and does not expect the adoption of SFAS 162 to have a material impact on the Company’s financial statements.

2.   Stock-Based Compensation

We adopted SFAS 123(R) using the modified prospective method. Stock based compensation expense for all awards granted after December 31, 2005 is based on the grant date fair value estimated in accordance with SFAS 123(R). Consistent with the requirements of SFAS 123(R), we recognized compensation expense net of estimated forfeitures over the requisite service period, which is generally the vesting period of 5 years. The Company estimates the fair value of each stock option award on the date of grant using the Black-Scholes option-pricing model. Expected volatilities are based principally on historical volatility of the Company’s stock. The Company estimates forfeitures based on historical experience and the expected term of the options granted are derived from historical data on employee exercises. The risk free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. The Company has not paid and does not anticipate paying dividends in the near future.

We also recognize non-cash stock compensation expense for restricted stock issued to directors and certain key executives. The restrictions expire at the end of one year for directors and expire in annual increments over three years for executives and are based on continued employment. We had 19,455 shares of restricted stock outstanding as of September 30, 2008, and approximately 26,000 shares at September 30, 2007. We expect to record future stock compensation expense of $25 as a result of the restricted stock grants outstanding as of September 30, 2008 that will be recognized over the remaining vesting period in 2008.

The material components of our stock compensation expense are as follows:

	Three Months				Nine Months
	Ended September 30,				Ended September 30,
	2008		2007		2008		2007
Continuing operations:
Stock options granted at fair value	$	846	$	894	$	2,661	$	2,807
Restricted stock		25		79		80		236
Employee stock purchase plan		29		27		57		78
Total stock compensation expense included in continuing operations	$	900	$	1,000	$	2,798	$	3,121
Discontinued operations:
Stock options granted at fair value	$	—	$	—	$	—	$	132
Total stock compensation expense included in discontinued operations	$	—	$	—	$	—	$	132

8

TeleCommunication Systems, Inc.

Notes to Consolidated Financial Statements — (Continued)

Non-cash stock compensation included in our continuing operations in the accompanying Consolidated Statements of Operations is as follows:

	Three Months Ended September 30,
	2008						2007
	Comm.		Gvmt		Total		Comm.		Gvmt		Total
Stock compensation included in direct cost of revenue:
Direct cost of services	$	278	$	119	$	397	$	260	$	160	$	420
Direct cost of systems		41		159		200		40		20		60
Total stock compensation included in direct costs of revenue	$	319	$	278	$	597	$	300	$	180	$	480

	Nine Months Ended September 30,
	2008						2007
	Comm.		Gvmt		Total		Comm.		Gvmt		Total
Stock compensation included in direct cost of revenue:
Direct cost of services	$	864	$	370	$	1,234	$	811	$	499	$	1,310
Direct cost of systems		128		494		622		125		63		188
Total stock compensation included in direct costs of revenue	$	992	$	864	$	1,856	$	936	$	562	$	1,498

	Three Months				Nine Months
	Ended				Ended
	September 30,				September 30,
	2008		2007		2008		2007
Stock compensation included in operating expenses:
Research and development expense	$	197	$	200	$	612	$	624
Sales and marketing expense		65		145		203		453
General and administrative expense		41		175		127		546
Total stock compensation included in operating expenses	$	303	$	520	$	942	$	1,623

9

TeleCommunication Systems, Inc.

Notes to Consolidated Financial Statements — (Continued)

A summary of our stock option activity and related information for the nine months ended September 30, 2008 is as follows:

				Weighted
				Average
	Number of			Exercise
(Share amounts in thousands)	Options			Price
Outstanding, beginning of year		11,144		$	3.69
Granted		2,772		$	3.24
Exercised		(1,649	)	$	2.93
Forfeited		(471	)	$	3.48
Outstanding, at September 30, 2008		11,796		$	3.70
Exercisable, at September 30, 2008		6,515		$	4.11
Vested and expected to vest at September 30, 2008		10,162		$	3.79
Estimated weighted-average grant- date fair value of options granted during the period	$	1.89
Weighted-average remaining contractual life of options outstanding at end of period		6.66 years

				Weighted
				Average
	Number of			Fair
	Options			Value
Non-vested, beginning of year		4,629		$	2.29
Forfeited		(410	)	$	2.07
Vested		1,710		$	2.20
Exercisable, at September 30, 2008		6,515		$	3.57
Non-vested, at September 30, 2008		5,281		$	2.13

Exercise prices for options outstanding at September 30, 2008 ranged from $0.29 to $26.05 as follows (all share amounts in thousands):

					Weighted-Average
			Weighted-Average		Remaining Contractual				Weighted-Average
	Options		Exercise Prices of		Life of Options		Options		Exercise Prices of
Exercise Prices	Outstanding		Options Outstanding		Outstanding (Years)		Exercisable		Options Exercisable
$0.29 - $ 2.61		3,063	$	2.37		6.64		2,102	$	2.35
$2.61 - $ 5.21		6,655	$	3.34		7.26		2,335	$	3.30
$5.21 - $ 7.82		2,048	$	6.74		4.81		2,048	$	6.74
$7.82 - $26.05		30	$	11.07		4.26		30	$	11.07
		11,796						6,515

As of September 30, 2008, we estimate that we will recognize $3,759 in expense for outstanding, unvested options over their weighted average remaining vesting period of 3.6 years, of which we estimate $879 will be recognized during the remainder of 2008.

10

TeleCommunication Systems, Inc.

Notes to Consolidated Financial Statements — (Continued)

In using the Black-Scholes model to calculate the fair value of our stock options, our assumptions were as follows:

	Nine Months Ended September 30,
	2008	2007
Expected life (in years)	5.5	5.5
Risk-free interest rate(%)	2.65%-3.33%	4.23%-4.92%
Volatility(%)	60%-67%	68%-74%
Dividend yield(%)	0%	0%

3.  Supplemental Disclosure of Cash Flow Information

Property and equipment acquired under capital leases totaled $879 and $2,744 during the three- and nine-months ended September 30, 2008, respectively. We acquired $887 and $1,516 of property under capital leases during the three- and nine-months ended September 30, 2007, respectively.

Interest paid totaled $205 and $734 during the three- and nine-months ended September 30, 2008, respectively. We paid $328 and $1,432 in interest for the three- and nine-months ended September 30, 2007, respectively.

Alternative minimum income taxes paid totaled $114 and $314 during the three- and nine-months ended September 30, 2008 and were nil for the three- and nine-months ended September 30, 2007.

During the second quarter of 2008, the Company returned 400 shares of Stockgroup Media Inc. with a net realized a loss of $140 in a settlement of a divestiture post closing adjustment claim.

4.   Fair Value Measurement

In the first quarter of 2008, we adopted SFAS 157 “Fair Value Measurements” for financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value, and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. This standard does not apply measurements related to share-based payments, nor does it apply to measurements related to inventory.

SFAS 157 discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flows), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The statement utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3: Observable inputs that reflect the reporting entity’s own assumptions.

11

TeleCommunication Systems, Inc.

Notes to Consolidated Financial Statements — (Continued)

Our population of financial assets and liabilities subject to fair value measurements and the necessary disclosures are as follow ($ in thousands):

	Fair Value		Fair Value Measurements at
	as of		9/30/2008
	9/30/2008		Using Fair Value Hierarchy
	Total		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	38,676	$	38,676	$	—	$	—
Marketable securities available for sale		181		181		—		—
	$	38,857	$	38,857	$	—	$	—

The fair value of marketable securities are based on quoted market prices from various stock exchanges.

5.   Segment Information

Our two operating segments are the Commercial and Government Segments.

Our Commercial Segment solutions enable wireless carriers to deliver short text messages, location information, internet content, and other enhanced communication services to and from wireless phones. Our Commercial Segment also provides E9-1-1 services, commercial location-based services, inter-carrier text message distribution services, and carrier technology on a hosted, or service bureau, basis. We also earn subscriber revenue through wireless applications including our Rand McNally^® Traffic application.

Our Government Segment designs, assembles, sells and maintains data network communication systems, including our SwiftLink^® deployable communication systems. We also own and operate secure satellite teleport facilities, resell access to satellite airtime (known as space segment), and provide communication systems integration, information technology services, and software systems and services to the U.S. Department of Defense and other government customers.

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

12

TeleCommunication Systems, Inc.

Notes to Consolidated Financial Statements — (Continued)

The following table sets forth results for our reportable segments for the three- and nine-months ended September 30, 2008 and 2007, respectively. All revenues reported below are from external customers. A reconciliation of segment gross profit to net loss for the respective periods is also included below:

	Three Months Ended September 30,
	2008						2007
	Comm.		Gvmt		Total		Comm.		Gvmt		Total
Revenue
Services	$	15,720	$	9,182	$	24,902	$	15,014	$	7,035	$	22,049
Systems		6,981		24,648		31,629		4,418		11,168		15,586
Total revenue		22,701		33,830		56,531		19,432		18,203		37,635
Operating costs and expenses
Direct cost of services		8,166		7,320		15,486		7,434		5,455		12,889
Direct cost of systems		2,449		21,139		23,588		1,141		9,467		10,608
Total direct costs		10,615		28,459		39,074		8,575		14,922		23,497
Gross profit
Services gross profit		7,554		1,862		9,416		7,580		1,580		9,160
Systems gross profit		4,532		3,509		8,041		3,277		1,701		4,978
Total gross profit	$	12,086	$	5,371	$	17,457	$	10,857	$	3,281	$	14,138

	Nine Months Ended September 30,
	2008						2007
	Comm.		Gvmt		Total		Comm.		Gvmt		Total
Revenue
Services	$	47,809	$	24,193	$	72,002	$	43,320	$	22,232	$	65,552
Systems		26,761		42,092		68,853		12,520		29,018		41,538
Total revenue		74,570		66,285		140,855		55,840		51,250		107,090
Operating costs and expenses
Direct cost of services		24,031		19,292		43,323		22,273		17,214		39,487
Direct cost of systems		7,338		33,961		41,299		3,791		24,698		28,489
Total direct costs		31,369		53,253		84,622		26,064		41,912		67,976
Gross profit
Services gross profit		23,778		4,901		28,679		21,047		5,018		26,065
Systems gross profit		19,423		8,131		27,554		8,729		4,320		13,049
Total gross profit	$	43,201	$	13,032	$	56,233	$	29,776	$	9,338	$	39,114

13

TeleCommunication Systems, Inc.

Notes to Consolidated Financial Statements — (Continued)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Total segment gross profit	$	17,457		$	14,138		$	56,233		$	39,114
Research and development expense		(3,815	)		(3,329	)		(11,838	)		(9,700	)
Sales and marketing expense		(3,128	)		(2,729	)		(9,822	)		(9,049	)
General and administrative expense		(6,071	)		(4,656	)		(17,386	)		(14,808	)
Depreciation and amortization of property and equipment		(1,474	)		(1,497	)		(4,470	)		(4,721	)
Amortization of acquired intangible assets		(37	)		(37	)		(111	)		(111	)
Interest expense and amortization of debt discount and debt issuance fees		(232	)		(351	)		(907	)		(4,566	)
Other income/(expense), net		171			177			(105	)		330
Gain/(loss) on sale of patent		—			—			8,060			—
Provision for income taxes		(114	)		—			(314	)		—
Income/(loss) from continuing operations		2,757			1,716			19,340			(3,511	)
Loss from discontinued operations		—			54			—			(215	)
Net loss	$	2,757		$	1,770		$	19,340		$	(3,726	)

6.   Inventory

Inventory consisted of the following:

	Sep. 30,		Dec. 31,
	2008		2007
Component parts	$	2,847	$	2,670
Finished goods		1,343		2,703
Total inventory at period end	$	4,190	$	5,373

14

TeleCommunication Systems, Inc.

Notes to Consolidated Financial Statements — (Continued)

7.   Acquired Intangible Assets and Capitalized Software Development Costs

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

	September 30, 2008						December 31, 2007
	Gross						Gross
	Carrying		Accumulated				Carrying		Accumulated
	Amount		Amortization		Net		Amount		Amortization		Net
Acquired intangible assets:
Customer Lists	$	606	$	492	$	114	$	606	$	405	$	201
Trademarks & Patents		612		128		484		612		104		508
Software development costs, including acquired technology		9,567		6,312		3,255		9,189		4,783		4,406
Total	$	10,785	$	6,932	$	3,853	$	10,407	$	5,292	$	5,115
Estimated future amortization expense:
Three months ending December 31, 2008					$	598
Year ending December 31, 2009					$	1,829
Year ending December 31, 2010					$	770
Year ending December 31, 2011					$	211
Thereafter					$	445

We routinely update our estimates of the recoverability of the software products that have been capitalized. Management uses these estimates as the basis for evaluating the carrying values and remaining useful lives of the respective assets.

8.   Concentrations of Credit Risk and Major Customers

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

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

		% of Total						% of Total
		Revenue For						Revenue For
		the Three						the Nine
		Months Ended						Months Ended
		September 30,						September 30,
Customer	Segment	2008			2007			2008			2007
Federal Agencies	Government		49	%		38	%		36	%		37	%
Customer A	Commercial		16	%		21	%		24	%		20	%

		As of September 30, 2008
		Accounts			Unbilled
Customer	Segment	Receivable			Receivables
Federal Agencies	Government		34	%		78	%
Customer A	Commercial		16	%		Less than 10	%

15

TeleCommunication Systems, Inc.

Notes to Consolidated Financial Statements — (Continued)

9.   Lines of Credit and Financing Arrangements

We have maintained a line of credit arrangement with our principal bank since 2003. In June 2007, we amended the agreement to extend our line of credit and decrease the cost of borrowing. Under the amended line of credit agreement, the availability of the line was extended to June 2010, and the borrowing rate decreased from prime plus 1.25% to the bank’s prime rate which was 5.00% per annum at September 30, 2008. Our maximum borrowing availability remained the same at $22,000. Borrowings at any time are limited to an amount based principally on accounts receivable levels as defined in the amended line of credit agreement. Our potential borrowings under the amended line of credit agreement is also reduced by the amounts of letters of credit outstanding which totaled $743 at September 30, 2008. There were no borrowings on the line of credit at September 30, 2008 or 2007.

In June 2007, we refinanced $10,000 of our March 2006 secured notes with a with a five year note payable to our principal bank. The borrowing rate under the new note is the bank’s prime rate plus 0.25% per annum, (5.25% at September 30, 2008) and the note is repayable in equal monthly installments of $167 plus interest.

Our amended line of credit and term loan agreement contains covenants requiring us to maintain a minimum adjusted quick ratio and a minimum liquidity ratio as well as other restrictive covenants including, among others, restrictions on our ability to merge, acquire assets above prescribed thresholds, undertake actions outside the ordinary course of our business (including the incurrence of indebtedness), guarantee debt, distribute dividends, and repurchase our stock, and maintenance of a minimum tangible net worth. The agreement also contains a subjective covenant that requires (i) no material adverse change in the business, operations, or financial condition of the Company occur, or (ii) no material impairment of the prospect of repayment of any portion of the borrowings under the agreement; or (iii) no material impairment of value or priority of the lenders security interests in the collateral of the bank credit agreement. As of September 30, 2008, we were in compliance with the covenants related to our line of credit and we believe that the Company will continue to comply with its restrictive covenants. If our performance does not result in compliance with any of these restrictive covenants, we would seek to further modify our financing arrangements, but there can be no assurance that the bank would not exercise its rights and remedies under its agreement with us, including declaring all outstanding debt due and payable.

In December 2006, we borrowed $5,000 under 3 year notes secured by accounts receivable of one customer. Effective March 28, 2008, we paid this debt in full and modified the terms of the note to a line of credit. Under the line of credit agreement, the maximum indebtedness of the line is equal to $3,237 ($2,187 at September 30, 2008) less $150 per month for the number of full months that have expired since the effective date. The remaining term for which we are able to draw down the line of credit is fifteen months at September 30, 2008, and the maturity date is December 28, 2009. The borrowing rate is London InterBank Offered Rate (LIBOR) plus 500 basis points. As of September 30, 2008, the Company had not borrowed against this line of credit.

As of September 30, 2008, we had approximately $18,029 of unused borrowing availability under our lines of credit.

10.   Contingencies

The Company has been notified that a customer may seek indemnification under its contractual arrangement with that customer for costs associated with defending a lawsuit alleging infringement of certain patents through the use of our products and services in combination with the use of products and services of multiple other vendors. The Company will continue to negotiate with the customer in good faith because the Company believes its technology does not infringe on the cited patents and due to specific clauses within the customer’s contractual arrangement that may or may not give rise to an indemnification obligation. Although the Company cannot currently predict the outcome of this matter, we do not expect the resolution will have a material effect on our consolidated results of operations, financial position or cash flows.

16

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

The following discussion and analysis of the financial condition and results of operations should be read in conjunction with the consolidated financial statements, related notes, and other detailed information included elsewhere in this Quarterly Report onForm 10-Q for the quarter ended September 30, 2008 (this“Form 10-Q”). ThisForm 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are statements other than historical information or statements of current condition. We generally identify forward-looking statements by the use of terms such as “believe”, “intend”, “expect”, “may”, “should”, “plan”, “project”, “contemplate”, “anticipate”, or other similar statements. Examples of forward looking statements in this Quarterly Report onForm 10-Q include, but are not limited to statements: (a) regarding our belief as to the sufficiency of our capital resources with cash generated from operations as well as cash on hand to meet our anticipated cash operating expenses, working capital, and capital expenditures and debt service needs for at least the next twelve months, (b) about our backlog and that we expect to realize approximately $116.8 million of backlog in the next twelve months, (c) regarding our belief that insurance policies may cover some or all of the potential costs of certain litigation, (d) that we believe that certain capitalized costs will be recoverable from future gross profits, (e) regarding our belief that we were in compliance with our loan covenants and that we believe that we will continue to comply with our restrictive covenants, (f) regarding our belief that our technology does not infringe on the patents cited in the lawsuit against our customer, and (g), regarding the impact of certain accounting pronouncements on the Company’s financial statements.

These forward-looking statements relate to our plans, objectives and expectations for future operations. In light of the risks and uncertainties inherent in all such projected operational matters, the inclusion of forward-looking statements in this report should not be regarded as a representation by us or any other person that our objectives or plans will be achieved or that any of our operating expectations will be realized. Our actual financial results realized could differ materially from the statements made herein, depending in particular upon the risks and uncertainties described in our filings with the Securities and Exchange Commission. These include without limitation risks and uncertainties relating to our financial results and our ability to (i) sustain profitability, (ii) continue to rely on our customers and other third parties to provide additional products and services that create a demand for our products and services, (iii) conduct our business in foreign countries, (iv) adapt and integrate new technologies into our products, (v) expand our sales and business offerings in the wireless communications industry, (vi) develop software without any errors or defects, (vii) have sufficient capital resources to fund the Company’s operations, (viii) protect our intellectual property rights, (ix) implement our sales and marketing strategy, and (x) successfully integrate the assets and personnel obtained in our acquisitions. These factors should not be considered exhaustive; we undertake no obligation to release publicly the results of any future revisions we may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. We caution you not to put undue reliance on these forward-looking statements.

The information in this “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” discusses our unaudited consolidated financial statements, which have been prepared in accordance with GAAP for interim financial information.

Critical Accounting Policies

The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments. Our most significant estimates relate to:

•  accounting for ourpercentage-of-completion and proportional performance contracts involving multiple elements and software,

17

•  accounts receivable realizability,

•  inventory value,

•  evaluating goodwill for impairment,

•  the realizability and remaining useful lives of long-lived assets, and

•  contingent liabilities.

Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We have identified our most critical accounting policies to be those related to:

•  revenue recognition for our software and other contracts with multiple elements,

•  revenue recognition for our contracts accounted for using thepercentage-of-completion and proportional performance methods,

•  capitalized software development costs,

•  acquired intangible assets, and

•  income taxes.

We describe these accounting policies in relevant sections of this discussion and analysis. This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included in our Annual Report onForm 10-K for the year ended December 31, 2007 (the “2007Form 10-K”), with the exception of the following disclosure regarding Fair Value Measures, the Company’s accounting policies remain unchanged through the third quarter of 2008.

Fair Value Measures

The Company adopted Statement of Accounting Standards SFAS 157, “Fair Value Measurements” effective January 1, 2008. The adoption of SFAS 157 did not have a material impact on the Company’s financials statements or results of operations. The statement identifies two kinds of inputs, observable and unobservable, that are used to determine the fair value of assets and liabilities. Observable inputs are based on market data or independent sources while unobservable inputs are based on the Company’s own assumptions. The Company’s major categories of financial assets and liabilities subject to fair value measurements include cash and cash equivalents and marketable securities that are held as available for sale. Both categories use observable inputs only and are measured using a market approach based on quoted prices.

Overview

Our business is reported across two market segments: (i) the Commercial Segment, which consists principally of enhanced communication services to and from wireless phones, location application software, our E9-1-1 application and other hosted services, and (ii) the Government Segment, which includes the design, development and deployment of information processing and communication systems and related services to government agencies.

This “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” provides information that our management believes to be necessary to achieve a clear understanding of our financial statements and results of operations. You should read this “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” together with Item 1A “Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and

18

Results of Operations” in our 2007Form 10-K as well as the unaudited interim consolidated financial statements and the notes thereto located elsewhere in thisForm 10-Q.

Indicators of Our Financial and Operating Performance

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

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

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

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

•  Liquidity and cash flows.  The primary driver of our cash flows is the results of our operations. Other important sources of our liquidity are our lease financings secured for the purchase of equipment and potential borrowings under our credit lines.

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

19

Results of Operations

Revenue and Cost of Revenue

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

Commercial Segment:

	Three Months											Nine Months
	Ended September 30,						2008 vs. 2007					Ended September 30,						2008 vs. 2007
($ in millions)	2008			2007			$		%			2008			2007			$		%
Services revenue	$	15.7		$	15.0		$	0.7		5	%	$	47.8		$	43.3		$	4.5		10	%
Systems revenue		7.0			4.4			2.6		59	%		26.8			12.5			14.3		114	%
Commercial segment revenue		22.7			19.4			3.3		17	%		74.6			55.8			18.8		34	%
Direct cost of services revenue		8.1			7.4			0.7		9	%		24.0			22.2			1.8		8	%
Direct cost of systems revenue		2.5			1.1			1.4		127	%		7.4			3.8			3.6		95	%
Commercial segment cost of revenue		10.6			8.5			2.1		25	%		31.4			26.0			5.4		21	%
Services gross profit		7.6			7.6			—		NM			23.8			21.1			2.7		13	%
% of revenue		48	%		51	%							50	%		49	%
Systems gross profit		4.5			3.3			1.2		36	%		19.4			8.7			10.7		123	%
% of revenue		64	%		75	%							72	%		70	%
Commercial segment gross profit1	$	12.1		$	10.9		$	1.2		11	%	$	43.2		$	29.8		$	13.4		45	%
% of revenue		53	%		56	%							58	%		53	%

¹ See discussion of segment reporting in Note 5 to the accompanying unaudited consolidated financial statements

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

Commercial services revenue increased 5% and 10%, respectively, for the three- and nine-months ended September 30, 2008 versus the comparable periods of 2007.

Our hosted services offerings include our E9-1-1 service for wireless and Voice over Internet Protocol (VoIP) E9-1-1 service providers, hosted Position Determining Entity (PDE) service, and hosted Location Based Service (LBS) applications. Revenue from these offerings primarily consists of monthly recurring service fees and is recognized in the month earned.E-911, PDE, VoIP and hosted LBS service fees are priced based on units served during the period, such as the number of customer cell sites served, the number of connections to Public Service Answering Points (PSAPs), or the number of customer subscribers served. Subscriber service revenue is generated by client software applications such as Rand McNally^® Traffic. Maintenance fees on our systems and software licenses are collected in advance and recognized ratably over the maintenance period. Unrecognized maintenance fees are included in deferred revenue. Custom software development, implementation and maintenance services may be provided under time and materials or fixed-fee contracts. Commercial services revenue in the three- and nine-months ended September 30, 2008 was $0.7 million and $4.5 million, respectively, higher than the same periods for 2007 from increased service connection deployments of our E9-1-1 services for cellular and VoIP service providers, an increase in maintenance revenue, and an increase in the number of carriers and carrier billable units served.

The direct cost of commercial services revenue consists primarily of compensation and benefits, network access, data feed and circuit costs, and equipment and third party software maintenance. The

20

direct cost of maintenance revenue consists primarily of compensation and benefits expense. For the three months ended September 30, 2008, the direct cost of service revenue increased 9% as compared to the third quarter of 2007. Similarly, the direct cost of services revenue increased 8% for the nine months ended September 30, 2008 compared to the same period of 2007. We incurred an increase in labor and direct costs related to custom development efforts responding to customer requests and deployment requirements for VoIP. For both the three- and nine-months ended September 30, 2008, the cost of circuits and other data access costs accounted for approximately 13% of total direct costs of our commercial service revenues. Such costs comprised approximately 15% of the total direct costs of our commercial service revenues for both the three- and nine-months ended September 30, 2007.

Commercial services gross profit for the three months ended September 30, 2008 and 2007 were about the same at $7.6 million. Commercial services gross profit as a percentage of revenue was 50% for the nine months ended September 30, 2008 versus 49% for the nine months ended September 30, 2007. This increase is due to improved operating efficiencies enabling higher revenue with only nominal increases in labor, fringe and contractors costs.

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

We sell communications systems incorporating our licensed software for enhanced services, including text messaging and location-based services, to wireless carriers. These systems are designed to incorporate our licensed software. We design our software to ensure that it is compliant with all applicable standards.

Licensing fees for our carrier software are generally a function of its volume of usage in our customers’ networks. As a carrier’s subscriber base or usage increases, the carrier must purchase additional capacity under its license agreement and we receive additional system license revenue. Systems revenues typically contain multiple elements, which may include the product license, installation, integration, and hardware. The total arrangement fee is allocated among each element based on vendor-specific objective evidence of the relative fair value of each of the elements. Fair value is generally determined based on the price charged when the element is sold separately. In the absence of evidence of fair value of a delivered element, revenue is allocated first to the undelivered elements based on fair value and the residual revenue to the delivered elements. The software licenses are generally perpetual licenses for a specified volume of usage, along with the purchase of annual maintenance at a specified rate. We recognize license fee revenue when each of the following has occurred: (1) evidence of an arrangement is in place; (2) we have delivered the software; (3) the fee is fixed or determinable; and (4) collection of the fee is probable. Software projects that require significant customization are accounted for under thepercentage-of-completion method. We measure progress to completion using costs incurred compared to estimated total costs or labor costs incurred compared to estimated total labor costs for contracts that have a significant component of third-party materials costs. We recognize estimated losses under long-term contracts in their entirety upon discovery. If we did not accurately estimate total costs to complete a contract or do not manage our contracts within the planned budget, then future margins may be negatively affected or losses on existing contracts may need to be recognized. Software license fees billed and not recognized as revenue are included in deferred revenue.

Commercial systems revenue for the three- and nine-months ended September 30, 2008 were 59% and 114% higher than in the same periods of 2007, due mainly to increased sales of licensed text messaging software and customer hardware upgrades.

The direct cost of our systems consists primarily of compensation and benefits, purchased equipment, third-party software, travel expenses, and consulting fees as well as the amortization of both acquired and capitalized software development costs for all reported periods. There is no significant direct cost associated with customer purchases of licensed capacity. During the three- and nine-months ended September 30, 2008, direct costs of systems included $0.6 million and $1.5 million, respectively, of amortization of software development costs. In the three- and nine-months ended September 30, 2007, the composition of the direct cost of our systems was about the same except for $0.4 million and

21

$1.1 million, respectively, of amortization of software development costs. The increase in the direct costs of systems of $1.4 million and $3.6 million in the three- and nine-months ended September 30, 2008 compared to the same periods in 2007 is due primarily to increases in hardware costs related to the development of new custom solutions.

Our commercial systems gross profit was 64% and 72%, respectively, in the three- and nine-months ended September 30, 2008 versus 75% and 70% for the three- and nine-months ended September 30, 2007. Gross profit for the three months ended September 30, 2008 versus the three months ended September 30, 2007 decreased as a percentage of revenue as a result of lower margins on hardware sales. Gross profit for the nine months ended September 30, 2008 versus the same period in 2007 increased by 123% as a result of higher sales of licensed software capacity slightly offset by the lower margins on hardware sales.

Government Segment:

	Three Months											Nine Months
	Ended September 30,						2008 vs. 2007					Ended September 30,						2008 vs. 2007
($ in millions)	2008			2007			$		%			2008			2007			$			%
Services revenue	$	9.2		$	7.0		$	2.2		31	%	$	24.2		$	22.2		$	2.0			9	%
Systems revenue		24.6			11.2			13.4		120	%		42.1			29.0			13.1			45	%
Government segment revenue		33.8			18.2			15.6		86	%		66.3			51.2			15.1			29	%
Direct cost of services revenue		7.3			5.4			1.9		35	%		19.3			17.2			2.1			12	%
Direct cost of systems revenue		21.1			9.5			11.6		122	%		34.0			24.7			9.3			38	%
Government segment cost of revenue		28.4			14.9			13.5		91	%		53.3			41.9			11.4			27	%
Services gross profit		1.9			1.6			0.3		19	%		4.9			5.0			(0.1	)		(2	)%
% of revenue		21	%		23	%							20	%		23	%
Systems gross profit		3.5			1.7			1.8		106	%		8.1			4.3			3.8			88	%
% of revenue		14	%		15	%							19	%		15	%
Government segment gross profit1	$	5.4		$	3.3		$	2.1		64	%	$	13.0		$	9.3		$	3.7			40	%
% of revenue		16	%		18	%							20	%		18	%

¹ See discussion of segment reporting in Note 5 to the accompanying unaudited consolidated financial statements

We provide products and services to government customers under long-term contracts. We recognize contract revenue as billable costs are incurred and for fixed-price product delivery contracts using thepercentage-of-completion method or proportional performance method, measured by either total labor costs or total costs incurred compared to total estimated labor costs or total estimated costs. We recognize estimated losses on contracts in their entirety upon discovery. If we have not accurately estimated total labor costs or total costs to complete a contract or do not manage our contracts within the planned budget, then future margins may be negatively affected or losses on existing contracts may need to be recognized, or contract terms must be renegotiated. Under our contracts with the U.S. Government, contract costs, including the allocated indirect expenses, are subject to audit and adjustment by the Defense Contract Audit Agency (DCAA). Since the Company’s inception, no significant adjustment has resulted from a DCAA audit. We record revenue under government contracts at estimated net realizable amounts.

22

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

Government services revenue primarily consists of communications engineering, program management, help desk outsource, satellite “space segment” and airtime, network design and management for government agencies. Our Government Segment also operates teleport facilities for data connectivity via satellite. Such services are delivered under time and materials or fixed price contracts. For fixed price delivery contracts we recognize revenue using thepercentage-of-completion method or proportional performance method, measured by either total labor costs or total costs incurred compared to total estimated labor costs or total costs to be incurred.

Government services revenues increased by approximately $2.0 million for both the three- and nine-months ended September 30, 2008 versus the comparable period for 2007. The increases were a result of additional orders on existing services contracts.

Direct cost of government services revenue consists of compensation, benefits and travel incurred in delivering these services, as well as satellite space segment purchased for resale to government customers. The direct costs of government services increased by 35% and 12% in the three- and nine-months ended September 30, 2008, respectively, compared to the same period in 2007, as a result of increased labor costs to support the increase in volume of service requests.

Our gross profit from government services was $1.9 million in the three months ended September 30, 2008 compared to $1.6 million in the same period of 2007. Gross profit was $4.9 million in the nine months ended September 30, 2008 versus $5.0 million in the same period of 2007. Gross profit as a percentage of revenue in the three- and nine-months ended September 30, 2008 compared to the three- and nine-months ended September 30, 2007 decreased as a result of lower average pricing upon the renewal of several contracts.

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

We generate government systems revenue from the design, development, assembly and deployment of information processing and communication systems, primarily deployable communications systems, and integration of those systems into customer networks, which are largely variations on our SwiftLink^® product line. These are lightweight, secure, deployable communications systems, sold to units of the U.S. Departments of State, Justice, and Defense, and other agencies. We recognize contract revenue as billable costs are incurred, and for fixed-price product delivery contracts using thepercentage-of-completion method, measured by either total labor costs, total costs incurred, or units shipped compared to total estimated labor costs, total costs, or units as appropriate under the contract. We recognize estimated losses on contracts in their entirety upon discovery. If we do not accurately estimate total labor costs or total costs to complete a contract or do not manage our contracts within the planned budget, then future margins may be negatively affected or losses on existing contracts may need to be recognized, or contract terms must be renegotiated.

Systems sales in our Government Segment were $24.6 million and $42.1 million for the three- and nine-months ended September 30, 2008 compared to $11.2 million and $29.0 million for the three- and nine-months ended September 30, 2007. The increase in the three- and nine-months ending September 30, 2008 versus the same periods in 2007 represents a higher sales volume from the fulfillment of task orders under the Army Worldwide Satellite Systems (WWSS)5-year contract vehicle. In July 2008, TCS was named the sole awardee of a delivery order contract with a potential value of $246 million over the next several years, under the WWSS procurement vehicle.

The cost of our government systems revenue consists of purchased system components, compensation, benefits, travel, satellite airtime, and the costs of third-party contractors that we engage. These costs for the three- and nine-months ended September 30, 2008 increased by 122% and 38%, respectively, over the same periods in 2007 as a direct result to the increase in revenue. These equipment and third-party costs are variable for our various types of products, and margins fluctuate between periods based on the respective product mixes.

23

Our government systems gross profit increased to $3.5 million and $8.1 million, respectively, in the three- and nine-months ended September 30, 2008 from $1.7 million and $4.3 million, respectively, in the comparable periods of 2007 mainly as a result of cost savings and slightly higher margins. The gross profit as percentage of revenue for the three months ended September 30, 2008 versus the same period in 2007 decreased slightly to 14% from 15% due to competitive pricing for awards to date under the WWSS contract.

Major Customers

For the three- and nine-months ended September 30, 2008, customers that accounted for 10% or more of total revenue were Verizon Wireless and U.S. Government agencies, measured as a single customer. The loss of either of these customers would have a material adverse impact on our business. Verizon Wireless and various U.S. Government agencies also accounted for 10% or more of total revenue for the three- and nine-months ended September 30, 2007. Verizon Wireless is a customer of our Commercial Segment, and the various U.S. Government agencies are customers of our Government Segment.

Revenue Backlog

As of September 30, 2008 and 2007, we had unfilled orders, or funded backlog, as follows:

	September 30,				2008 vs. 2007
($ in millions)	2008		2007		$			%
Commercial Segment	$	68.5	$	93.9	$	(25.4	)		(27	)%
Government Segment		87.0		46.0		41.0			89	%
Total funded contract backlog	$	155.5	$	139.9	$	15.6			11	%
Commercial Segment	$	68.5	$	111.5	$	(43.0	)		(39	)%
Government Segment		381.2		141.5		239.7			169	%
Total backlog of orders and commitments, including customer options	$	449.7	$	253.0	$	196.7			78	%
Expected to be realized within the next 12 months	$	116.8	$	88.4	$	28.4			32	%

Funded contract backlog on September 30, 2008 and 2007 was approximately $155.5 million and $139.9 million, respectively, of which the Company expects to recognize approximately $116.8 million in the next twelve months. Total backlog was approximately $449.7 million and $253.0 million at the end of the third quarter of 2008 and 2007, respectively. Funded contract backlog represents contracts for which fiscal year funding has been appropriated by our customers (mainly federal agencies), and for our hosted services is computed by multiplying the most recent month’s recurring revenue times the remaining months under existing long-term agreements, which we believe is the best available information for anticipating revenue under those agreements. Total backlog, as is typically measured by government contractors, includes orders covering optional periods of serviceand/or deliverables, but for which budgetary funding may not yet have been approved. Company backlog at any given time may be affected by a number of factors, including the availability of funding, contracts being renewed or new contracts being signed before existing contracts are completed. Some of our backlog could be canceled for causes such as late delivery, poor performance and other factors. Accordingly, a comparison of backlog from period to period is not necessarily meaningful and may not be indicative of eventual actual revenue.

24

Operating Expenses

Research and development expense:

	Three Months											Nine Months
	Ended September 30,						2008 vs. 2007					Ended September 30,						2008 vs. 2007
($ in millions)	2008			2007			$		%			2008			2007			$		%
Research and development expense	$	3.8		$	3.3		$	0.5		15	%	$	11.8		$	9.7		$	2.1		22	%
% of total revenue		7	%		9	%							8	%		9	%

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

The expenses we incur relate mainly to software applications which are being marketed to new and existing customers on a global basis. Throughout the three- and nine-months ended September 30, 2008 and 2007, research and development was primarily focused on cellular and hosted location-based applications, including Voice over IP E9-1-1, enhancements to our hosted location-based service platform, and wireless location-based service applications.

For the three- and nine-months ended September 30, 2008, we capitalized $0.1 million and $0.4 million, respectively, of research and development costs for certain software projects in accordance with the above policy versus $0.3 million and $1.2 million for the three- and nine-months ended September 30, 2007. The capitalized costs relate to our location-based software. These costs will be amortized on aproduct-by-product basis using the straight-line method over the products’ estimated useful life, not longer than three years. Amortization is also computed using the ratio that current revenue for the product bears to the total of current and anticipated future revenue for that product (the revenue curve method). If this revenue curve method results in amortization greater than the amount computed using the straight-line method, amortization is recorded at that greater amount. We believe that these capitalized costs will be recoverable from future gross profits generated by these products.

Research and development expenses were higher for the three- and nine-months ended September 30, 2008 versus the comparable periods of 2007, primarily as the result of decreased capitalized expenses (discussed above), increased company personnel assigned to software development work, an allocated portion of a $0.5 million charge for vacating on of our facility leases in Tampa, Florida, which was due to expire in December 2009, and variable compensation charges.

Sales and marketing expense:

	Three Months											Nine Months
	Ended September 30,						2008 vs. 2007					Ended September 30,						2008 vs. 2007
($ in millions)	2008			2007			$		%			2008			2007			$		%
Sales and marketing expense	$	3.1		$	2.7		$	0.4		15	%	$	9.8		$	9.0		$	0.8		9	%
% of total revenue		5	%		7	%							7	%		8	%

Our sales and marketing expenses include compensation and benefits, trade show expenses, travel costs, advertising and public relations costs as well as a proportionate share of facility-related costs which are expensed as incurred. Our marketing efforts also include speaking engagements and attending and sponsoring industry conferences. We sell our software products and services through our direct sales force and through indirect channels. We have also historically leveraged our relationships with original equipment manufacturers to market our software products to wireless carrier customers. We sell our

25

products and services to the U.S. Government primarily through direct sales professionals. Sales and marketing expenses have increased due to additional government sales expenditures and variable compensation charges.

General and administrative expense:

	Three Months											Nine Months
	Ended September 30,						2008 vs. 2007					Ended September 30,						2008 vs. 2007
($ in millions)	2008			2007			$		%			2008			2007			$		%
General and administrative expense	$	6.1		$	4.7		$	1.4		30	%	$	17.4		$	14.8		$	2.6		18	%
% of total revenue		11	%		13	%							12	%		14	%

General and administrative expense consists primarily of costs associated with management, finance, legal, human resources and internal information systems. These costs include compensation, benefits, professional fees, travel, and a proportionate share of rent, utilities and other facilities costs which are expensed as incurred. The increase in 2008 was due to an allocated portion of a $0.5 million charge for vacating one of our facility leases in Tampa, Florida, which was due to expire in December 2009 and an allocated portion of a $2.8 million charge for variable compensation.

Depreciation and amortization of property and equipment:

	Three Months								Nine Months
	Ended September 30,				2008 vs. 2007				Ended September 30,				2008 vs. 2007
($ in millions)	2008		2007		$		%		2008		2007		$			%
Depreciation and amortization of property and equipment	$	1.5	$	1.5	$	—		NM	$	4.5	$	4.7	$	(0.2	)		(4	)%
Average gross cost of property and equipment during the period	$	51.4	$	55.7					$	49.7	$	55.0

Depreciation and amortization of property and equipment represents the period costs associated with our investment in computers, telephone equipment, software, furniture and fixtures, and leasehold improvements. We compute depreciation and amortization using the straight-line method over the estimated useful lives of the assets. The estimated useful life of our assets generally ranges from 5 years for furniture, fixtures, and leasehold improvements to 3 to 4 years for most other types of assets including computers, software, telephone equipment and vehicles. Depreciation expense in the nine months of 2008 reflects a lower balance of net fixed asset cost than a year ago and assets bought more than three years ago having become fully depreciated.

Amortization of acquired intangible assets:

	Three Months								Nine Months
	Ended September 30,				2008 vs. 2007				Ended September 30,				2008 vs. 2007
($ in millions)	2008		2007		$		%		2008		2007		$		%
Amortization of acquired intangible assets	$	0.1	$	0.1	$	—		NM	$	0.1	$	0.1	$	—		NM

The amortization of acquired intangible assets relates to the digital mapping business assets acquired from Kivera, Inc. in 2004, which are being amortized over their useful lives of between three and nineteen years using the greater of the straight-line method or the revenue curve method.

26

Interest expense:

	Three
	Months										Nine Months
	Ended September 30,				2008 vs. 2007						Ended September 30,				2008 vs. 2007
($ in millions)	2008		2007		$			%			2008		2007		$			%
Interest expense incurred on notes payable and line of credit	$	0.1	$	0.2	$	(0.1	)		(50	)%	$	0.5	$	1.2	$	(0.7	)		(58	)%
Interest expense incurred on capital lease obligations		0.1		0.1		—			NM			0.2		0.2		—			NM
Amortization of deferred financing fees		—		0.1		(0.1	)		(100	)%		0.2		0.3		(0.1	)		(33	)%
Amortization of debt discount		—		—		—			NM			—		0.5		(0.5	)		(100	)%
Write-off of unamortized debt discount and debt issuance expenses		—		—		—			NM			—		2.4		(2.4	)		(100	)%
Total interest expense	$	0.2	$	0.4	$	(0.2	)		(50	)%	$	0.9	$	4.6	$	(3.7	)		(80	)%

Interest expense is incurred under notes payable, a line of credit, and capital lease obligations. Interest on our notes payable is primarily at stated interest rates at the bank’s prime rate plus 0.25% per annum (5.25% at September 30, 2008) and interest on line of credit borrowing is at the bank’s prime rate, which was 5.00% per annum as of September 30, 2008.

On June 25, 2007, we refinanced our $10 million long term debt with a new five year note payable to our principal bank. The borrowing rate under the new note was the bank’s prime rate plus 0.25% per annum, (5.25% at September 30, 2008) and the note is repayable in equal monthly installments of $0.2 million plus interest. The funds were used primarily to retire the March 2006 secured notes (2006 Notes). This refinancing resulted in the $2.4 million write-off of unamortized debt discount and debt issuance expenses in the second quarter of 2007. In March 2006, we issued and sold $10 million in principal amount of secured notes due March 10, 2009 (2006 Notes), with cash interest at the rate of 14% per annum, along with warrants to purchase an aggregate of 1.75 million shares of our Class A Common Stock at an exercise price of $2.40 per share (2006 Warrants). The 2006 Notes provide for optional in-kind interest payments, but we have paid all interest due under the 2006 Notes in cash.

Our bank line of credit expires in June 2010, and our maximum line of credit is $22 million. Borrowings at any time are limited to an amount based principally on accounts receivable levels as defined in the amended line of credit agreement. Our potential borrowings under the amended line of credit agreement is also reduced by the amounts of letters of credit outstanding which totaled about $0.7 million at September 30, 2008. There were no borrowings outstanding under our line of credit at September 30, 2008.

In December 2006, we borrowed $5 million under 3 year notes secured by accounts receivable of one customer. Effective March 28, 2008, we paid this debt in full and modified the terms of the note to a line of credit. Under the line of credit agreement, the maximum indebtedness of the line is equal to $3.2 ($2.2 million at September 30, 2008) less $0.2 million per month for the number of full months that have expired since the effective date. The remaining term for which we will be able to draw down the line of credit is fifteen months at September 30, 2008, and the maturity date is December 28, 2009. The borrowing rate is London InterBank Offered Rate (LIBOR) plus 500 basis points. As of September 30, 2008, the Company had not borrowed against this line.

Cash interest expense on notes payable in the nine months ending September 30, 2008 was lower than in the comparable period in 2007 due the effect of higher priced March 2006 debt. The interest cost of capital lease financings was about the same in both periods.

Deferred financing fees relate to the up-front expenditures at the time of contracting for notes payable and our revolving line of credit facility, which are being amortized over the term of the note or the life of the facility. The higher 2007 amortization reflects fees to borrow the 2006 Notes.

The amortization of debt discount for the nine months ending September 30, 2007, is related to the 2006 notes that were written off with the 2007 refinancing.

27

Our total interest and financing expense decreased for the three- and nine-months ended September 30, 2008 versus the comparable period of 2007 primarily as a result of retiring our incremental March 2006 and December 2006 borrowings.

Other income/(expense), net:

Other income/(expense), net for the nine months end September 30, 2008 consisted primarily of $0.6 million of interest earned on investment accounts and foreign currency translation/transaction gain or loss, which is dependent on international fluctuations in exchange rates. In the nine months ended September 30, 2008, the Company recorded a loss of $0.7 million from the decline in the fair market value of certain securities considered to be other than temporary and recognized a corresponding expense. The other components of other income/(expense), net typically remain comparable between periods.

Income taxes:

We have recorded a full valuation allowance for deferred tax assets as a result of the uncertainty regarding our ability to fully realize our net operating loss carry-forwards and other deferred tax assets. Income tax expense of $0.1 million and $0.3 million, respectively, was recorded for the three- and nine-months ended September 30, 2008 based on projected annual effective tax rates. The projected annual effective tax rate is calculated using alternative minimum taxes (AMT) due on income, for which a valuation allowance has been provided for the AMT credit carryforward.

Discontinued Operations — Enterprise assets:

In 2007, the Company sold its Enterprise division operations, which had previously been included in our Commercial Segment. Their operations and cash flows of the business have been eliminated from those of continuing operations and the Company has no significant involvement in the operations since the disposal transactions. Accordingly, the assets, liabilities, results of operations, and cash flows for the Enterprise assets have been classified as discontinued operations for all periods presented in the Consolidated Financial Statements included in this Quarterly Report onForm 10-Q in accordance with Statement of Financial Accounting Standards No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets(Statement No. 144).

Effective January 1, 2007, the Company sold two of its three Enterprise units to strategic buyers for common stock in the acquiring publicly traded companies valued at approximately $1 million and earn-out arrangements. During the nine months ended September 30, 2008, we wrote down the investments by about $0.7 million. The Company does not currently expect to receive material payments from the earn-out arrangement. During May 2007, the last Enterprise unit was sold for $4 million in cash of which $0.2 was in escrow that was released in June 2008, a $1 million18-month note, and $0.2 million in equity interest.

Net income/(loss):

	Three Months									Nine Months
	Ended September 30,				2008 vs. 2007					Ended September 30,					2008 vs. 2007
($ in millions)	2008		2007		$		%			2008		2007			$		%
Net income/(loss)	$	2.8	$	1.8	$	1.0		56	%	$	19.3	$	(3.7	)	$	23.0		622	%

Net income increased for the three- and nine-months ended September 30, 2008 versus the comparable three- and nine-months of 2007 due primarily to increased revenue and gross profit from continuing operations, the absence of the effect of discontinued operations, a one-time payment of $8.1 million net from the sale of a patent, and other factors discussed above.

28

Liquidity and Capital Resources

	Nine Months
	Ended
	September 30,						2008 vs. 2007
($ in millions)	2008			2007			$			%
Net cash and cash equivalents provided by/(used in):
Continuing operations
Income/(loss)	$	19.3		$	(3.5	)	$	22.8			651	%
Non-cash charges		9.8			12.2			(2.4	)		(20	)%
Net changes in working capital including changes in other assets		(1.2	)		(3.1	)		1.9			61	%
Cash provided by operating activities		27.9			5.6			22.3			398	%
Purchases of property and equipment		(2.2	)		(1.9	)		(0.3	)		(16	)%
Capitalized software development costs		(0.4	)		(1.2	)		0.8			67	%
Proceeds from new borrowings		—			10.0			(10.0	)		(100	)%
Other financing activities		(2.6	)		(9.0	)		6.4			71	%
Cash provided by continuing operations		22.7			3.5			19.2			549	%
Discontinued operations
Operating activities		—			(3.3	)		3.3			100	%
Investing activities		—			4.0			(4.0	)		(100	)%
Cash provided by discontinued operations		—			0.7			(0.7	)		100	%
Net increase in cash	$	22.7		$	4.2		$	18.5			440	%
Days revenue outstanding in accounts receivable, including unbilled receivables		89			85

Capital resources:  We have funded our operations, acquisitions, and capital expenditures primarily using cash generated by our operations, as well as the capital leases to fund fixed asset purchases.

Sources and uses of cash:  The Company’s cash and cash equivalents balance was approximately $38.7 million at September 30, 2008, a $24.2 million increase from $14.5 million at September 30, 2007.

Operations:  Cash generated by continuing operations increased to $22.7 million for the nine months ended September 30, 2008 compared to cash provided by continuing operations of $3.5 million for the same period in 2007. This change is primarily due to higher earnings for the nine months ended September 30, 2008 and the one-time receipt of $8.1 million by the Company for the sale of a patent. Discontinued operations generated $0.7 million in 2007. The operations and cash flows of the discontinued operations have been eliminated from those of continuing operations and the Company has no significant involvement in the operations since the disposal transaction.

Investing activities:  Fixed asset additions were approximately $2.2 million for the nine months ended September 30, 2008, and $1.9 million for the nine months ended September 30, 2007. Also, investments were made in development of carrier software for resale which had reached the stage of development calling for capitalization, in the amounts approximately $0.4 million and $1.2 million for the nine months ended September 30, 2008 and 2007, respectively.

Financing activities:  We have a $22 million revolving credit line with our principal bank through June 2010 and the borrowing rate was the bank’s prime rate, which was 5.00% per annum at September 30, 2008. Borrowings at any time are limited based mainly on accounts receivable levels as defined in the amended line of credit agreement. The line of credit available is also reduced by the amount of letters of credit outstanding, which was $0.7 million at September 30, 2008. As of September 30, 2008, we had no borrowings outstanding under our bank line of credit and had approximately $15.8 million of unused borrowing availability under the line.

29

In June 2007, we refinanced $10 million of our March 2006 secured notes with a with a five year note payable to our principal bank. The borrowing rate under the new note was the bank’s prime rate plus 0.25% per annum, (5.25% at September 30, 2008) and the note is repayable in equal monthly installments of $0.2 million plus interest.

Our line of credit and term loan agreement contains covenants requiring us to maintain a minimum adjusted quick ratio and a minimum liquidity ratio; as well as other restrictive covenants including, among others, restrictions on our ability to merge, acquire assets above prescribed thresholds, undertake actions outside the ordinary course of our business (including the incurrence of indebtedness), guarantee debt, distribute dividends, and repurchase our stock, and minimum tangible net worth. The bank credit agreement also contains a subjective covenant that requires (i) no material adverse change in the business, operations, or financial condition of the Company to occur, or (ii) no material impairment of the prospect of repayment of any portion of the borrowings under the agreement; or (iii) no material impairment of value or priority of the lenders security interests in the collateral of the agreement. If our performance does not result in compliance with any of our restrictive covenants, we would seek to further modify our financing arrangements, but there can be no assurance that the bank would not exercise its rights and remedies under its agreement with us, including declaring all outstanding debt due and payable. As of September 30, 2008, we were in compliance with the covenants related to our line of credit and term loan agreement and we believe that the Company will continue to comply with these covenants.

On December 28, 2006, we issued a $5 million note for a term of three years, secured by accounts receivable of one customer to an institutional lender. Effective March 28, 2008, we paid our December 2006 term loan in full and modified the terms of the note to a line of credit. Under the line of credit agreement, the maximum indebtedness of the line is equal to $3.2 million ($2.2 million at September 30, 2008) less $0.2 million per month for the number of full months that have expired since the effective date. The remaining term for which we are able to draw down the line of credit is fifteen months at September 30, 2008, and the maturity date is December 28, 2009. The borrowing rate is London InterBank Offered Rate (LIBOR) plus 500 basis points. As of September 30, 2008, we had no borrowings outstanding and $2.2 million in unused borrowing availability under the line.

We currently believe that we have sufficient capital resources with cash generated from operations as well as cash on hand to meet our anticipated cash operating expenses, working capital, and capital expenditure and debt service needs for the next twelve months. We have borrowing capacity available to us in the form of capital leases as well as a line of credit arrangement with our principal bank which expires in June 2010. We may also consider raising capital in the public markets as a means to meet our capital needs and to invest in our business. Although we may need to return to the capital markets, establish new credit facilities or raise capital in private transactions in order to meet our capital requirements, we can offer no assurances that we will be able to access these potential sources of funds on terms acceptable to us or at all.

Off-Balance Sheet Arrangements

As of September 30, 2008, we had standby letters of credit issued on our behalf of approximately $0.7 million, principally pursuant to a contracting requirement for our Government segment’s City of Baltimore services contract.

30

Contractual Commitments

As of September 30, 2008, our most significant commitments consisted of term debt, obligations under capital leases and non-cancelable operating leases. We lease certain furniture and computer equipment under capital leases. We lease office space and equipment under non-cancelable operating leases. As of September 30, 2008 our commitments consisted of the following:

	Within 12		1-3		3-5		More than
($ in millions)	Months		Years		Years		5 Years		Total
Term notes payable	$	2.6	$	4.6	$	1.7	$	—	$	8.9
Capital lease obligations		2.1		2.3		0.6		—		5.0
Operating leases		3.3		4.6		1.1		0.6		9.6
Total contractual commitments	$	8.0	$	11.5	$	3.4	$	0.6	$	23.5

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

There have not been any material changes to our interest rate risk as described in Item 7A of our 2007 Annual Report onForm 10-K.

Foreign Currency Risk

For the three- and nine-months ended September 30, 2008, we generated $2.1 million and $5.9 million of revenue, respectively, outside the U.S., mostly denominated in U.S. dollars. A change in exchange rates would not have a material impact on our Consolidated Financial Statements. As of September 30, 2008, we had no billed accounts receivable that were denominated in foreign currencies and would be exposed to foreign currency exchange risk. During 2008, our average receivables and average deferred revenue balances subject to foreign currency exchange risk were $0.1 million and $0.8 million, respectively. We have not had a material balance of unbilled receivables denominated in foreign currency at any point in 2008.

There have not been any other material changes to our foreign currency risk as described in Item 7A of our 2007 Annual Report onForm 10-K.

Item 4.   Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, and summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required byRule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2008.

There have been no changes in the Company’s internal control over financial reporting during the latest fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

31

PART II. — OTHER INFORMATION

Item 1.   Legal Proceedings

In November 2001, a shareholder class action lawsuit was filed against us, certain of our current officers and a director, and several investment banks that were the underwriters of our initial public offering (the “Underwriters”): Highstein v. TeleCommunication Systems, Inc., et al., United States District Court for the Southern District of New York, Civil ActionNo. 01-CV-9500. The plaintiffs seek an unspecified amount of damages. The lawsuit purports to be a class action suit filed on behalf of purchasers of our Class A Common Stock during the period August 8, 2000 through December 6, 2000. The plaintiffs allege that the Underwriters agreed to allocate our Class A Common Stock offered for sale in our initial public offering to certain purchasers in exchange for excessive and undisclosed commissions and agreements by those purchasers to make additional purchases of our Class A Common Stock in the aftermarket at pre-determined prices. The plaintiffs allege that all of the defendants violated Sections 11, 12 and 15 of the Securities Act, and that the underwriters violated Section 10(b) of the Exchange Act, andRule 10b-5 promulgated thereunder. The claims against us of violation ofRule 10b-5 have been dismissed with the plaintiffs having the right to re-plead. On February 15, 2005, the District Court issued an Order preliminarily approving a settlement agreement among class plaintiffs, all issuer defendants and their insurers, provided that the parties agree to a modification narrowing the scope of the bar order set forth in the settlement agreement. The parties agreed to a modification narrowing the scope of the bar order, and on August 31, 2005, the court issued an order preliminarily approving the settlement. On December 5, 2006, the United States Court of Appeals for the Second Circuit overturned the District Court’s certification of the class of plaintiffs who are pursuing the claims that would be settled in the settlement against the underwriter defendants. Plaintiffs filed a Petition for Rehearing and Rehearing En Banc with the Second Circuit on January 5, 2007 in response to the Second Circuit’s decision. On April 6, 2007, the Second Circuit denied plaintiffs’ rehearing petition, but clarified that the plaintiffs may seek to certify a more limited class in the District Court. On June 25, 2007, the District Court signed an Order terminating the settlement. On November 13, 2007, the issuer defendants in certain designated “focus cases” filed a motion to dismiss the second consolidated amended class action complaints that were filed in those cases. On March 26, 2008, the District Court issued an Opinion and Order denying, in large part, the motions to dismiss the amended complaints in the “focus cases.” We intend to continue to defend the lawsuit until the matter is resolved. We have purchased Directors and Officers insurance policy which we believe should cover any potential liability that may result from these claims, but can provide no assurance that any or all of the costs of the litigation will ultimately be covered by the insurance. No reserve has been created for this matter. More than 300 other companies have been named in nearly identical lawsuits that have been filed by some of the same law firms that represent the plaintiffs in the lawsuit against us.

On July 12, 2006, we filed suit in the United States District Court for the Eastern District of Virginia against Mobile 365 (now Sybase 365, a subsidiary of Sybase Inc.) and WiderThan Americas for patent infringement related to U.S. patent No. 6,985,748, Inter-Carrier Short Messaging Service Providing Phone Number Only Experience (“the ’748 patent”), issued to the Company. We resolved the matter with regard to WiderThan Americas, and, during the second quarter of 2007, we received a favorable jury decision that Sybase 365 infringed the claims of our patent. The jury awarded us a one-time monetary payment in excess of $10 million for past damages and a 12% royalty. The jury also found Sybase 365’s infringement willful and upheld the validity of the patent. After the jury verdict, both parties filed post-trial motions. The court denied Sybase 365’s post-trial motion for a new trial or a judgment in its favor, granted TCS’s motion for a permanent injunction prohibiting any further infringement by Sybase 365, but stayed the injunction pending the outcome of any appeal that may be filed, reduced the jury verdict damages award by $2.2 million and vacated the jury finding of willful infringement. We expect that Sybase 365 will appeal from the final judgment of the district court to U.S. Court of Appeals for the Federal Circuit. In the first quarter of 2008, Sybase 365 filed a request for reexamination of the ’748 patent claiming that the patent is invalid. In the second quarter of 2008, the United States Patent and Trademark Office granted the request and began the requested reexamination of the ’748 patent. There can be no assurances to what extent the matter will continue to be successful, if at all. Additionally, we could become subject to counterclaims or

32

further challenges to the validity of the ’748 patent. To date, the Company has not received or recorded any amounts related to this jury award.

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

Item 1A.   Risk Factors

There have not been any material changes to the information previously disclosed in “Item 1A. Risk Factors” in our 2007 Annual Report onForm 10-K, except for the following:

Because our business may not generate sufficient cash to fund operations, we may not be able to continue to grow our business if we are unable to obtain additional capital when needed.

We believe that our cash and cash equivalents, and our bank line of credit, coupled with the funds anticipated to be generated from operations will be sufficient to finance our operations for at least the next twelve months. Although we currently believe that we have sufficient capital resources to meet our anticipated working capital and capital expenditures requirements beyond the next twelve months, unanticipated events could cause us to fall short of our capital requirements. The capital and credit markets have been experiencing extreme volatility and disruption for more than twelve months. In recent weeks, the volatility and disruption have reached unprecedented levels. Continued adverse developments in the capital and credit markets, including those through recession, downturn or otherwise, may limit our ability to successfully obtain additional capital on favorable terms, or at all. In addition, unanticipated events could cause us to violate our bank line of credit covenants causing the bank to foreclose on the lineand/or opportunities and may make it necessary for us to return to the public markets, or establish new credit facilities or raise capital in private transactions in order to meet our capital requirements. We cannot assure you that we will be able to raise additional capital in the future on terms acceptable to us, or at all.

Our line of credit and term loan agreement contains covenants requiring us to maintain a minimum adjusted quick ratio and a minimum liquidity ratio; as well as other restrictive covenants including, among others, restrictions on our ability to merge, acquire assets above prescribed thresholds, undertake actions outside the ordinary course of our business (including the incurrence of indebtedness), guarantee debt, distribute dividends, and repurchase our stock, and minimum tangible net worth. The agreement also contains a subjective covenant that requires (i) no material adverse change in the business, operations, or financial condition of our Company occur, or (ii) no material impairment of the prospect of repayment of any portion of the bank credit agreement; or (iii) no material impairment of value or priority of the lenders security interests in the collateral of the bank credit agreement. We believe that we will continue to comply with our restrictive covenants under our debt agreements. If our performance does not result in compliance with any of the restrictive covenants, or if our line of credit agreement lender seeks to exercise its rights under the subjective acceleration clause referred to above, we would seek to further modify our financing arrangements, but there can be no assurance that our debt holders would not exercise their rights and remedies under their agreements with us, including declaring all outstanding debt due and payable.

We are exposed to counterparty credit risk and there can be no assurances that we will manage this risk effectively, if at all.

We are exposed to many different industries and counterparties, and regularly interact with counterparties in various industries. The default, insolvency or other inability of a source of financing or significant counterparty to perform its obligations under an agreement or transaction, including, without limitation, as a result of the rejection of an agreement or transaction by a counterparty in bankruptcy proceedings, could have a material adverse effect on our business.

33

Item 6.   Exhibits

Exhibit
Numbers			Description
	31	.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31	.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32	.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	32	.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

34

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on the 4th day of November 2008.

TELECOMMUNICATION SYSTEMS, INC.

By:  /s/  Maurice B. Tosé

Maurice B. Tosé

Chairman, President and Chief Executive Officer

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

/s/Maurice B. Tosé Maurice B. Tosé November 4, 2008	Chairman, President and Chief Executive Officer (Principal Executive Officer)
/s/Thomas M. Brandt, Jr. Thomas M. Brandt, Jr. November 4, 2008	Senior Vice President and Chief Financial Officer (Principal Financial Officer)

35