United States Securities and Exchange Commission

Form 10-Q

(Mark One)

For the quarterly period ended March 31, 2005
or

For the transition period from             to            .
Commission File Number: 0-21213

LCC International, Inc.

Registrant’s telephone number, including area code: (703) 873-2000

Not Applicable

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

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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes o No o

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of April 29, 2005 the registrant had outstanding 20,304,152 shares of Class A Common Stock, par value $0.01 per share (the “Class A Common Stock”) and 4,427,577 shares of Class B Common Stock, par value $0.01 per share (the “Class B Common Stock”).

LCC International, Inc. and Subsidiaries

Quarterly Report on Form 10-Q
For the quarter ended March 31, 2005

INDEX

2

PART I: FINANCIAL INFORMATION

Item 1: Financial Statements

LCC International, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

3

LCC International, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets
(In thousands, except per share data)

See accompanying notes to condensed consolidated financial statements.

4

LCC International, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

5

LCC International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements
(Unaudited)

(1) Description of Operations

     LCC International Inc. a Delaware Corporation (“LCCI”), was formed in 1983. Unless the context indicates otherwise, the terms the “Company”, “we”, “us”, and “our” refer herein to LCCI.

     We provide integrated end-to-end solutions for wireless voice and data communication networks with service offerings to include high level technical consulting, to system design and deployment, to ongoing operations and maintenance services. We operate in a highly competitive environment subject to rapid technological change and emergence of new technologies. Historically, the key drivers of changes in our wireless services business have been (1) the issuance of new or additional licenses to wireless operators; (2) the introduction of new services or technologies; (3) increases in the number of subscribers served by wireless operators; (4) the increasing complexity of wireless systems in operation; and (5) changes in wireless infrastructure spending and deployment. Although we believe that our services are transferable to emerging technologies, rapid changes in technology and deployment could have an adverse financial impact on us.

(2) Basis of Presentation

     We have prepared the condensed consolidated financial statements included herein without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and they reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods.

     Certain information and footnote disclosure normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2004. Operating results for the interim periods are not necessarily indicative of results for an entire year.

(3) Equity-Based Compensation

     We account for equity-based compensation arrangements in accordance with the provisions of Accounting Principles Board (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations including FASB Interpretation No. 44, and comply with the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” The Company has adopted the disclosure provisions of SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure Amendment of SFAS Statement No. 123.” All equity-based awards to non-employees are accounted for at their fair value in accordance with SFAS No. 123. Under APB No. 25, compensation expense is based upon the difference, if any, on the date of grant between the fair value of our stock and the exercise price.

     Our pro-forma net income (loss) would have been the following had compensation cost for our stock based-compensation plans and employee stock purchase plan been determined on the fair value at the grant dates for awards under those plans, consistent with SFAS No. 123.

6

(4) Other Comprehensive Income (Loss)

     Comprehensive income (loss) is defined as net income (loss) plus the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Other comprehensive income (loss) refers to revenues, expenses, gains and losses that under accounting principles generally accepted in the United States of America are included in comprehensive income (loss), but excluded from net income (loss). Accumulated other comprehensive income (loss) consists solely of foreign currency translation adjustments at March 31, 2004 and 2005. Comprehensive income (loss) for the three months ended March 31 is as follows (in thousands).

(5) Related Party Transactions

     RF Investors, a subsidiary of Telcom Ventures, owns the Class B Common Stock shares outstanding, which have ten-to-one voting rights over the Class A Common Stock shares and therefore represent approximately 69% voting control.

     Prior to our initial public offering, both our employees and the employees of Telcom Ventures were eligible to participate in our life, medical, dental and 401(k) plans. In connection with our initial public offering in 1996, we agreed pursuant to an Overhead and Administrative Services Agreement to allow the employees of Telcom Ventures to continue to participate in our employee benefit plans in exchange for full reimbursement of our cash costs and expenses. We billed Telcom Ventures $77,000 during the year ended December 31, 2004 and $20,000 for the first quarter of 2005 for payments made by us pursuant to this agreement. We received reimbursements from Telcom Ventures of $82,000 during 2004 and $14,000 for the first quarter of 2005. At December 31, 2004 and March 31, 2005, outstanding amounts associated with payments made by us under this agreement were $1,000 and $7,000, respectively, and are included as due from related parties and affiliates within the consolidated balance sheets in the accompanying financial statements.

     During the three months ended March 31, 2005, we provided services to two customers where Telcom Ventures has a minority investment. Dr. Rajendra Singh, a director of Telcom Ventures, is a member of our Board of Directors. Revenues earned from these customers were $156,000 for the quarter ending March 31, 2005. Billed and unbilled receivables outstanding were $211,000 as of December 31, 2004 and $251,000 as of March 31, 2005, and are included in trade accounts receivable and unbilled receivables in the accompanying condensed consolidated balance sheet.

     In July 2002, we acquired 51 percent of the outstanding shares of Detron LCC Network Services B.V. (“Detron”), a newly formed corporation in the Netherlands. We acquired the shares from Westminster Capital B.V. (“Westminster”) which transferred the shares to Detron in January 2003. Detron has certain ongoing transactions with Westminster. Under a five-year lease agreement for office space, Detron recorded approximately $36,000 and $48,000 of rent expense for the quarters ended March 31, 2004 and 2005, respectively. During the first quarters of 2004 and 2005, Detron seconded various idle employees to Detron Telematics, Westminster’s wholly-owned subsidiary and recorded revenue of approximately $46,000 and $18,000, respectively. During the quarters ended March 31, 2004 and 2005, Detron recorded approximately $42,000 and $0, respectively, of management and advisory fees.

(6) Restructuring Charge

     During the second quarter of 2002, we adopted a restructuring plan and recorded a restructuring charge of $10.0 million. During the fourth quarter of 2002, we recorded an additional $3.5 million relating to the costs of excess office space. The restructuring plan was in response to the low utilization of professional employees caused by the completion of several large fixed-price contracts and the difficulty in obtaining new contracts as a result of the slowdown in wireless telecommunications infrastructure spending. The cost of the severance and associated expenses was approximately $1.0 million and resulted in a work force reduction of approximately 140 people. In addition, we had excess facility costs relative to the space occupied by the employees affected by the reduction in force, space previously occupied by divested operations, and reduced business use of office space resulting from a continued trend for clients to provide professional staff office space for our employees while performing their services. The charge for the excess office space was approximately $12.5 million, which included $2.0 million in written-off leasehold improvements and other assets related to the excess space. The facility charge equals the existing lease obligation, less the anticipated rental receipts to be received from existing and potential subleases. This charge required significant judgments about the length of time that space will remain vacant, anticipated cost escalators and operating costs associated with the leases, market rate of the subleased space, and broker fees or other costs necessary to market the space. As of March 31, 2005, the restructuring charge calculation assumes we will receive $10.6 million in sublease income, of which $8.3 million is committed.

7

     During the first quarter of 2003, we reversed excess severance payable of approximately $0.2 million. During the third quarter of 2003, we reoccupied a portion of our office space in McLean, Virginia and reversed $0.4 million of the payable and recorded an increase in the restructuring payable of $0.5 million related to an estimated increase in the time period expected to sublease space in our London office. During the second quarter of 2004, we reversed $0.9 million of the payable due to reoccupied office space in McLean, Virginia and a decrease in the estimated time period expected to sublease space in our McLean and London offices. During the fourth quarter of 2004 we reversed an additional $0.2 million of the payable due to reoccupied office space in McLean, Virginia.

     A reconciliation of the restructuring activities is as follows:

     At December 31, 2004 and March 31, 2005, the restructuring payable was classified as follows:

8

(7) Investments

     We held 1,666,666 shares of Class B Common Stock of NextWave Telecom, Inc. (“NextWave Telecom”) which is the parent corporation of NextWave Personal Communications Inc. We acquired the shares of NextWave Telecom in May 1996 for a purchase price of $5.0 million in connection with a series of transactions entered into between NextWave Telecom and us under an agreement dated March 12, 1996 (the “March Agreement”). We also acquired warrants to purchase an additional 123,356 shares of Class B Common Stock of NextWave Telecom at $3.00 per share. Under the March Agreement, NextWave Telecom agreed to engage us to provide not less than (a) $14.0 million of radio frequency engineering services and (b) $35.0 million of system deployment services. These services were to be provided in increments of twenty-percent (20%) each year during the five-year period following the execution of the March Agreement. NextWave Telecom filed for bankruptcy protection on December 23, 1998. The March Agreement was rejected by NextWave Telecom upon confirmation of its bankruptcy plan on March 2, 2005. On March 23, 2005, we agreed to settle our rejection damages claims against Nextwave Telecom by executing a Network Deployment Agreement whereby Nextwave Telecom agreed to engage us to perform $30.0 million of radio frequency engineering and system deployment services over three years in future markets commencing with Las Vegas.

     On August 4, 2003 we, through our wholly owned subsidiary LCC China Services, L.L.C., closed an investment in a newly created entity based in China, Beijing LCC Bright Oceans Communication Consulting Co. Ltd. (“LCC/BOCO”). We contributed approximately $1.1 million for a 49.0% share of LCC/BOCO’s registered capital. Bright Oceans Inter-Telecom Corporation, a Chinese publicly traded network management and systems integrator (“BOCO”), contributed approximately $1.1 million to hold the remaining 51.0% of LCC/BOCO’s registered capital. We account for the investment in LCC/ BOCO using the equity method of accounting. BOCO has advised us that it has made a strategic decision to exit the wireless telecommunications infrastructure services business and we have agreed to dissolve the joint venture. We have undertaken to transfer selected projects and joint venture employees to our wholly-owned Chinese subsidiary, which continues to pursue projects independently with customers in China. We expect to liquidate this investment in the third quarter of 2005.

(8) Line of Credit

     In 2003, Detron established a line of credit with NMB-Heller N.V. (“NMB”). The line of credit provides that NMB will provide credit to Detron in the form of advance payments collateralized by Detron’s outstanding receivables. The agreement provides for NMB to advance up to 75% of the receivable balance. There is no maximum on the amount of receivables Detron can assign to NMB. Detron must repay the advances from NMB within 90 days or upon customer payment whichever occurs first. Interest on the advance payments will be calculated at a rate equal to NMB’s overdraft base rate plus 2% subject to a minimum of 5.75% per year. The agreement had an initial term of two years and was terminated on January 26, 2005 under mutual agreement. As of December 31, 2004, Detron had $0.1 million outstanding under the credit facility.

(9) Commitments and Contingencies

     We are party to various non-material legal proceedings and claims incidental to our business. Management does not believe that these matters will have a material adverse affect on our consolidated results of operations or financial condition.

(10) Segment reporting

     SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information established standards for reporting information about the operating segments in interim and annual financial reports issued to stockholders. It also established standards for related disclosures about products and services and geographic areas. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and assess performance. Our chief operating decision-making group is the Executive Committee, which comprises the Chief Executive Officer and our Senior Vice Presidents.

     Our operating segments are defined geographically by region (see Overview), namely the Americas region and the EMEA region. Both regions provide design and deployment services, operations and maintenance services and technical consulting services.

     Segment detail is summarized as follows (in thousands):

9

     A reconciliation of totals reported for the operating segments to the applicable line items in the consolidated financial statements is as follows (in thousands):

(11) Receivables

     For the year ended December 31, 2004 and the quarter ended March 31, 2005, we derived 81.7% and 83.7%, respectively, of total revenues from our ten largest customers, indicating significant customer concentration risk with our receivables.

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

     This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Exchange Act of 1934, which are made under the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934. These statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In some cases, these statements can be identified by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “will,” and “would” or similar words. The statements that contain these words should be read carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial position, or state other forward-looking information. These statements include, among others, our estimates of future revenues and our expectations that those revenues will fluctuate significantly, our belief that we have adequate cash, available borrowing capacity and short-term investments which will satisfy cash requirements for at least the next twelve months, and our ability to pursue and secure new business opportunities.

     The factors listed under “Risk Factors” in our annual report on Form 10-K for the fiscal year ended December 31, 2004, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this report and presented elsewhere by management from time to time. Such factors, among others, may have a material adverse effect upon our business, financial condition, and results of operations. We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Accordingly, you are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made.

Overview

     We provide integrated end-to-end solutions for wireless voice and data communications networks with offerings ranging from high level technical consulting, to system design and turnkey deployment, to operations and maintenance services. We have been successful on occasion in using initial opportunities to provide high level technical consulting services to secure later-stage system design and deployment contracts. Long-term engagements to provide design and deployment services also enable us to secure ongoing operations and maintenance projects. Providing ongoing operations and maintenance services also positions us well for additional opportunities as new technologies continue to be developed and wireless service providers must either upgrade their existing networks or deploy new networks utilizing the latest available technologies.

10

     We provide these services through a regional organization, which comprises two principal regions and several smaller divisions. Our primary operating segments are Americas and EMEA (Europe, Middle East and Africa).

     Our primary sources of revenues are from engineering design and system deployment services. Revenues from services are derived both from fixed price and time and materials contracts. We recognize revenues from fixed price service contracts using the percentage-of-completion method. With fixed price contracts, we recognize revenues based on the ratio of individual contract costs incurred to date on a project compared with total estimated costs on completion. Anticipated contract losses are recognized as they become known and estimable. We recognize revenues on time and materials contracts as the services are performed.

     Cost of revenues includes direct compensation and benefits, living and travel expenses, payments to third-party subcontractors and consultants, equipment rentals, expendable computer software and equipment, and allocated, or directly attributed, facility and overhead costs identifiable to projects.

     General and administrative expenses consist of compensation, benefits, office and occupancy, and other costs required for the finance, human resources, information systems, and executive office functions. Sales and marketing expenses consist of salaries, benefits, sales commissions, travel and other related expenses required to implement our marketing, sales and customer support plans.

     We generate cash from fixed price contracts by billings associated with contract milestones, which are typically agreed with our customers at the time the contracts are negotiated. For our time and materials contracts, we usually bill our customers on a monthly basis as services are performed. On large network deployment contracts, which involve the design and construction of complex wireless networks, it is increasingly common for our customers to require fewer contract milestones than in previous years. This results in extending the periods during which we are obliged to fund our operating costs until a milestone can be billed to the customer. This increases the capital that we require to operate the business, and is evidenced by increases in unbilled receivables on our balance sheet. This is an integral part of our business and we are constantly striving to manage our working capital requirements. We expect to experience increasing demands for working capital in the future as we grow our revenues.

     Another critical statistic that we monitor is our contract backlog, which at March 31, 2005, comprised firm backlog of $84.9 million and implied backlog of $5.6 million. We expect that our contract backlog will vary from time to time as we deliver contract revenues and win new awards.

     Since 2001, we have engaged in a number of business dispositions, acquisitions and investments, some of which have either generated significant cash proceeds or created significant requirements for cash and these transactions significantly affect the year-to-year comparability of our financial statements. In 2001, we sold certain of our interests in NextWave Telecom, Inc. or NextWave for cash proceeds of about $21 million. Later in that year and during 2002, we acquired operations in our EMEA region, which required cash of approximately $10 million. In 2003 we sold further interests in NextWave for another $1 million and we initiated our investment in the joint venture in China, which required a total cash commitment of about $1.1 million. In 2004, we sold an unsecured claim against NextWave for $0.8 million and recorded an impairment charge of $0.2 million for our investment in the joint venture in China, following changes in the local business conditions. We expect to continue to consider business dispositions, acquisitions and investments as a way of supporting our longer-term strategies.

11

Trends That Have Affected or May Affect Results of Operations and Financial Condition

     The major trends that have affected or may affect our business are as follows:

•

project related revenues derived from a limited set of customers in each market where we do business;

•

our customers have faced difficulties in obtaining financing to fund the development, expansion and upgrade of their networks;

•

the acceleration or the delay associated with the introduction of new technologies and services by our customers;

•

the management and the services composition of our fixed price contracts;

•

the impact of the percentage of subcontracted work (versus self perform work) on our large programs and the associated margin degradations; and

•

increased spending by wireless service providers in the areas of network design, deployment and optimization.

     Our business is characterized by a limited number of projects awarded by a limited number of customers. This can lead to volatility in our results as projects initially ramp up and then wind down. As projects are completed, we are faced with the task of replacing project revenues with new projects, either from the same customer or from new customers. In addition, the wireless industry is composed of a relatively small number of wireless service providers and equipment vendors, and this inevitably leads to issues of customer concentration. Consequently, our business may be affected in any single market by the changing priorities of a small group of customers.

     During 2001 and 2002, some of our customers faced difficulty in obtaining the necessary financing to fund the development, expansion and upgrade of their networks. The state of the wireless industry and the overall financial market have an impact on our business, and to the extent there is a slowdown in the wireless sector of the overall economy in the future, there could be an adverse effect on the company.

     We tend to benefit from projects undertaken by our customers to introduce new technologies and services in their networks and we tend to suffer when projects are delayed. Revenues from 3G networks constituted approximately 7% and 17% of our total revenues for the three months ended March 31, 2004 and 2005, respectively, and it is expected to continue to be an area of business growth in the future. A large proportion of the contracts awarded by our customers are fixed price, and we expect this trend to continue. We have experienced an increase in the percentage of fixed price contracts awarded by our customers, and we expect this trend to continue. A recent trend is for the award of fixed price contracts to cover the design and deployment of a certain geographic network area on a full turnkey basis, including planning, engineering design, site acquisition, construction and deployment services.

     In the three months ended March 31, 2005, approximately 39% of our revenues were generated by work done by subcontractors, for construction related activities, compared to 32% for the same period in the previous year. To the extent that these large turnkey projects include a relatively large proportion of construction related activities, we expect that the composition of our revenues by delivery method will vary so as to decrease the proportion of services that we perform ourselves through our own workforce and increase the services that we deliver through third parties, typically subcontractors for construction. A consequence of this change in mix may be to reduce our average gross margins because subcontracted work generally commands lower margins.

     We believe our Americas region may benefit from increased spending by certain United States wireless service providers. This increased spending can be attributed to several trends: (i) the implementation of new technologies such as 3G wireless and broadband wireless; (ii) activity generated by efforts to consolidate networks resulting from merger activity in 2004/2005; (iii) network quality enhancement programs to reduce churn; (iv) network expansion and capacity programs geared toward enabling new and enhanced services; and (v) other miscellaneous network upgrades and enhancements required for market share maintenance and competitive reasons.

     We have also observed an increase in spending on wireless networks in developing countries. However, the increase in worldwide terrorism may affect our business in these countries. For example, the U.S. State Department has issued security advisories for U.S. nationals in Saudi Arabia and certain other countries in the Middle East. While we tend to staff these projects largely with local or regional personnel, we do recognize that undertaking work in such areas at this time carries a higher level of operating and political risk than in other more developed areas.

12

Three Months Ended March 31, 2005
Compared to
Three Months Ended March 31, 2004

Results of Operations

     The discussion below provides information which management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and accompanying notes thereto included elsewhere herein.

Revenues, Cost of Revenues and Gross Margins

Americas

     In the first quarter of 2004, we had already completed significant portions of the implementation plans associated with the large network deployment programs that we won in the second and third quarters of 2003, while our RF/wireless design services exhibited strong growth. Network deployment represented about $17.1 million of revenue in 2004, an increasing percentage of which included construction activities, which we subcontracted to third parties. RF/wireless design services represented about $9.9 million in 2004. Revenues and cost of revenues included $0.3 million and $0.8 million, respectively, for a new service offering undertaken in the quarter and now curtailed. In addition, cost of revenues and gross margins were affected by costs of $0.4 million, which represented labor, recruiting and overhead expenses for RF engineers hired in the quarter in contemplation of specific future customer needs.

     In the first quarter of 2005, revenues from network deployment contracts declined $6.7 million in North America compared to first quarter 2004 due primarily to the winding down of the US Cellular turnkey contract. Revenues from RF contracts in North America declined $1.8 million over the same period due primarily to completion of Nokia design contracts. However, revenues from South and Central America increased $0.9 million due primarily to the start of new projects in Brazil and Mexico. Gross margins improved from 13.4% in the first quarter of 2004 to 16.0% for the same period. This improvement occurred because of a higher percentage of revenues throughout the Americas being derived from RF contracts as opposed to network deployment contracts.

EMEA

     In 2004, our total revenues of $17.2 million for the region represented a larger portfolio of activities, including our projects in Algeria and our recently awarded technical consulting contract in Saudi Arabia. During the quarter we expensed approximately $0.2 million of start up costs associated with our contract in Saudi Arabia.

     The period-to-period increase in revenues for the first quarter of 2005 is attributable to a $7.0 million increase in revenues from the technical consulting contract in Saudi Arabia, which had just commenced during the first quarter of 2004. Revenues from Algeria were essentially unchanged. European revenues were down quarter-to-quarter about $1.7 million. Gross margins for the EMEA region improved dramatically due to the Saudi contract.

13

Asia and other

     Revenues for Asia and other were unchanged at $0.8 million in the first quarters of both 2004 and 2005, Gross margin is also essentially unchanged from quarter-to-quarter. In 2004, the revenues were generated by our Wireless Institute and Wireline activities. In 2005, we experienced increased activity in Asia and declines for the Wireless Institute and Wireline activities. Because of declining revenues and poor margins, the Wireline business is being wound down and dissolved.

Operating Expenses

     The increase in sales and marketing expenses from $1.8 million in the first quarter of 2004 to $2.3 million in 2005 is largely attributable to an increase in commission expense relating to the technical consulting contract in Saudi Arabia.

     The increase in general and administrative expenses from $6.2 million in the first quarter of 2004 to $7.3 million in 2005 is largely attributable to severance costs in the Americas, EMEA, and corporate of approximately $0.7 million, and an additional $0.3 million due to higher consulting and audit fees associated with Sarbanes-Oxley Act compliance.

Other Income and Expense

     The loss in Other is attributable to foreign currency transaction losses in the first quarter of 2005 as a result of the U.S. dollar appreciating against the British pound and the Euro.

Tax Benefit or (Expense)

     A tax expense of $0.8 million was recognized in the first quarter of 2005 as compared to a tax benefit of $0.1 million in the first quarter of 2004. The 2005 tax expense arises from international operations that generate taxable income. A valuation allowance has been established for tax benefits associated with losses in the U.S. and certain foreign operations. No tax benefit is recognized for these losses because we do not have sufficient history of taxable income in these jurisdictions to conclude that it is more likely than not that tax benefits associated with net operating loss carryforwards will be realized.

14

Net Income or (Loss)

     In the first quarter of 2004, revenues of $45.0 million generated operating losses of $1.8 million. We reported a loss before taxes of $1.6 million and we recorded a tax benefit of $0.1 million, equivalent to an effective tax rate of 5.5%, resulting in a reported net loss of $1.6 million.

In the first quarter of 2005, revenues of $42.5 million generated operating losses of $1.4 million. We reported a loss before taxes of $1.9 million and we recorded a tax expense of $0.8 million resulting in a reported net loss of $2.8 million.

Liquidity and Capital Resources

     The following discussion relates to our sources and uses of cash and cash requirements during the three months ended March 31, 2004 and 2005.

Sources and Uses of Cash

     In the first quarter of 2004, operating activities increased significantly compared to the prior year, and we reported revenues of $45.0 million for the quarter and operating losses of $1.8 million. Cash used in operating activities increased to $6.1 million, mostly reflecting the increase in receivables following the growth in revenues compared to 2003 and an increase in amounts due from certain key customers with whom extended credit terms were negotiated. Cash used in investing activities was $0.8 million, which was offset by cash provided by financing activities of $1.1 million. Overall, cash decreased by $5.8 million during the quarter.

     In the first quarter of 2005, operating activities were down slightly compared to the prior year, and we reported revenues of $42.5 million for the quarter with an operating loss of $1.4 million. Cash used in operating activities declined to $4.9 million, primarily due to a decrease in accounts payable and accrued expenses representing net payments of $7.7 million during the first quarter of 2005. This was partially offset by a combined decrease of $6.1 million in trade and unbilled receivables representing net collections during the quarter. The combined decline in total receivables of $6.2 million is due to a $12.5 million decline in trade accounts receivable, which was partially offset by an increase of $6.3 million in unbilled receivables reflective of the timing of milestone payment collections on some major contracts. Cash used in investing activities was $0.2 million, which was offset by cash provided by financing activities of $0.2 million. Overall, cash decreased by $4.9 million during the quarter.

Cash Requirements

     During the first quarter of 2005, the principal requirements for cash were to finance operating losses and the decrease in accounts payable and accrued expenses of $7.7 million Although working capital declined by $2.5 million during the quarter, we anticipate that collection of existing unbilled receivables will largely fund our cash requirements as we continue to perform work ahead of contractual billing milestones, primarily in the Americas region. This expectation may be affected by the timing of the milestone payments by major customers. Despite the decline in working capital for the first quarter of 2005, we believe that for at least the next twelve months we have adequate cash and other working capital to fund our operations.

15

     As of March 31, 2005, we had no material cash commitments and we had not engaged in any off-balance sheet financing.

Critical Accounting Policies

     Our critical accounting policies are as follows:

	•	revenue recognition;
	•	allowance for doubtful accounts;
	•	accounting for income taxes; and
	•	restructuring charge.

Revenue recognition

     Our principal sources of revenues consists of design and system deployment services. We provide design services on a contract basis, usually in a customized plan for each client, and generally charge for engineering services on a time and materials or fixed price basis. We generally offer deployment services on a fixed price, time-certain basis. The portion of our revenues from fixed-price contracts was 74.8% and 81.7% for the three months ended March 31, 2004 and 2005, respectively. We recognize revenues on fixed-price contracts using the percentage-of-completion method. With the percentage-of-completion method, expenses on each project are recognized as incurred, and revenues are recognized based on the ratio of the current costs incurred for the project to the then estimated total costs of the project. Accordingly, revenues recognized in a given period depend on, among other things, the costs incurred on each individual project and our then current estimate of the total costs at completion for individual projects. Considerable judgment on the part of our management may be required in determining estimates to complete a project including the scope of the work to be completed, and reliance on the customer or other vendors to fulfill some task(s). If in any period we significantly increase the estimate of the total costs to complete a project, we may recognize very little or no additional revenues with respect to that project. If total contract cost estimates increase, gross profit for any single project may be significantly reduced or eliminated. If the total contract cost estimates indicate that there is a loss, the loss is recognized in the period the determination is made. At December 31, 2004 and March 31, 2005, respectively, we had $34.3 million and $40.6 million of unbilled receivables.

Allowance for doubtful accounts

     The preparation of our consolidated financial statements requires our management to make estimates and assumptions that affect the reported amount of assets, liabilities, contingent assets and liabilities and the reported amounts of revenues and expenses during the reported period. Specifically, our management must make estimates of the probability of collection of accounts receivable. Management specifically analyzes accounts receivable balances, customer concentrations, customer credit-worthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the valuation allowance for doubtful accounts. For the year ended December 31, 2004 and the quarter ended March 31, 2005, we derived 81.7% and 83.7%, respectively, of total revenues from our ten largest customers, indicating significant customer concentration risk with our receivables. These ten largest customers constituted 75.3% and 82.4% of our net receivable balance as of December 31, 2004 and March 31, 2005, respectively. Lastly, we frequently perform services for development stage customers, which carry a higher degree of risk, particularly as to the collection of accounts receivable. These customers may be particularly vulnerable to the current tightening of available credit and general economic slowdown.

16

Accounting for income taxes

     As part of the process of preparing our consolidated financial statements an estimate for income taxes is required for each of the jurisdictions in which we operate. This process requires estimating the actual current tax expense together with assessing temporary differences resulting from differing treatment of items, such as deferred revenues, for tax accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the consolidated balance sheet. We must then assess the likelihood that the deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which the deferred tax assets will be recoverable. In the event the actual results differ from these estimates, we may need to increase or decrease the valuation allowance, which could have a material impact on the financial position and results of operations.

     Considerable management judgment may be required in determining our provision for income taxes, the deferred tax assets and liabilities and any valuation allowance recorded against the net deferred tax assets. We have recorded a valuation allowance of $14.7 million and $16.0 million as of December 31, 2004 and March 31, 2005, respectively, due to uncertainties related to our ability to utilize some of the deferred tax assets before they expire. These deferred tax assets primarily consist of net operating losses carried forward, foreign tax credits and compensation accruals. The net deferred tax assets as of December 31, 2004 and March 31, 2005, remained unchanged at $1.1 million.

Restructuring charge

     In 2002 we recorded restructuring charges of $13.5 million. Included in these restructuring charges was a charge for excess facilities aggregating $12.5 million. This facility charge primarily relates to leased office space, which we no longer occupy. The facility charge equals the existing lease obligation less anticipated rental receipts to be received from existing and potential subleases. This requires significant judgments about the length of time the space will remain vacant, anticipated cost escalators and operating costs associated with the leases, the market rate at which the space will be subleased, and broker fees or other costs necessary to market the space. These judgments were based upon independent market analysis and assessment from experienced real estate brokers. The restructuring charge calculation assumes as of March 31, 2005 that we will receive $10.6 million in sublease income, of which $8.3 million is committed.

Related Party Transactions

     For a description of related party transactions, see note 5 to the consolidated financial statements.

Item 3: Quantitative and Qualitative Disclosures about Market Risk

     We are exposed to the impact of foreign currency fluctuations. The exposure to exchange rates relates primarily to our foreign subsidiaries. Subsidiaries with material foreign currency exposure are in Great Britain, Algeria and Italy. For our foreign subsidiaries, exchange rates can have an impact on the United States dollar value of their reported earnings and the intercompany transactions with the subsidiaries.

     Customers outside of the United States accounted for 38.8% and 56.4% of our revenues for the quarters ended March 31, 2004 and 2005, respectively. In connection with the increased availability of 3G equipment in Europe, we anticipate continued growth of our international operations, particularly in Europe, the Middle East and Africa, in 2005 and beyond. As a result, fluctuations in the value of foreign currencies against the United States dollar may have a significant impact on our reported results. Revenues and expenses denominated in foreign currencies are translated monthly into United States dollars at the weighted average exchange rate. Consequently, as the value of the dollar strengthens or weakens relative to other currencies in our major markets the resulting translated revenues, expenses and operating profits become lower or higher, respectively.

     Fluctuations in currency exchange rates also can have an impact on the United States dollar amount of our shareholders’ equity. The assets and liabilities of the non-U.S. subsidiaries are translated into United States dollars at the exchange rate in effect on the date of the balance sheet for the respective reporting period. The resulting translation adjustments are recorded in shareholders’ equity as accumulated other comprehensive loss. Consequently, the accumulated other comprehensive income (loss) component of shareholders’ equity decreased $0.1 million during the quarters ended March 31, 2004 and 2005. As of March 31, 2005, the net amount invested in non-U.S. subsidiaries subject to this equity adjustment, using the exchange rate as of the same date, was $18.9 million.

17

     We are exposed to the impact of foreign currency fluctuations due to the operations of short-term intercompany transactions between the London office and its consolidated foreign subsidiaries and between the McLean office and its consolidated foreign subsidiaries. While these intercompany balances are eliminated in consolidation, exchange rate changes do affect consolidated earnings. Foreign subsidiaries with amounts owed to or from the London operations at March 31, 2005 (denominated in Euros) include Italy in the amount of $1.9 million and Algeria in the amount of $1.6 million. Foreign subsidiaries with amounts owed to or from the McLean operations at March 31, 2005 (denominated in Euros or British Pounds) include Italy in the amount of $4.4 million and England in the amount of $5.6 million. These balances generated a foreign exchange loss of $0.4 million included in our consolidated results at March 31, 2005. A hypothetical appreciation of the Euro and British Pound of 10% would result in a $16,000 net increase to our operating losses generated outside the United States. This was estimated using a 10% appreciation factor to the average monthly exchange rates applied to net income or loss for each of our subsidiaries in the respective period. A hypothetical appreciation of the Euro and the British Pound of 10% would result in a gain of $1.1 million on the intercompany receivables denominated in these currencies. Foreign exchange gains and losses recognized on any transactions are included in our consolidated statements of operations.

     Although currency fluctuations can have an impact on our reported results and shareholders’ equity, such fluctuations can affect our cash flow and could result in actual economic gains or losses. We currently do not hedge any of these risks in our foreign subsidiaries because: (i) our subsidiaries generally earn revenues and incur expenses within a single country and, consequently, do not incur currency risks in connection with the conduct of their normal operations; (ii) other foreign operations are minimal; and (iii) we do not believe that hedging transactions are justified by the current exposure and cost at this time.

Item 4: Controls and Procedures

(a) Evaluation of disclosure controls and procedures

     The Chief Executive Officer and Chief Financial Officer as of March 31, 2005 carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, these officers have concluded that as of March 31, 2005, our disclosure controls and procedures were adequate and designed to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities.

(b) Changes in internal controls

     There were no significant changes in our internal controls or other factors that could significantly affect our disclosure controls and procedures subsequent to December 31, 2004.

18

PART II: OTHER INFORMATION

Item 1: Legal Proceedings

     We are party to various non-material legal proceedings and claims incidental to our business.

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

     Not Applicable

Item 3: Defaults Upon Senior Securities

     Not Applicable

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

     Not Applicable

Item 5: Other Information

     Not Applicable

Item 6: Exhibits and Reports on Form 8-K

19

Signature

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

20