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 March 31, 2011

OR

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

Commission File No. 0-30821

TELECOMMUNICATION SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

MARYLAND		52-1526369
(State or Other Jurisdiction of		(I.R.S. Employer Identification No.)
Incorporation or Organization)
275 West Street, Annapolis, MD		21401
(Address of principal executive offices)		(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 Rule 12b-2 of the Exchange Act. (Check one):

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

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

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

		Shares outstanding
		as of April 30,
Title of Each Class		2011
Class A Common Stock, par value $0.01 per share			51,118,734
Class B Common Stock, par value $0.01 per share			5,591,334
Total Common Stock Outstanding			56,710,068

 

 

INDEX

TELECOMMUNICATION SYSTEMS, INC.

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2011 (Unaudited) and December 31, 2010			3
Consolidated Statements of Income for the three-months ended March 31, 2011 and 2010 (Unaudited)			4
Consolidated Statement of Stockholders’ Equity for the three-months ended March 31, 2011 (Unaudited)			5
Consolidated Statements of Cash Flows for the three-months ended March 31, 2011 and 2010 (Unaudited)			6
Notes to Consolidated Financial Statements (Unaudited)			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3. Quantitative and Qualitative Disclosures About Market Risk			29
Item 4. Controls and Procedures			29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			30
Item 1A. Risk Factors			30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			30
Item 3. Defaults Upon Senior Securities			30
Item 5. Other Information			30
Item 6. Exhibits			31
SIGNATURES			32
EX-31.1
EX-31.2
EX-32.1
EX-32.2

TeleCommunication Systems, Inc.

Consolidated Balance Sheets
(amounts in thousands, except share data)

		March 31,				December 31,
		2011				2010
		(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	16,394			$	45,220
Marketable securities			38,315				36,307
Accounts receivable, net of allowance of $442 in 2011 and $447 in 2010			63,491				52,073
Unbilled receivables			23,401				32,358
Inventory			5,764				5,440
Deferred income tax assets			6,737				8,179
Deferred project costs and other current assets			16,364				8,961
Total current assets			170,466				188,538
Property and equipment, net of accumulated depreciation and amortization of $60,014 in 2011 and 56,696 in 2010			42,684				39,337
Software development costs, net of accumulated amortization of $21,792 in 2011 and $19,241 in 2010			37,854				39,427
Acquired intangible assets, net of accumulated amortization of $7,516 in 2011 and $6,190 in 2010			36,032				28,264
Goodwill			176,495				159,143
Other assets			13,093				8,100
Total assets		$	476,624			$	462,809
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and accrued expenses		$	33,026			$	42,833
Accrued payroll and related liabilities			13,544				13,570
Deferred revenue			21,666				18,063
Current portion of note payable and capital lease obligations			24,818				24,519
Total current liabilities			93,054				98,985
Notes payable and captial lease obligations, less current portion			133,147				135,981
Non-current deferred income tax liabilities			7,741				8,382
Other liabilities			9,735				3,916
Stockholders’ equity:
Class A Common Stock; $0.01 par value:
Authorized shares - 225,000,000; issued and outstanding shares of 51,060,884 in 2011 and 47,749,762 in 2010			511				478
Class B Common Stock; $0.01 par value:
Authorized shares - 75,000,000; issued and outstanding shares of 5,591,334 in 2011 and 5,741,334 in 2010			56				57
Additional paid-in capital			312,913				297,585
Accumulated other comprehensive income			13				30
Accumulated deficit			(80,546	)			(82,605	)
Total stockholders’ equity			232,947				215,545
Total liabilities and stockholders’ equity		$	476,624			$	462,809

See accompanying Notes to Consolidated Financial Statements.

TeleCommunication Systems, Inc.

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

		Three Months Ended
		March 31,
		2011				2010
Revenue
Services		$	74,802			$	59,844
Systems			15,564				31,073
Total revenue			90,366				90,917
Direct costs of revenue
Direct cost of services revenue			41,707				34,332
Direct cost of systems revenue			12,065				23,036
Total direct cost of revenue			53,772				57,368
Services gross profit			33,095				25,512
Systems gross profit			3,499				8,037
Total gross profit			36,594				33,549
Operating expenses
Research and development expense			8,543				8,518
Sales and marketing expense			7,350				5,979
General and administrative expense			10,566				8,462
Depreciation and amortization of property and equipment			3,099				1,976
Amortization of acquired intangible assets			1,325				1,172
Total operating expenses			30,883				26,107
Income from operations			5,711				7,442
Interest expense			(1,920	)			(2,352	)
Amortization of deferred financing fees			(187	)			(160	)
Other income, net			35				490
Income before income taxes			3,639				5,420
Provision for income taxes			(1,580	)			(410	)
Net income		$	2,059			$	5,010
Net income per share-basic		$	0.04			$	0.10
Net income per share-diluted		$	0.04			$	0.08
Weighted average shares outstanding-basic			55,530				52,654
Weighted average shares outstanding-diluted			57,837				67,245

See accompanying Notes to Consolidated Financial Statements.

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, 2011		$	478			$	57			$	297,585			$	30			$	(82,605	)		$	215,545
Issuance of 3,000,000 shares of Class A Common Stock in connection with the acquisition of Trident Space & Defense, LLC			30				—				12,240				—				—				12,270
Options exercised for the purchase of 96,454 shares of Class A Common Stock			1				—				282				—				—				283
Issuance of 64,569 shares of Class A Common Stock under Employee Stock Purchase Plan			1				—				225				—				—				226
Conversion of 150,000 shares of Class B Common Stock to Class A Common Stock			1				(1	)			—				—				—				—
Stock based compensation expense			—				—				2,581				—				—				2,581
Net unrealized loss on securities and other			—				—				—				(17	)			—				(17	)
Net income for the three-months ended March 31, 2011			—				—				—				—				2,059				2,059
Balance at March 31, 2011		$	511			$	56			$	312,913			$	13			$	(80,546	)		$	232,947

See accompanying Notes to Consolidated Financial Statements.

TeleCommunication Systems, Inc.

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

		Three Months Ended
		March 31,
		2011				2010
Operating activities:
Net Income		$	2,059			$	5,010
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property and equipment			3,099				1,976
Amortization of capitalized software development costs			2,551				2,306
Stock based compensation expense			2,581				3,122
Deferred tax provision			1,579				410
Amortization of acquired intangible assets			1,325				1,172
Amortization of deferred financing fees			187				160
Other non-cash adjustments			1,698				1,282
Changes in operating assets and liabilities:
Accounts receivable, net			(9,018	)			(2,503	)
Unbilled receivables			8,957				(4,766	)
Inventory			(324	)			(3,851	)
Deferred project costs and other current assets			(1,647	)			21,655
Other assets			234				1,359
Accounts payable and accrued expenses			(11,110	)			(7,048	)
Accrued payroll and related liabilities			(642	)			(8,428	)
Deferred revenue			1,415				11,342
Other liabilities			(550	)			(3,573	)
Subtotal — Changes in operating assets and liabilities			(12,687	)			4,187
Net cash provided by operating activities			2,393				19,625
Investing activities:
Acquisitions, net of cash acquired			(16,376	)			—
Earnout payment related to 2009 acquisition			(3,213	)			—
Purchases of marketable securities			(9,952	)			—
Proceeds from sale and maturity of marketable securities			7,683				—
Purchases of property and equipment			(5,268	)			(2,724	)
Capitalized software development costs			(978	)			(821	)
Net cash used in investing activities			(28,104	)			(3,545	)
Financing activities:
Payments on long-term debt and capital lease obligations			(3,624	)			(2,552	)
Proceeds from exercise of employee stock options and sale of stock			509				1,462
Net cash used in financing activities			(3,115	)			(1,090	)
Net (decrease)/increase in cash			(28,826	)			14,990
Cash and cash equivalents at the beginning of the period			45,220				61,425
Cash and cash equivalents at the end of the period		$	16,394			$	76,415

See accompanying Notes to Consolidated Financial Statements.

TeleCommunication Systems, Inc.

Notes to Consolidated Financial Statements
March 31, 2011
(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 to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ended December 31, 2011. These consolidated financial statements should be read in conjunction with our audited financial statements and related notes included in our 2010 Annual Report on Form 10-K. The terms “TCS”, “Company”, “we”, “us” and “our” as used in this Form 10-Q refer to TeleCommunication Systems, Inc. and its subsidiaries as a combined entity, except where it is made clear that such terms mean only TeleCommunication Systems, Inc.

     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.

     Revenue Recognition. Effective January 1, 2011, the Company adopted the Accounting Standards Update (“ASU”) 2009-14 (ASC topic 985) “Certain Revenue Arrangements That Include Software Elements” and the ASU 2009-13 (ASC topic 605) “Revenue Recognition — Multiple Deliverable Revenue Arrangements” on a prospective basis for any contract entered into or significantly modified after January 1, 2011. The adoption of which did not have a material impact on the Financial Statements.

     The Company recognizes revenue when all of the following criteria are met (i) persuasive evidence of an arrangement exists (ii) delivery has occurred, (iii) the fee is fixed or determinable and (iv) the fee is probable of collection.

     Revenue is generated from our two segments as described below:

     Services Revenue. Revenue from hosted and subscriber services consists of monthly recurring service fees and is recognized in the month earned. Maintenance fees are generally collected in advance and recognized ratably over the maintenance period, which is typically annual.

     We also recognize services revenue from the design, development, deployment, and maintenance of information processing and communication systems primarily for government enterprises. These services are provided under time and materials contracts, cost plus fee contracts, or fixed price contracts. Revenue is recognized under time and materials contracts and cost plus fee contracts as billable costs are incurred. Fixed-price service contracts are accounted for using the proportional performance method. These contracts generally allow for monthly billing or billing upon achieving certain specified milestones.

     Systems Revenue. We also design, develop, and deploy custom communications products and systems. Custom systems typically contain multiple elements, which may include hardware, installation, integration, and product licenses, which are either incidental or provide essential functionality.

     We allocate the fees in a multi-element systems to each element based on the relative fair value of each element, using vendor-specific objective evidence (“VSOE”) of the fair value of each of the elements, if available. VSOE is generally determined based on the price charged when an element is sold separately. In the absence of VSOE of fair value, the fee is allocated among each element based on third-party evidence (“TPE”) of fair value, which is determined based on competitor pricing for similar deliverables when sold separately. When the Company is unable to establish fair value using VSOE or TPE, the Company uses estimated selling price (“ESP”) to allocate value to each element. The objective of ESP is to determine the price at which the Company would transact a sale if the product or service were sold separately. The Company determines ESP for deliverables by considering multiple factors including, but not limited to, prices it charges for similar offerings, market conditions, competitive landscape and pricing practices.

     Fees from the development and implementation of custom systems are generally performed under time and materials and fixed fee contracts. Revenue is recognized under time and materials contracts and cost plus fee contracts as billable costs are incurred. Fixed-price product delivery contracts are accounted for using the percentage-of-completion or proportional performance method, measured

either by total costs incurred as a percentage of total estimated costs at the completion of the contract, or direct labor costs incurred compared to estimated total direct labor costs for projects for which third-party hardware represents a significant portion of the total estimated costs. These contracts generally allow for monthly billing or billing upon achieving certain specified milestones. Any estimated losses under long-term contracts are recognized in their entirety at the date that it becomes probable of occurring. Revenue from hardware sales to our monthly subscriber customers is recognized as systems revenue. The Company also has contracts and purchase orders where revenue is recognized at the time products or services are delivered, or when the product is shipped and the risk of the loss is transferred to the buyer, net of discounts.

     Software licenses are generally perpetual licenses for a specified number of users that allow for the purchase of annual maintenance at a specified rate. All fees are recognized as revenue when the four criteria described above are met. In accordance with the amended guidance, for multiple element arrangements that contain only software and software-related elements, we allocate the fees to each element based on the VSOE of fair value of each element. Systems containing software licenses include a 90-day warranty for defects. We have not incurred significant warranty costs on any software product to date, and no costs are currently accrued upon recording the related revenue.

     When a customer is billed or we receive payment and we have not met all of the criteria for revenue recognition, the billed or paid amount is recorded as deferred revenue on the Company’s consolidated balance sheet. As the revenue recognition criteria are met, the deferred amounts are recognized as revenue. We defer direct project costs incurred in certain situations as dictated by authoritative accounting literature. The Company classifies deferred revenue and deferred project costs on the consolidated balance sheet as either current or long-term depending on the expected product delivery dates or service coverage periods. Long-term deferred revenue is included in other liabilities and long-term deferred project costs are included in other assets on the Company’s consolidated balance sheet.

     Under our contracts with the U.S. government for both systems and services, contract costs, including the allocated indirect expenses, are subject to audit and adjustment by the Defense Contract Audit Agency. We record revenue under these contracts at estimated net realizable amounts.

     Earnings per share. Basic income per common share is based upon the average number of shares of common stock outstanding during the period. At March 31, 2011 and 2010, stock options to purchase approximately 6.8 million and 5.5 million shares, respectively, were excluded from the computation of diluted net income per share because their inclusion would have been anti-dilutive. At March 31, 2011, 10 million shares of common stock issuable upon the conversion of the Company’s convertible notes were excluded from the computation of diluted net income per share because their inclusion would have been anti-dilutive.

     The following table summarizes the computations of basic and diluted earnings per share for the quarters ended March 31(in thousands):

		2011				2010
Numerator:
Net income, basic		$	2,059			$	5,010
Adjustment for assumed dilution:
Interest on convertible notes, net of taxes, for if-converted method			—				671
Net income, diluted		$	2,059			$	5,681
Denominator:
Total basic weighted-average common shares outstanding			55,530				52,654
Effect of dilutive stock options based on treasury stock method			2,307				4,589
Effect of dilutive warrants based on treasury stock method			—				—
Effect of dilutive 4.5% convertible notes, based on “if converted” method			—				10,002
Weighted average diluted shares			57,837				67,245
Basic earnings per common share:
Net income per share — basic		$	0.04			$	0.10
Diluted earnings per common share:
Net income per share-diluted		$	0.04			$	0.08

     Comprehensive Income. Other comprehensive income refers to revenue, expenses, gains and losses that under GAAP are included as a component of shareholders’ equity but are excluded from net income. The Company’s other comprehensive income consists of foreign currency translation adjustments and unrealized gains and losses on marketable securities classified as available-for-sale.

     The following table summarizes components of total comprehensive income for the quarters ended March 31:

		2011				2010
Net income		$	2,059			$	5,010
Other comprehensive income:
Change in foreign currency translation			(1)				1
Change in unrealized gains/(loss) on marketable securities			(16	)			—
Total comprehensive income		$	2,042			$	5,011

     Recent Accounting Pronouncements.

     There have been no significant developments in recently issued accounting standards, including the expected dates of adoption and estimated effects on our consolidated financial statements, from those disclosed in our 2010 Annual Report on form 10-K.

2. Acquisitions

     Effective January 31, 2011, the Company completed the acquisition of the outstanding units of Trident Space & Defense, LLC (“Trident”), in accordance with the Purchase and Sale Agreement (the “Purchase Agreement”). The Trident acquisition was accounted for using the acquisition method; accordingly, the total purchase price was allocated to the acquired assets and assumed liabilities based on management preliminary valuation of the fair values as of January 31, 2011. Trident’s operating results are reflected in the Company’s consolidated financial statements and are integrated into the Government Segment.

     The purchase price was $29,770, comprised of $17,500 paid in cash and 3.0 million shares in the Company’s Class A Common Stock valued at $12,270. The acquisition cash came from funds available from operations. The total purchase price has been allocated based on the estimated fair value of the acquired tangible and intangible assets and assumed liabilities, with the excess of the purchase price over the assets acquired and liabilities assumed being allocated to goodwill. The weighted average amortization period for the Other intangibles — customer list and other is approximately 9.6 years. The valuation has resulted in the recognition of $17,352 of goodwill, which will be deductible for tax purposes.

     Trident is headquartered in Torrance, CA and is a leading provider of engineering and electronics solutions for global space and defense markets. Trident is expected to improve the Company’s international sales growth, and provide additional leverage into the U.S. military and space markets. Substantially all of the Trident revenue is derived from the sale of high reliability component parts to the aerospace, military and industrial markets.

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

Assets:
Cash		$	1,124
Accounts receivable			2,400
Other current assets			5,755
Deferred income taxes			779
Property and equipment			89
Acquired intangible assets			9,094
Other long-term assets			5,413
Accounts payable and accrued expenses			(3,063	)
Accrued payroll and related liabilities			(616	)
Deferred revenue			(2,188	)
Other liabilities			(6,369	)
Total net assets			12,418
Goodwill			17,352
Net assets acquired		$	29,770

     The Consolidated Balance Sheets as of March 31, 2011 reflects this preliminary allocation. The Company is currently completing its analysis of the fair value of the identifiable intangible assets, as well a consideration of the deferred taxes acquired in the acquisition. The Company’s analysis will be finalized in a timely manner, not to exceed 12 months from the acquisition date. The Trident operations have been included in our consolidated results of operations since the acquisition date of January 31, 2011. The pro forma

statement of operations information is omitted because the acquisition of substantially all of the assets of Trident did not have a significant impact on our results of operations or income per share attributable to common stockholders for the period ended March 31, 2011.

3. Stock Based Compensation

     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 on historical volatility of the Company’s stock. We recognize compensation expense net of estimated stock option forfeitures over the requisite service period, which is generally the vesting period of 5 years. The Company estimates forfeitures based on historical experience, and the expected term of the options granted is 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 stock based 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 603 thousand shares and 15 thousand shares of restricted stock outstanding, respectively, as of March 31, 2011 and March 31, 2010. There was $2,395 of unrecognized stock based compensation as a result of the restricted stock grants outstanding as of March 31, 2011 that will be recognized over the remaining vesting period from 2011 through 2014.

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

		Three Months
		Ended March 31,
		2011				2010
Stock based compensation:
Stock options		$	2,299			$	3,031
Restricted stock			198				53
Employee stock purchase plan			84				38
Total stock based compensation		$	2,581			$	3,122

     Stock based compensation is included in our operations in the accompanying Consolidated Statements of Income as follows:

		Three Months
		Ended
		March 31,
		2011				2010
Stock based compensation included in expenses:
Direct cost of revenue		$	1,722			$	1,963
Research and development expense			503				815
Sales and marketing expense			135				190
General and administrative expense			221				154
Total stock based compensation included in expenses:		$	2,581			$	3,122

     A summary of our stock option activity and related information for the three-months ended March 31, 2011 is as follows:

						Weighted
						Average
		Number of				Exercise
(Share amounts in thousands)		Options				Price
Outstanding, beginning of year			15,446			$	5.42
Granted			2,202			$	4.43
Exercised			(96	)		$	2.89
Expired			(220	)		$	7.28
Forfeited			(480	)		$	6.61
Outstanding, at March 31, 2011			16,852			$	5.25
Exercisable, at March 31, 2011			9,869			$	4.52
Vested and expected to vest at March 31, 2011			15,557			$	5.17
Weighted-average remaining contractual life of options outstanding at March 31, 2011		6.6 years

		Three Months March 31,
		2011				2010
Estimated weighted-average grant-date fair value of options granted during the period		$	2.45			$	4.70
Total fair value of options vested during the period		$	4,686			$	4,490
Intrinsic value of options exercised during the period		$	132			$	1,684

     Exercise prices for options outstanding at March 31, 2011 ranged from $1.07 to $9.86 as follows (all share amounts in thousands):

																						Weighted-Average
										Weighted-Average												Remaining
						Weighted-Average				Remaining								Weighted-Average				Contractual Life
						Exercise Prices				Contractual Life				Options				Exercise Prices				of Options
		Options				of Options				of Options				Vested and				of Options Vested				Vested and
Exercise Prices		Outstanding				Outstanding				Outstanding (years)				Exercisable				and Exercisable				Exercisable (years)
$1.07 — $1.84			69			$	1.68				1.76				69			$	1.68				1.76
$1.92 — $2.99			2,255			$	2.47				4.56				2,227			$	2.47				4.55
$3.05 — $4.68			7,509			$	3.64				6.61				4,344			$	3.32				4.66
$4.76 — $7.20			2,284			$	6.43				4.96				1,634			$	6.73				3.39
$7.45 — $9.86			4,735			$	8.62				8.46				1,595			$	8.49				8.13
			16,852												9,869

     As of March 31, 2011, the aggregate intrinsic value of options outstanding was $8,037 and the aggregate intrinsic value of options vested and exercisable was $7,446. As of March 31, 2011, we estimate that we will recognize $22,034 in expense for outstanding, unvested options over their weighted average remaining vesting period of 3.5 years, of which we estimate $6,400 will be recognized during the remainder of 2011.

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

		Three Months Ended March 31,
		2011				2010
Expected life (in years)			5.5				5.5
Risk-free interest rate (%)			2.2%-2.5%				2.4%-2.8%
Volatility (%)			61%				60%
Dividend yield (%)			0%				0%

4. Supplemental Disclosure of Cash Flow Information

     Property and equipment acquired under capital leases totaled $1,089 and $2,638 during the three-months ended March 31, 2011 and 2010, respectively.

     Interest paid totaled $642 and $540 during the three-months ended March 31, 2011 and 2010, respectively.

     Income taxes and estimated state income taxes refunded totaled $196 during the three-months ended March 31, 2011 and income taxes and estimated state income taxes paid totaled $1,229 during the three-months ended March 31, 2010.

5. Marketable Securities

     The following is a summary of available-for-sale marketable securities at March 31, 2011:

		Amortized				Gross				Gross
		Cost				Unrealized				Unrealized				Estimated
		Basis				Gains				Losses				Fair Value
Corporate bonds		$	25,906			$	51			$	(27	)		$	25,930
Mortgage-backed and asset-backed securities			4,810				4				(16	)			4,798
Agency bonds			4,500				—				(13	)			4,487
Government bonds			2,249				1				—				2,250
Commercial paper			850				—				—				850
Total marketable securities		$	38,315			$	56			$	(56	)		$	38,315

     The following table summarizes the original cost and estimated fair value of available-for-sale marketable securities by contractual maturity at March 31, 2011:

		Original
		Cost				Fair Value
Due within 1 year or less		$	14,852			$	14,652
Due within 1-2 years			17,579				17,324
Due within 2-3 years			6,412				6,339
		$	38,843			$	38,315

6. Fair Value Measurements

     Our population of assets and liabilities subject to fair value measurements on a recurring basis and the necessary disclosures are as follows:

		Fair Value				Fair Value Measurements at
		as of				3/31/2011
		3/31/2011				Using Fair Value Hierarchy
		Total				Level 1				Level 2				Level 3
Assets:
Cash and cash equivalents		$	16,394			$	16,394			$	—			$	—
Corporate bonds			25,930				25,930
Mortgage-backed and asset-backed securities			4,798				4,798
Agency bonds			4,487				4,487
Government bonds			2,250				2,250
Commercial paper			850				850				—				—
Marketable securities			38,315				38,315				—				—
Deferred compensation plan investments			670				670				—				—
Assets at fair value		$	55,379			$	55,375			$	—			$	—
Liabilities:
Contractual acquisition earnouts		$	3,162			$	—			$	—			$	3,162
Deferred compensation			394				394				—				—
Liabilities at fair value		$	3,556			$	394			$	—			$	3,162

		Fair Value				Fair Value Measurements at
		as of				3/31/2010
		3/31/2010				Using Fair Value Hierarchy
		Total				Level 1				Level 2				Level 3
Assets
Cash and cash equivalents		$	76,415			$	76,415			$	—			$	—
Deferred compensation plan investments			1,118				1,118				—				—
Assets at fair value		$	77,533			$	77,533			$	—			$	—
Liabilities
Contractual acquisition earnouts		$	7,280			$	—			$	—			$	7,280
Deferred compensation			931				931				—				—
Liabilities at fair value		$	8,211			$	931			$	—			$	7,280

     ASC 820-10 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.

     The Company holds marketable securities that are investment grade and are classified as available-for-sale. The securities include corporate bonds, commercial paper, government bonds, mortgage and asset backed securities that are carried at fair market value based on quoted market prices, see Note 5. The Company holds trading securities as part of a rabbi trust to fund certain supplemental executive retirement plans and deferred income plans. The funds held are all managed by a third party, and include fixed income funds, equity securities, and money market accounts, or other investments for which there is an active quoted market. The related deferred compensation liabilities are valued based on the underlying investment selections held in each participant’s account. The contractual acquisition earnouts were part of the consideration paid for certain 2009 acquisitions. The fair value of the earnouts is based on probability-weighted payouts under different scenarios, discounted using a discount rate commensurate with the risk.

     The following table provides a summary of the changes in the Company’s contractual acquisition earnouts measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three-months ended March 31, 2011:

		Fair Value
		Measurements
		Using Significant
		Unobservable
		Inputs (Level 3)
Balance at January 1, 2011		$	6,174
Fair value adjustment recognized in earnings			201
Purchases, issuances, and settlements, net			(3,213	)
Transfers in and/or out of Level 3			—
Balance at March 31, 2011		$	3,162

     The Company’s long-term debt consists of borrowings under a commercial bank term loan agreement, a 4.5% convertible senior notes, and promissory notes, see Note 12. The long-term debt is currently reported at the borrowed amount outstanding and the fair value of the Company’s long-term debt approximates its carrying amount.

     The Company’s assets and liabilities that are measured at fair value on a non-recurring basis include long-lived assets, intangible assets, and goodwill. These items are recognized at fair value when they are considered to be other than temporarily impaired. In the first quarter of 2011, there were no required fair value impairments for assets and liabilities measured at fair value on a non-recurring basis.

7. Segment Information

Our two operating segments are the Commercial and Government Segments.

     Our commercial services and systems enable wireless carriers to deliver location-based information, internet content, short text messages, and other enhanced communication services to and from wireless phones. Our hosted commercial services include mobile location-based applications including turn-by-turn navigation, E9-1-1 call routing, and inter-carrier text message technology; that is, customers use our software functionality through connections to and from network operations centers, paying us monthly based on the number of subscribers, cell sites, or call center circuits, or message volume. We provide hosted services under contracts with more than 40 wireless carrier networks and VoIP service providers. We earn subscriber revenue through wireless applications including our navigation, people finder, and asset tracking applications which are available via many wireless carriers. We earn carrier software-based systems revenue through the sale of licenses, deployment and customization fees, and maintenance fees, pricing for which is generally based on the volume of capacity purchased from us by the carrier.

     We design, furnish, install and operate wireless and data network communication systems, including our SwiftLink^® deployable communication systems which integrate high speed, satellite and other wireless, and internet protocol technology, with secure Government-approved cryptologic devices. We also own and operate secure satellite teleport facilities, resell access to satellite airtime (known as space segment,) and provide professional services including field support of our systems and cyber security training to the U.S. Department of Defense and other government and foreign 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.

     The following table sets forth results for our reportable segments for the three-months ended March 31, 2011 and 2010, respectively. All revenues reported below are from external customers. A reconciliation of segment gross profit to net income for the respective periods is also included below:

		Three Months Ended March 31,
		2011												2010
		Comm.				Gvmt				Total				Comm.				Gvmt				Total
Revenue
Services		$	44,227			$	30,575			$	74,802			$	39,278			$	20,566			$	59,844
Systems			4,747				10,817				15,564				8,645				22,428				31,073
Total revenue			48,974				41,392				90,366				47,923				42,994				90,917
Direct costs of revenue
Direct cost of services			19,859				21,848				41,707				19,264				15,068				34,332
Direct cost of systems			3,164				8,901				12,065				3,441				19,595				23,036
Total direct costs of revenue			23,023				30,749				53,772				22,705				34,663				57,368
Gross profit
Services gross profit			24,368				8,727				33,095				20,014				5,498				25,512
Systems gross profit			1,583				1,916				3,499				5,204				2,833				8,037
Total gross profit		$	25,951			$	10,643			$	36,594			$	25,218			$	8,331			$	33,549

		Three Months Ended
		March 31,
		2011				2010
Total segment gross profit		$	36,594			$	33,549
Research and development expense			(8,543	)			(8,518	)
Sales and marketing expense			(7,350	)			(5,979	)
General and administrative expense			(10,566	)			(8,462	)
Depreciation and amortization of property and equipment			(3,099	)			(1,976	)
Amortization of acquired intangible assets			(1,325	)			(1,172	)
Interest expense			(1,920	)			(2,352	)
Amortization of deferred finance fees			(187	)			(160	)
Other income, net			35				490
Income before income taxes			3,639				5,420
Provision for income taxes			(1,580	)			(410	)
Net income		$	2,059			$	5,010

      

8. Inventory

     Inventory consisted of the following:

		Mar. 31,				Dec. 31,
		2011				2010
Component parts		$	1,904			$	2,564
Finished goods			3,860				2,876
Total inventory		$	5,764			$	5,440

9. Acquired Intangible Assets, Capitalized Software Development Costs, and Goodwill

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

		March 31, 2011												December 31, 2010
		Gross												Gross
		Carrying				Accumulated								Carrying				Accumulated
		Amount				Amortization				Net				Amount				Amortization				Net
Acquired intangible assets:
Customer lists and other		$	22,046			$	3,537			$	18,509			$	12,952			$	2,928			$	10,024
Customer relationships			20,138				3,489				16,649				20,138				2,818				17,320
Trademarks and patents			1,364				490				874				1,364				444				920
Software development costs, including acquired technology			59,646				21,792				37,854				58,668				19,241				39,427
Total acquired intangible assets and software dev. costs		$	103,194			$	29,308			$	73,886			$	93,122			$	25,431			$	67,691
Estimated future amortization expense:
Nine-months ending December 31, 2011																						$	10,783
Year ending December 31, 2012																						$	14,265
Year ending December 31, 2013																						$	14,248
Year ending December 31, 2014																						$	12,257
Year ending December 31, 2015																						$	4,585
Thereafter																						$	17,748
																						$	73,886

     For the three-months ended March 31, 2011 and 2010, we capitalized $978 and $821, respectively, of software development costs for certain software projects after the point of technological feasibility had been reached but before the software was available for general release. Accordingly, these costs have been capitalized and are being amortized over their estimated useful lives beginning when the products are available for general release. The capitalized costs relate to our location-based software. We believe that these capitalized costs will be recoverable from future gross profits generated by these products.

     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.

     The changes in the carrying amount of goodwill are as follows:

		Commercial				Government
		Segment				Segment				Total
Balance as of December 31, 2010		$	122,454			$	36,689			$	159,143
Goodwill from acquisitions			—				17,352				17,352
Balance as of March 31, 2011		$	122,454			$	54,041			$	176,495

     The gross carrying amounts increased in the first quarter of 2011 due to the preliminary Trident purchase price allocation. Prior to the end of the measurement period for the final purchase price allocation, which is not to exceed 12 months from the respective acquisition dates, if information becomes available which would indicate adjustments are required to the purchase price these adjustments will be included in the purchase price allocation retrospectively.

10. Concentrations of Credit Risk and Major Customers

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

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

						% of Total Revenue For the Three
						Months Ended
						March 31,
Customer		Segment				2011				2010
U.S. Government		Government					23	%			36	%
Customer A		Commercial					21	%			29	%
Customer B		Commercial					12	%			< 10	%

						As of March 31, 2011
						Accounts				Unbilled
Customer		Segment				Receivable				Receivables
U.S. Government		Government					28	%			31	%
Customer A		Commercial					21	%			32	%
Customer B		Commercial					< 10	%			11	%
Customer C		Commercial					< 10	%			10	%

11. Lines of Credit

     We have maintained a line of credit arrangement with our principal bank since 2003. Our present Loan Agreement with our principal bank provides for a $35,000 revolving line of credit (the “Line of Credit.”) available through June 25, 2012. Our potential borrowings under the Line of Credit are reduced by a cash management services sublimit which totaled $1,525 at March 31, 2011.

     The Line of Credit includes three sub-facilities: (i) a letter of credit sub-facility pursuant to which the bank may issue letters of credit, (ii) a foreign exchange sub-facility pursuant to which the Company may purchase foreign currency from the bank, and (iii) a cash management sub-facility pursuant to which the bank may provide cash management services (which may include, among others, merchant services, direct deposit of payroll, business credit cards and check cashing services) and in connection therewith make loans and extend credit to the Company. The principal amount outstanding under the Line of Credit accrues interest at a floating per annum rate equal to the rate which is the greater of (i) 4% per annum, or (ii) the bank’s most recently announced “prime rate,” even if it is not the bank’s lowest prime rate. The principal amount outstanding under the Line of Credit is payable either prior to or on the maturity date and interest on the Line of Credit is payable monthly.

     As of March 31, 2011 and December 31, 2010, there were no borrowings on the line of credit and we had approximately $33,500 and $32,900, respectively, of unused borrowing availability under this line of credit.

12. Long-term Debt

     Long-term debt consisted of the following:

		Mar. 31,				Dec. 31,
		2011				2010
4.5% Convertible notes dated November 16, 2009		$	103,500			$	103,500
Promissory note payable to NIM sellers dated December 16, 2009			10,000				10,000
Term loan from commercial bank dated December 31, 2009			21,667				23,333
Term loan from commercial bank dated September 30, 2010			8,666				9,333
Total long-term debt			143,833				146,166
Less: current portion			(19,333	)			(19,333	)
Non-current portion of long-term debt		$	124,500			$	126,833

     Aggregate maturities of long-term debt (including interest) at March 31, 2011 are as follows:

2011		$	25,763
2012			14,743
2013			14,324
2014			110,508
Total long-term debt		$	165,338

     During 2009, the Company entered into several financing agreements to fund corporate initiatives.

     On November 10, 2009, the Company sold $103.5 million aggregate principal amount of 4.5% Convertible Senior Notes (the “Notes”) due 2014. The Notes are not registered and were offered under Rule 144A of the Securities Act of 1933, as amended. Concurrent with the issuance of the Notes, we entered into convertible note hedge transactions and warrant transactions, also detailed below, that are expected to reduce the potential dilution associated with the conversion of the Notes. Holders may convert the Notes at their option on any day prior to the close of business on the second “scheduled trading day” (as defined in the Indenture) immediately preceding November 1, 2014. The conversion rate will initially be 96.637 shares of Class A common stock per $1,000 principal amount of Notes, equivalent to an initial conversion price of approximately $10.35 per share of Class A common stock. The effect of the convertible note hedge and warrant transactions, described below, is an increase in the effective conversion premium of the Notes to $12.74 per share.

     The convertible note hedge transactions cover, subject to adjustments, 10,001,303 shares of Class A common stock. Also, in connection with the sale of the Notes, the Company entered into separate warrant transactions with certain counterparties (collectively, the “Warrant Dealers”). The Company sold to the Warrant Dealers the warrants to purchase in the aggregate 10,001,303 shares of Class A common stock, subject to adjustments, at an exercise price of $12.74 per share of Class A common stock. The Company offered and sold the warrants to the Warrant Dealers in reliance on the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended.

     The convertible note hedge and the warrant transactions are separate transactions, each entered into by the Company with the counterparties, which are not part of the terms of the Notes and will not affect the holders’ rights under the Notes. The cost of the convertible note hedge transactions to the Company was approximately $23.8 million, and has been accounted for as an equity transaction in accordance with ASC 815-40, Contracts in Entity’s own Equity. The Company received proceeds of approximately $13 million related to the sale of the warrants, which has also been classified as equity as the warrants meet the classification criteria under ASC 815-40-25, in which the warrants and the convertible note hedge transactions require settlements in shares and provide the Company with the choice of a net cash or common shares settlement. As the convertible note hedge and warrants are indexed to our common stock, we recognized them in Additional paid-in capital, and will not recognize subsequent changes in fair value as long as the instruments remain classified as equity.

     Interest on the Notes is payable semiannually on November 1 and May 1 of each year, beginning May 1, 2010. The notes will mature and convert on November 1, 2014, unless previously converted in accordance with their terms. The notes are TCS’s senior unsecured obligations and rank equally with all of its present and future senior unsecured debt and senior to any future subordinated debt. The notes are structurally subordinate to all present and future debt and other obligations of TCS’s subsidiaries and will be effectively subordinate to all of TCS’s present and future secured debt to the extent of the collateral securing that debt. The notes are not redeemable by TCS prior to the maturity date.

     On December 15, 2009, the Company issued $40 million in promissory notes as part of the consideration paid for the acquisition of Networks In Motion. The promissory notes bear simple interest at 6% and are due in three installments: $30 million was paid in December 2010, $5 million is due in June 2011 and $5 million is due in December 2011. The promissory notes are effectively subordinated to TCS’s secured debt and structurally subordinated to any present and future indebtedness and other obligations of TCS’s subsidiaries.

     On December 31, 2009, we refinanced our June 2009 commercial bank term loan agreement with a $40 million five year term loan (the “Term Loan”), which matures July 2014. The Company initially drew $30 million of the term funds available on December 31, 2009 and drew the remaining $10 million available balance on September 30, 2010. The principal amount outstanding under the Term Loan accrues interest at a floating per annum rate equal to the rate which is 0.5% plus the greater of (i) 4% per annum, or (ii) the bank’s prime rate (3.25% at March 31, 2011). The principal amount outstanding under the Term Loan is payable in sixty equal installments of principal of $556 beginning on January 29, 2010 plus an additional forty five equal installments of principal of $222

beginning October 31, 2010. Interest is payable on a monthly basis. Funds from the initial $30 million draw on the Term Loan were used primarily to retire the June 2009 term loan and funds from the additional $10 million drawn in September 2010 were used for general corporate purposes.

     Our bank Loan Agreement contains customary representations and warranties and customary events of default. Availability under the Line of Credit is subject to certain conditions, including the continued accuracy of the Company’s representations and warranties. The Loan Agreement also contains subjective covenants that require (i) no material impairment in the perfection or priority of the bank’s lien in the collateral of the Loan Agreement, (ii) no material adverse change in the business, operations, or condition (financial or otherwise) of the Borrowers, or (iii) no material impairment of the prospect of repayment of any portion of the borrowings under the Loan Agreement. The Loan Agreement also contains covenants requiring the Company to maintain a minimum adjusted quick ratio and a fixed charge coverage ratio as well as other restrictive covenants including, among others, restrictions on the Company’s ability to dispose part of its business or property; to change its business, liquidate or enter into certain extraordinary transactions; to merge, consolidate or acquire stock or property of another entity; to incur indebtedness; to encumber its property; to pay dividends or other distributions or enter into material transactions with an affiliate. On March 4, 2011, the Loan Agreement covenants requiring a minimum adjusted quick ratio and a fixed charge coverage ratio where modified. As of March 31, 2011, we were in compliance with the covenants related to the Loan Agreement, and we believe that we will continue to comply with these covenants in the foreseeable future. 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 the Loan Agreement, including declaring all outstanding debt due and payable.

13. Capital leases

     We lease certain equipment under capital leases. Capital leases are collateralized by the leased assets. Amortization of leased assets is included in depreciation and amortization expense.

     Future minimum payments under capital lease obligations consisted of the following at March 31, 2011:

2011		$	4,715
2012			5,460
2013			3,867
2014			1,375
2015			46
Total minimum lease payments			15,463
Less: amounts representing interest			(1,331	)
Present value of net minimum lease payments (including current portion of $5,485)		$	14,132

14. Income taxes

     The provision for income taxes for the three-months ended March 31, 2011 totaled $1,580 and $410 for the three-months ended March 31, 2010. The effective tax rate was approximately 43.4% for the three-months ended March 31, 2011. The expense recorded for the three-months ended March 31, 2010 is comprised of tax expense of $2,161 based on pretax income plus a discrete tax benefit of $1,751 related to Research & Experimentation tax credits.

     We do not anticipate a significant change to the total amount of unrecognized tax benefits within the next twelve months.

15. Commitments and Contingencies

     Our purchase obligations represent contracts for parts and services in connection with our government satellite services and systems offerings, and contractual acquisition earnouts consist of consideration included as part of the purchase price allocation of certain acquisitions. As of March 31, 2011, our total commitments from purchase obligations and other long-term liabilities consisted of the following:

		Within 12				1-3				3-5				More than
		Months				Years				Years				5 Years				Total
Purchase obligations		$	7,410			$	948			$	7			$	—			$	8,365
Contractual acquisition earnouts			3,162				—				—				—				3,162
Total contractual commitments		$	10,572			$	948			$	7			$	—			$	11,527

     The Company has been notified that some customers will or may seek indemnification under its contractual arrangements with those customers for costs associated with defending lawsuits alleging infringement of certain patents through the use of our products and

services and the use of our products and services in combination with products and services of multiple other vendors. In some cases we have agreed to assume the defense of the case. In others, the Company will continue to negotiate with these customers in good faith because the Company believes its technology does not infringe the cited patents and due to specific clauses within the customer contractual arrangements that may or may not give rise to an indemnification obligation. The Company cannot currently predict the outcome of these matters and the resolutions could have a material effect on our consolidated results of operations, financial position or cash flows.

     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 Action No. 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, and Rule 10b-5 promulgated thereunder. The claims against us of violation of Rule 10b-5 have been dismissed with the plaintiffs having the right to re-plead. On October 5, 2009, the Court approved a settlement of this and approximately 300 similar cases. On January 14, 2010, an Order and Final Judgment was entered. Various notices of appeal of the Court’s October 5, 2009 order were subsequently filed. On October 7, 2010, all but two parties who had filed a notice of appeal filed a stipulation with the Court withdrawing their appeals with prejudice, and the two remaining objectors filed briefs in support of their appeals. We intend to continue to defend the lawsuit until the matter is resolved. We have purchased a Directors and Officers insurance policy which we believe should cover any potential liability that may result from these laddering class action 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 recorded for this matter.

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

     The following discussion and analysis of the financial condition and results of operations should be read in conjunction with the consolidated financial statements, related notes, and other detailed information included elsewhere in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 (this “Form 10-Q”). This Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are statements other than historical information or statements of current condition. 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 on Form 10-Q include, but are not limited to statements: (a) regarding our belief that our technology does not infringe the patents related to customer indemnification requests and that indemnification claims should not have a material effect on our results of operations; (b) regarding our expectations with regard to the notes hedge transactions; (c) that we believe we have sufficient capital resources to fund our operations for the next twelve months, (d) as to the sufficiency of our capital resources to meet our anticipated working capital and capital expenditures for at least the next twelve months, (e) that we expect to realize approximately $177.5 million of backlog in the next twelve months, (f) that we believe that capitalized software development costs will be recoverable from future gross profits (g) regarding our belief that we were in compliance with our loan covenants and that we believe that we will continue to comply with these covenants, (h) regarding our expectations with regard to income tax assumptions and future stock based compensation expenses, (i) indicating our insurance policies should cover all of the costs of the claims in the IPO laddering class action lawsuit, (j) that we believe the Trident acquisition will help expand our market reach, and (k) that we believe our Intellectual property represented by patents is a valuable asset which will contribute positively to our results of operations.

     These forward-looking statements relate to our plans, objectives and expectations for future operations. We base these statements on our beliefs as well as assumptions made using information currently available to us. 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. Revenues, results of operations, and other matters are difficult to forecast and our actual financial results realized could differ materially from the statements made herein, as a result of 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) 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, (ii) conduct our business in foreign countries, (iii) adapt and integrate new technologies into our products, (iv) develop software without any errors or defects, (v) protect our intellectual property rights, (vi) implement our business strategy, (vii) realize backlog, (viii) compete with small business competitors, (ix) effectively manage our counterparty risks, (x) achieve continued revenue growth in the foreseeable future in certain of our business lines, (xi) have sufficient capital resources to fund the Company’s operations, and (xii) 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 and Estimates

     Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments. 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 and estimates to be those related to the following:

	-		Revenue recognition,
	-		Acquired intangible assets,

	-		Impairment of goodwill,
	-		Stock based compensation expense,
	-		Marketable securities,
	-		Software development costs,
	-		Income taxes,
	-		Business combinations, and
	-		Legal and other contingencies.

     This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2010 (the “2010 Form 10-K”). See Note 1 to the unaudited interim consolidated financial statements included elsewhere in this Form 10-Q for a list of the standards implemented for the three months ended March 31, 2011.

Overview

     Our business is reported using two business segments: (i) the Commercial Segment, which consists principally of communication technology for wireless networks based on location-based services, including our E9-1-1 application and other applications for wireless carriers and Voice Over IP service providers, and text messaging and (ii) the Government Segment, which consists principally of engineering, deployment and field support of secure communication solutions and components, mainly satellite-based, and related services, including cyber-security training and related services, to government agencies.

2011 Acquisition

     On January 31, 2011, the Company acquired privately-held Trident Space & Defense, LLC, a leading provider of engineering and electronics solutions for global space and defense markets, located in Torrance, California. Total consideration for the acquisition was $29.8 million including, $17.5 million paid in cash and $12.3 million or approximately three million shares of our Class A common stock. Substantially all of the Trident revenue stream is from the supply of highly reliable electronic parts, materials, radiation tolerant components, products and services for areospace, military and industrial markets. Trident adds engineering and design depth to our government solution operations. The Company believes Trident will help expand the overall market reach of the combined entities. Most of Trident’s business is from international customers to which the Company intends to sell other products and services, and the Company expects to sell Trident’s solutions to the U.S. military and space markets. The newly acquired business operations are included in our Government Segment.

     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 Results of Operations” in our 2010 Form 10-K as well as the unaudited interim consolidated financial statements and the notes thereto located elsewhere in this Form 10-Q.

     Indicators of Our Financial and Operating Performance

     Our management monitors and analyzes a number of 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, maintenance 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, communication systems and components for 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, network operation center and co-location facility operating expenses, amortization of capitalized software development costs, 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 capitalized software development costs, including acquired technology, is associated with the recognition of 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 stock based 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 capacity to borrow, through our bank credit and term loan facility and other markets; lease financing for the purchase of equipment; and access to the public equity market.
	•		Balance sheet. We view cash, working capital, and accounts receivable balances and days revenue outstanding as important indicators of our financial health.

Results of Operations

     The comparability of our operating results in the first quarter of 2011 to the first quarter of 2010 is affected by our 2011 acquisition of Trident which occurred on January 31, 2011. Where changes in our results of operations from the first quarter of 2011 compared to the first quarter of 2010 are clearly related to this acquisition, such as revenue and increases in amortization of intangibles, we quantify the effects. This acquisition did not result in our entry into a new line of business or product category since it added products and services similar to those provided by our Government Segment.

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
		Ended March 31,								2011 vs. 2010
($ in millions)		2011				2010				$				%
Services revenue		$	44.2			$	39.3			$	4.9				12	%
Systems revenue			4.8				8.6				(3.8	)			(44	)%
Commercial Segment revenue			49.0				47.9				1.1				2	%
Direct cost of services revenue			19.8				19.3				0.5				3	%
Direct cost of systems revenue			3.2				3.4				(0.2	)			(6	)%
Commercial Segment cost of revenue			23.0				22.7				0.3				1	%
Services gross profit			24.4				20.0				4.4				22	%
Systems gross profit			1.6				5.2				(3.6	)			(69	)%
Commercial Segment gross profit(1)		$	26.0			$	25.2			$	0.8				3	%
Segment gross profit as a percent of revenue			53	%			53	%