TELECOMMUNICATION SYSTEMS INC /FA/ - FORM 10-Q

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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 June 30, 2011

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

Commission File No. 0-30821

TELECOMMUNICATION SYSTEMS, INC.

(Exact name of registrant as specified in its charter)



MARYLAND (State or Other Jurisdiction of Incorporation or Organization)		52-1526369 (I.R.S. Employer Identification No.)

275 West Street, Annapolis, MD (Address of principal executive offices)		21401 (Zip Code)

(410) 263-7616
(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant 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 þ 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 July 31,
Title of Each Class	2011
Class A Common Stock, par value $0.01 per share		51,511,632
Class B Common Stock, par value $0.01 per share		5,571,923

Total Common Stock Outstanding		57,083,555

INDEX

TELECOMMUNICATION SYSTEMS, INC.


	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2011 (Unaudited) and December 31, 2010		3
Consolidated Statements of Income for the three- and six-months ended June 30, 2011 and 2010 (Unaudited)		4
Consolidated Statement of Stockholders’ Equity for the six-months ended June 30, 2011 (Unaudited)		5
Consolidated Statements of Cash Flows for the six-months ended June 30, 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		18
Item 3. Quantitative and Qualitative Disclosures About Market Risk		28
Item 4. Controls and Procedures		28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		29
Item 1A. Risk Factors		29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		29
Item 3. Defaults Upon Senior Securities		29
Item 5. Other Information		29
Item 6. Exhibits		29
SIGNATURES		30

TeleCommunication Systems, Inc.

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


	June 30,			December 31,
	2011			2010
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	25,342		$	45,220
Marketable securities		37,061			36,307
Accounts receivable, net of allowance of $391 in 2011 and $447 in 2010		59,578			52,073
Unbilled receivables		22,746			32,358
Inventory		6,583			5,440
Deferred income tax assets		4,488			8,179
Deferred project costs and other current assets		14,276			8,961

Total current assets		170,074			188,538

Property and equipment, net of accumulated depreciation and amortization of $62,566 in 2011 and $56,696 in 2010		46,518			39,337
Software development costs, net of accumulated amortization of $24,452 in 2011 and $19,241 in 2010		35,635			39,427
Acquired intangible assets, net of accumulated amortization of $8,918 in 2011 and $6,190 in 2010		34,483			28,264
Goodwill		176,477			159,143
Other assets		12,458			8,100

Total assets	$	475,645		$	462,809


Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and accrued expenses	$	37,057		$	42,833
Accrued payroll and related liabilities		13,251			13,570
Deferred revenue		22,786			18,063
Current portion of notes payable and capital lease obligations		19,961			24,519

Total current liabilities		93,055			98,985

Notes payable and capital lease obligations, less current portion		130,414			135,981
Deferred income tax liabilities		7,741			8,382
Other liabilities		6,609			3,916

Stockholders’ equity:
Class A Common Stock; $0.01 par value:
Authorized shares - 225,000,000; issued and outstanding shares of 51,478,267 in 2011 and 47,749,762 in 2010		515			478
Class B Common Stock; $0.01 par value:
Authorized shares - 75,000,000; issued and outstanding shares of 5,571,923 in 2011 and 5,741,334 in 2010		56			57
Additional paid-in capital		315,636			297,585
Accumulated other comprehensive income		102			30
Accumulated deficit		(78,483	)		(82,605	)

Total stockholders’ equity		237,826			215,545

Total liabilities and stockholders’ equity	$	475,645		$	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						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
Revenue
Services	$	75,993		$	63,429		$	150,795		$	123,273
Systems		24,686			29,233			40,250			60,306

Total revenue		100,679			92,662			191,045			183,579
Direct costs of revenue
Direct cost of services revenue		40,597			35,886			82,304			70,218
Direct cost of systems revenue		22,009			23,588			34,074			46,624

Total direct cost of revenue		62,606			59,474			116,378			116,842


Services gross profit		35,396			27,543			68,491			53,055
Systems gross profit		2,677			5,645			6,176			13,682

Total gross profit		38,073			33,188			74,667			66,737
Operating expenses
Research and development expense		9,633			6,571			18,176			15,089
Sales and marketing expense		6,932			5,967			14,282			11,946
General and administrative expense		11,421			9,802			21,987			18,264
Depreciation and amortization of property and equipment		2,552			2,257			5,651			4,233
Amortization of acquired intangible assets		1,402			1,171			2,727			2,343

Total operating expenses		31,940			25,768			62,823			51,875
Income from operations		6,133			7,420			11,844			14,862
Interest expense		(1,882	)		(2,237	)		(3,802	)		(4,589	)
Amortization of deferred financing fees		(237	)		(216	)		(424	)		(376	)
Other income (expense), net		(161	)		495			(126	)		985

Income before income taxes		3,853			5,462			7,492			10,882
Provision for income taxes		(1,790	)		(2,367	)		(3,370	)		(2,777	)


Net income	$	2,063		$	3,095		$	4,122		$	8,105


Net income per share-basic	$	0.04		$	0.06		$	0.07		$	0.15

Net income per share-diluted	$	0.03		$	0.06		$	0.07		$	0.14


Weighted average shares outstanding-basic		56,891			52,920			56,214			52,788
Weighted average shares outstanding-diluted		59,263			56,124			58,554			66,897

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		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 390,565 shares of Class A Common Stock		4		—			614		—		—			618
Issuance of 138,685 shares of Class A Common Stock under Employee Stock Purchase Plan		1		—			491		—		—			492
Conversion of 169,411 shares of Class B Common Stock to Class A Common Stock		1		(1	)		—		—		—			—
Issuance of 29,745 Class A Common Stock for vested restricted stock		1		—			—		—		—			1
Stock-based compensation expense		—		—			4,706		—		—			4,706
Net unrealized gain on securities and other									72					72
Net income for the six-months ended June 30, 2011		—		—			—		—		4,122			4,122

Balance at June 30, 2011	$	515	$	56		$	315,636	$	102	$	(78,483	)	$	237,826

See accompanying Notes to Consolidated Financial Statements.

TeleCommunication Systems, Inc.

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


	Six Months Ended
	June 30,
	2011			2010
Operating activities:
Net Income	$	4,122		$	8,105
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property and equipment		5,651			4,233
Amortization of capitalized software development costs		5,211			4,607
Stock based compensation expense		4,706			5,371
Deferred tax provision		3,828			2,777
Amortization of acquired intangible assets		2,727			2,343
Amortization of investment premiums and accretion of discounts, net		488			—
Impairment of marketable securities		—			225
Amortization of deferred financing fees		424			376
Other non-cash adjustments		1,218			884
Changes in operating assets and liabilities:
Accounts receivable, net		(5,105	)		14,280
Unbilled receivables		9,612			(2,084	)
Inventory		(1,143	)		5,607
Deferred project costs and other current assets		322			20,947
Other assets		632			465
Accounts payable and accrued expenses		(6,939	)		(13,377	)
Accrued payroll and related liabilities		(935	)		(6,862	)
Deferred revenue		2,535			(5,146	)
Other liabilities		(3,676	)		8,922

Subtotal — Changes in operating assets and liabilities		(4,697	)		22,752

Net cash provided by operating activities		23,678			51,673
Investing activities:
Acquisitions, net of cash acquired		(16,066	)		—
Earnout payment related to 2009 acquisition		(3,213	)		—
Purchases of marketable securities		(16,324	)		—
Proceeds from sale and maturity of marketable securities		15,154			—
Purchases of property and equipment		(10,478	)		(11,075	)
Capitalized software development costs		(1,410	)		(2,172	)

Net cash used in investing activities		(32,337	)		(13,247	)
Financing activities:
Payments on notes payable and capital lease obligations		(12,329	)		(5,218	)
Proceeds from exercise of employee stock options and sale of stock		1,110			2,402

Net cash used in financing activities		(11,219	)		(2,816	)

Net (decrease) increase in cash		(19,878	)		35,610
Cash and cash equivalents at the beginning of the period		45,220			61,425

Cash and cash equivalents at the end of the period	$	25,342		$	97,035

See accompanying Notes to Consolidated Financial Statements.

TeleCommunication Systems, Inc.

Notes to Consolidated Financial Statements

June 30, 2011

(amounts in thousands, except per share amounts)

(unaudited)

1. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation. The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three- and six-months ended June 30, 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 U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and related disclosures. Actual results could differ from those estimates.

Goodwill. Goodwill represents the excess of cost over the fair value of assets of acquired businesses. Goodwill is not amortized, but instead is evaluated annually for impairment using a discounted cash flow model and other measurements of fair value such as market comparable transactions, etc. The authoritative guidance for the goodwill impairment model includes a two-step process. First, it requires a comparison of the book value of net assets to the fair value of the reporting units that have goodwill assigned to them. If the fair value is determined to be less than the book value, a second step is performed to compute the amount of the impairment. In the second step, a fair value for goodwill is estimated, based in part on the fair value of the reporting unit used in the first step, and is compared to its carrying value. The shortfall of the fair value below carrying value, if any, represents the amount of goodwill impairment.

The Company assesses goodwill for impairment in the fourth quarter of each fiscal year, or sooner should there be an indicator of impairment. The Company periodically analyzes whether any such indicators of impairment exist. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators include a sustained, significant decline in the Company’s stock price and market capitalization, a decline in the Company’s expected future cash flows, a significant adverse change in legal factors or in the business climate, unanticipated competition, and/or slower growth rate, among others. As of June 30, 2011, the Company has not identified any indicators of impairment with respect to its goodwill.

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 arrangement 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 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. 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 net income per common share is based upon the average number of shares of common stock outstanding during the period. Stock options and restricted stock of approximately 5.8 million shares and 6.7 million shares, respectively, for the three- and six-months ended June 30, 2011 and 7.8 million shares and 5.9 million shares, respectively, for the three- and six-months ended June 30, 2010 were excluded from the computation of diluted net income per share because their inclusion would have been anti-dilutive. Shares issuable upon conversion of convertible debt issued in the fourth quarter of 2009 were included in weighted average diluted shares for the six-months ended June 30, 2010 but were excluded from weighted average diluted shares for the six-months ended June 30, 2011 and for the three-months ended June 30, 2011 and 2010 because the effect of their inclusion would have been anti-dilutive. A reconciliation of basic to diluted weighted average common shares outstanding is as follows:


	Three Months				Six Months
	Ended				Ended
	June 30,				June 30,
	2011		2010		2011		2010
Numerator:
Net income, basic	$	2,063	$	3,095	$	4,211	$	8,105
Adjustment for assumed dilution:
Interest on convertible debt, net of taxes		—		—		—		1,457

Net income, diluted	$	2,063	$	3,095	$	4,211	$	9,562


Denominator:
Total basic weighted-average common shares outstanding		56,891		52,920		56,214		52,788
Effect of dilutive stock options and restricted stock based on treasury stock method		2,372		3,204		2,340		4,107
Effect of dilutive 4.5% convertible debt, based on “if converted” method		—		—		—		10,002

Weighted average diluted shares		59,263		56,124		58,554		66,897


	Three Months				Six Months
	Ended				Ended
	June 30,				June 30,
	2011		2010		2011		2010
Basic earnings per common share:

Net income per share — basic	$	0.04	$	0.06	$	0.07	$	0.15


Diluted earnings per common share:
Net income per share-diluted	$	0.03	$	0.06	$	0.07	$	0.14

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 are as follows:


	Three Months				Six Months
	Ended				Ended
	June 30,				June 30,
	2011		2010		2011			2010
Net income	$	2,063	$	3,095	$	4,122		$	8,105
Other comprehensive income:
Change in foreign currency translation		—		—		(1	)		1
Change in unrealized gains (loss) on marketable securities		88		—		72			—

Total comprehensive income	$	2,151	$	3,095	$	4,193		$	8,106

Recent Accounting Pronouncements.

In June 2011, the Financial Accounting Standards Board issued ASU 2011-5 Topic 220 “Comprehensive Income.” This guidance updates the presentation of comprehensive income and eliminates the option of presenting the components of other comprehensive income as part of the statement of changes in stockholders’ equity. It requires presentation of reclassification adjustments from other comprehensive income to net income on the face of the financial statements. This guidance is effective for fiscal years and interim periods beginning after December 15, 2011, and early adoption is permitted. This guidance is not expected to have a material impact on our results of operations, cash flows or financial position. It will however change the Company’s financial statement presentation.

2. Acquisition

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’s preliminary determination of the fair values as of January 31, 2011. Trident’s operating results are reflected in the Company’s consolidated financial statements and are included in the Government Segment.

The purchase price was $29,460, comprised of $17,190 paid in cash and 3.0 million shares in the Company’s Class A Common Stock valued at $12,270. The total purchase price was 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 Acquired intangible assets is approximately 9.6 years. The valuation has resulted in the recognition of $17,334 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 product engineering depth, access to international sales opportunities, 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		5,637
Deferred income taxes		779
Property and equipment		89
Acquired intangible assets		8,947
Other long-term assets		5,413
Accounts payable and accrued expenses		(3,070	)
Accrued payroll and related liabilities		(616	)
Deferred revenue		(2,208	)
Other liabilities		(6,369	)


Total net assets		12,126
Goodwill		17,334

Net assets acquired	$	29,460

The Consolidated Balance Sheets as of June 30, 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 June 30, 2011.

3. Stock-Based Compensation

We recognize compensation expense net of estimated forfeitures over the requisite service period for grants under our option plan, which is generally the vesting period of 5 years. The Company estimates the fair value of each stock option award on the date of grant using the Black-Scholes option-pricing model. Expected volatilities are based on historical volatility of the Company’s stock. The Company estimates forfeitures based on historical experience and the expected term of the options granted are derived from historical data on employee exercises. The risk free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. The Company has not paid and does not anticipate paying dividends in the near future.

We also recognize stock compensation expense for restricted stock issued to directors and certain key executives. The restrictions expire at the end of one year for directors and expire in annual increments over three years for executives and are based on continued employment. We had 627 thousand shares and 42 thousand shares of restricted stock outstanding, respectively, as of June 30, 2011 and June 30, 2010. As a result of the restricted stock grants outstanding as of June 30, 2011, we expect to record future stock compensation expense of $528 during 2011 and $1,845 over the remaining vesting periods of the shares ending in the second quarter of 2014.

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


	Three Months				Six Months
	Ended June 30,				Ended June 30,
	2011		2010		2011		2010
Stock-based compensation:
Stock options	$	1,781	$	2,110	$	4,080	$	5,141
Restricted stock		289		69		486		122
Employee stock purchase plan		55		70		140		108

Total stock compensation expense	$	2,125	$	2,249	$	4,706	$	5,371

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


	Three Months				Six Months
	Ended				Ended
	June 30,				June 30,
	2011		2010		2011		2010
Stock-based compensation:
Direct cost of revenue	$	1,426	$	1,415	$	3,148	$	3,377
Research and development expense		410		587		913		1,402
Sales and marketing expense		109		136		244		326
General and administrative expense		180		111		401		266

Total stock compensation included in operating expenses	$	2,125	$	2,249	$	4,706	$	5,371

A summary of our stock option activity and related information for the six-months ended June 30, 2011 is as follows:


				Weighted
				Average
	Number of			Exercise
(Share amounts in thousands)	Options			Price
Outstanding, beginning of the period		15,446		$	5.42
Granted		2,921		$	4.36
Exercised, including 181 exercised through a net share settlement transaction		(390	)	$	3.05
Expired		(367	)	$	7.24
Forfeited		(1,424	)	$	5.10

Outstanding, at June 30, 2011		16,186		$	5.28


			Weighted
			Average
	Number of		Exercise
(Share amounts in thousands)	Options		Price
Exercisable, at June 30, 2011		8,990	$	4.64

Vested and expected to vest at June 30, 2011		14,924	$	5.22

Weighted-average remaining contractual life of options outstanding at June 30, 2011	6.8 years


	Six Months June 30,
	2011		2010
Estimated weighted-average grant-date fair value of options granted during the period	$	2.42	$	4.58

Total fair value of options vested during the period	$	5,231	$	5,297

Intrinsic value of options exercised during the period	$	631	$	2,258

4. Supplemental Disclosure of Cash Flow Information

Property and equipment acquired under capital leases totaled $1,115 and $2,203 during the three- and six-months ended June 30, 2011, respectively. We acquired $3,068 and $5,706 of property under capital leases during the three- and six-months ended June 30, 2010, respectively.

Interest paid totaled $2,468 and $3,110 during the three- and six-months ended June 30, 2011, respectively. We paid $954 and $2,606 in interest for the three- and six-months ended June 30, 2010, respectively.

Income taxes paid totaled $116 during the three-months ended June, 30, 2011 and income taxes refunded netted to $80 during the six-months ended June 30, 2011. Income taxes paid totaled $942 and $2,172 for the three- and six-months ended June 30, 2010, respectively.

5. Marketable Securities

The following is a summary of available-for-sale marketable securities at June 30, 2011:


	Amortized		Gross		Gross
	Cost		Unrealized		Unrealized			Estimated
	Basis		Gains		Losses			Fair Value
Corporate bonds	$	25,495	$	99	$	(8	)	$	25,586
Mortgage-backed and asset-backed securities		4,478		5		(17	)		4,466
Agency bonds		5,502		3		(2	)		5,503
Government bonds		1,498		8		—			1,506

Total marketable securities	$	36,973	$	115	$	(27	)	$	37,061

The following table summarizes the original cost and estimated fair value of available-for-sale marketable securities by contractual maturity at June 30, 2011:


	Original
	Cost		Fair Value
Due within 1 year or less	$	15,309	$	15,114
Due within 1-2 years		16,450		16,145
Due within 2-3 years		5,900		5,802

	$	37,659	$	37,061

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		6/30/2011
	6/30/2011		Using Fair Value Hierarchy
	Total		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	25,342	$	25,342	$	—	$	—
Corporate bonds		25,586		25,586		—		—
Mortgage-backed and asset-backed securities		4,466		4,466		—		—
Agency bonds		5,503		5,503		—		—
Government bonds		1,506		1,506		—		—

Marketable securities		37,061		37,061		—		—
Deferred compensation plan investments		654		654		—		—

Assets at fair value	$	63,057	$	63,057	$	—	$	—


	Fair Value		Fair Value Measurements at
	as of		6/30/2011
	6/30/2011		Using Fair Value Hierarchy
	Total		Level 1		Level 2		Level 3
Liabilities:
Contractual acquisition earnouts	$	3,444	$	—	$	—	$	3,444
Deferred compensation		423		423		—		—

Liabilities at fair value	$	3,867	$	423	$	—	$	3,444


	Fair Value		Fair Value Measurements at
	as of		6/30/2010
	6/30/2010		Using Fair Value Hierarchy
	Total		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	97,035	$	97,035	$	—	$	—
Deferred compensation plan investments		1,005		1,005		—		—

Assets at Fair Value	$	98,040	$	98,040	$	—	$	—

Liabilities
Deferred compensation	$	858	$	858	$	—	$	—
Contractual acquisition earnouts		6,441		—		—		6,441

Liabilities at Fair Value	$	7,299	$	858	$	—	$	6,441

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, government bonds, agency 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 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 six-months ended June 30, 2011:


	Fair Value
	Measurements
	Using Significant
	Unobservable
	Inputs (Level 3)
Balance at January 1, 2011	$	6,174
Fair value adjustment recognized in earnings		483
Purchases, issuances, and settlements, net		(3,213	)
Transfers in and/or out of Level 3		—

Balance at June 30, 2011	$	3,444

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 six months of 2011, there were no impairments.

7. Segment Information

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. We provide hosted services under contracts with more than 40 wireless carrier networks and VoIP service providers. 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 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- and six-months ended June 30, 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 June 30,
	2011						2010
	Comm.		Gvmt		Total		Comm.		Gvmt		Total
Revenue
Services	$	43,820	$	32,173	$	75,993	$	41,323	$	22,106	$	63,429
Systems		3,773		20,913		24,686		6,670		22,563		29,233

Total revenue		47,593		53,086		100,679		47,993		44,669		92,662

Direct costs of revenue
Direct cost of services		19,364		21,233		40,597		20,470		15,416		35,886
Direct cost of systems		3,616		18,393		22,009		3,448		20,140		23,588

Total direct costs		22,980		39,626		62,606		23,918		35,556		59,474

Gross profit
Services gross profit		24,456		10,940		35,396		20,853		6,690		27,543
Systems gross profit		157		2,520		2,677		3,222		2,423		5,645

Total gross profit	$	24,613	$	13,460	$	38,073	$	24,075	$	9,113	$	33,188


	Six Months Ended June 30,
	2011						2010
	Comm.		Gvmt		Total		Comm.		Gvmt		Total
Revenue
Services	$	88,047	$	62,748	$	150,795	$	80,601	$	42,672	$	123,273
Systems		8,520		31,730		40,250		15,315		44,991		60,306

Total revenue		96,567		94,478		191,045		95,916		87,663		183,579

Direct costs of revenue
Direct cost of services		39,223		43,081		82,304		39,734		30,484		70,218
Direct cost of systems		6,780		27,294		34,074		6,889		39,735		46,624

Total direct costs		46,003		70,375		116,378		46,623		70,219		116,842

Gross profit
Services gross profit		48,824		19,667		68,491		40,867		12,188		53,055
Systems gross profit		1,740		4,436		6,176		8,426		5,256		13,682

Total gross profit	$	50,564	$	24,103	$	74,667	$	49,293	$	17,444	$	66,737


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
Total segment gross profit	$	38,073		$	33,188		$	74,667		$	66,737
Research and development expense		(9,633	)		(6,571	)		(18,176	)		(15,089	)
Sales and marketing expense		(6,932	)		(5,967	)		(14,282	)		(11,946	)
General and administrative expense		(11,421	)		(9,802	)		(21,987	)		(18,264	)
Depreciation and amortization of property and equipment		(2,552	)		(2,257	)		(5,651	)		(4,233	)
Amortization of acquired intangible assets		(1,402	)		(1,171	)		(2,727	)		(2,343	)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
Interest expense		(1,882	)		(2,237	)		(3,802	)		(4,589	)
Amortization debt discount and debt issuance expenses		(237	)		(216	)		(424	)		(376	)
Other income (expense), net		(161	)		495			(126	)		985

Income before income taxes		3,853			5,462			7,492			10,882
Provision for income taxes		(1,790	)		(2,367	)		(3,370	)		(2,777	)

Net income	$	2,063		$	3,095		$	4,122		$	8,105

8. Inventory

Inventory consisted of the following:


	June 30,		Dec. 31,
	2011		2010
Component parts	$	3,975	$	2,564
Finished goods		2,608		2,876

Total inventory at period end	$	6,583	$	5,440

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

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


	June 30, 2011						December 31, 2010
	Gross						Gross
	Carrying		Accumulated				Carrying		Accumulated
	Amount		Amortization		Net		Amount		Amortization		Net
Acquired intangible assets:
Customer lists and other	$	21,899	$	4,222	$	17,677	$	12,952	$	2,928	$	10,024
Customer relationships		20,138		4,160		15,978		20,138		2,818		17,320
Trademarks and patents		1,364		536		828		1,364		444		920
Software development costs, including acquired technology		60,087		24,452		35,635		58,668		19,241		39,427

Total acquired intangible assets and software dev. costs	$	103,488	$	33,370	$	70,118	$	93,122	$	25,431	$	67,691


Estimated future amortization expense:
Six Months ending December 31, 2011											$	7,138
Year ending December 31, 2012											$	14,174
Year ending December 31, 2013											$	14,157
Year ending December 31, 2014											$	12,166
Year ending December 31, 2015											$	4,494
Thereafter											$	17,989

											$	70,118

For the three- and six-months ended June 30, 2011, we capitalized $442 and $1,420, respectively, of software development costs for certain software projects after the point of technological feasibility had been reached but before the products were available for general release. For the three- and six-months ended June 30, 2010, we capitalized $1,352 and $2,172, respectively, of software development costs. These costs 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 the selected products and services.

We routinely update our estimates of the recoverability of the software that has 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 acquisition		—		17,334		17,334

Balance as of June 30, 2011	$	122,454	$	54,023	$	176,477

The gross carrying amounts increased in the six-months ended June 30, 2011 due to the preliminary Trident purchase price allocation and adjustments. 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 date, 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

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

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


		% of Total Revenue For the Three						% of Total Revenue For the Six
		Months Ended						Months Ended
		June 30,						June 30,
Customer	Segment	2011			2010			2011			2010
U.S. Government agencies and departments	Government		31	%		36	%		27	%		36	%
Customer A	Commercial		19	%		28	%		20	%		29	%
Customer B	Commercial		11	%		< 10	%		11	%		< 10	%


		As of June 30, 2011
		Accounts			Unbilled
Customer	Segment	Receivable			Receivables
U.S. Government agencies and departments	Government		17	%		29	%
Customer A	Commercial		20	%		26	%
Customer B	Commercial		7	%		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 June 30, 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 June 30, 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:


	June 30,			Dec. 31,
	2011			2010
4.5% Convertible notes	$	103,500		$	103,500
Promissory note payable to NIM sellers		5,000			10,000
Term loan from commercial bank		19,999			23,333
Term loan from commercial bank		8,002			9,333

Total long-term debt		136,501			146,166
Less: current portion		(14,334	)		(19,333	)

Non-current portion of long-term debt	$	122,167		$	126,833

Aggregate maturities of long-term debt (including interest) at June 30, 2011 are as follows:


2011	$	12,882
2012		14,848
2013		14,428
2014		112,885

Total long-term debt	$	155,043

On November 10, 2009, the Company sold $103,500 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 $23,800, 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 $13,000 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 $40,000 in promissory notes as part of the consideration paid for the acquisition of Networks In Motion, of which $5,000 is outstanding and due in December 2011. The promissory notes bear simple interest at 6%. 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.

We have a $40,000 five year commercial bank term loan (the “Term Loan”), which matures July 2014. The Company initially drew $30,000 of the term funds available on December 31, 2009 and drew the remaining $10,000 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 June 30, 2011). The principal amount outstanding under the Term Loan is payable in sixty equal monthly installments of principal of $556 beginning on January 2010 through June 2014 plus an additional forty five equal monthly installments of principal of $222 beginning October 2010 through June 2014. Interest is payable on a monthly basis.

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 June 30, 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 June 30, 2011:


2011	$	3,296
2012		5,766
2013		4,173
2014		1,680
2014		174

Total minimum lease payments		15,089
Less: amounts representing interest		(1,214	)

Present value of net minimum lease payments (including current portion of $5,627)	$	13,875

14. Income taxes

Our provision for income taxes totaled $1,790 and $3,370 for the three- and six-months ended June 30, 2011, respectively, as compared to $2,367 and $2,777 being recorded for the three- and six-months ended June 30, 2010. The expense recorded for the six-month period ended June 30, 2011 is comprised of current year tax expense of $3,226 recorded based on estimated annual pretax income plus a discrete tax expense of $144 recorded related to unrecognized tax benefits.

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 June 30, 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	$	16,870	$	1,331	$	7	$	—	$	18,208
Contractual acquisition earnouts		3,444		—		—		—		3,444

Total contractual commitments	$	20,314	$	1,331	$	7	$	—	$	21,652

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 June 30, 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 $277.5 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 our backlog at any given time may be affected by a number of factors, including the availability of funding, contracts being renewed or new contracts being signed before existing contracts are completed, (l) that we believe our intellectual property represented by patents is a valuable asset which will contribute positively to our results of operations, (m) that the failure to expand the federal government debt ceiling in the future may result in customer directed stoppage of work on existing contracts, or in delayed payments for work performed on existing contracts, and (n) that a sustained, significant decline in the Company’s stock price and market capitalization, a decline in the Company’s expected future cash flows, a significant adverse change in legal factors or in the business climate, unanticipated competition, and/or slower growth rate, among others may indicate an impairment of our goodwill.

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 compensation expense,

Marketable securities,

Capitalized 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 six-months ended June 30, 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 $29.5 million including, $17.2 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 aerospace, 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 three- and six-month period ended June 30, 2011 to the three- and six-month period ended June 30, 2010 is affected by acquisition of Trident which completed on January 31, 2011. Where changes in our results of operations from the three- and six-months ended June 30, 2011 compared to the three- and six-months ended June 30, 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												Six Months
	Ended June 30,						2011 vs. 2010						Ended June 30,						2011 vs. 2010
($ in millions)	2011			2010			$			%			2011			2010			$			%
Services revenue	$	43.8		$	41.3		$	2.5			6	%	$	88.1		$	80.6		$	7.5			9	%
Systems revenue		3.8			6.7			(2.9	)		(43	)%		8.5			15.3			(6.8	)		(44	)%

Commercial segment revenue		47.6			48.0			(0.4	)		(1	)%		96.6			95.9			0.7			1	%

Direct cost of services revenue		19.4			20.4			(1.0	)		(5	)%		39.2			39.7			(0.5	)		(1	)%
Direct cost of systems revenue		3.6			3.5			0.1			3	%		6.8			6.9			(0.1	)		(1	)%

Commercial segment cost of revenue		23.0			23.9			(0.9	)		(4	)%		46.0			46.6			(0.6	)		(1	)%

Services gross profit		24.4			20.9			3.5			17	%		48.9			40.9			8.0			20	%
% of revenue		56	%		51	%								56	%		51	%
Systems gross profit		0.2			3.2			(3.0	)		(94	)%		1.7			8.4			(6.7	)		(80	)%

% of revenue		5	%		48	%								20	%		55	%
Commercial segment gross profit(1)	$	24.6		$	24.1		$	0.5			2	%	$	50.6		$	49.3		$	1.3			3	%

% of revenue		52	%		50	%								52	%		51	%


¹		See discussion of segment reporting in Note 7 to the accompanying unaudited consolidated financial statements.

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

Our commercial services revenue includes hosted wireless Location Based Service (“LBS”) applications including turn-by-turn navigation, people-finder, asset tracker and E9-1-1 service for wireless and Voice over Internet Protocol (“VoIP”) service providers, and hosted wireless LBS infrastructure including Position Determining Entity (“PDE”) service. This revenue primarily consists of monthly recurring service fees recognized in the month earned. Subscriber service revenue is generated by client software applications for wireless subscribers,

generally on a per-subscriber per month basis. Hosted LBS service and E9-1-1 fees are generally priced based on units served during the period, such as the number of customer cell sites, the number of connections to Public Service Answering Points, or the number of customer subscribers or sessions using our technology. Maintenance fees on our systems and software licenses are usually collected in advance and recognized ratably over the contractual maintenance period. Unrecognized maintenance fees are included in deferred revenue. Custom software development, implementation and maintenance services may be provided under time and materials or fixed-fee contracts.

Commercial services revenue in the three- and six-months ended June 30, 2011 increased $2.5 million, or 6%, and $7.5 million, or 9%, respectively, compared to the same periods in 2010 due to increased sales of both wireless and VoIP E9-1-1 services, an increase in LBS subscriber application revenue, and an increase in software maintenance revenue.

The direct cost of commercial services revenue consists primarily of compensation and benefits, network access, data feed and circuit costs for network operation centers and co-location facilities, and equipment and software maintenance. The direct cost of services also includes amortization of capitalized software development costs of $1.7 million for both the three-months ended June 30, 2011 and June 30, 2010. For the three-months ended June 30, 2011, the direct cost of services revenue decreased $1.0 million, or 5%, from 2010, due mainly to savings in labor and other direct costs. Amortization of capitalized software development costs were $3.5 million and $3.3 million, respectively, for the six-months ended June 30, 2011 and 2010. For the six-months ended June 30, 2011 the direct cost of services revenue decreased $0.5 million, or 1%, compared to the same period in 2010 due to savings in labor and other direct costs, such as licensed content.

Commercial services gross profit for the three- and six-months ended June 30, 2011 increased $3.5 million, or 17%, and $8.0 million, or 20%, respectively, compared to the same periods in 2010 due to increased revenue, favorable mix, and cost control.

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

We sell communications systems to wireless carriers incorporating our licensed software for enhanced services mainly for LBS and text messaging. Licensing fees for our carrier software are generally a function of its volume of usage in our customers’ networks during the relevant period. As a carrier’s subscriber base or usage increases, the carrier must purchase additional capacity under its license agreement and we receive additional revenue.

Commercial systems revenue for the three- and six-months ended June 30, 2011 decreased $2.9 million, or 43% and $6.8 million, or 44%, respectively, compared to the same periods of 2010. The decrease is primarily due to lower sales of text messaging software licenses for incremental customer volume capacity and, to a lesser extent, lower sales of location-based infrastructure systems. The rate of growth in customer use of text messaging has declined, affecting our sales of new licenses, and no text messaging license sales for incremental customer capacity needs are expected for the remainder of 2011.

The direct cost of our commercial systems revenue consists primarily of compensation and benefits, third-party hardware and software purchased for integration and resale, travel expenses, consulting fees as well as the amortization of acquired and capitalized software development. The direct costs of systems revenue for the three- and six-months ended June 30, 2011 were relatively flat compared to the same periods in 2010. The direct cost of the license component of systems revenue is normally very low, and the gross profit very high since much of the software development costs were expensed in prior periods, so that changes in the license component of the systems revenue mix significantly affects the average gross margin in a period. During the three- and six-months ended June 30, 2011, direct costs of systems revenue included $0.9 million and $1.8 million, respectively, of amortization of software development costs. Comparatively, in the three- and six-months ended June 30, 2010, direct cost of systems revenue included $0.7 million and $1.3 million, respectively, of amortization of software development costs.

Our commercial systems gross profit for the three-months ended June 30, 2011 decreased to $0.2 million, or 5% of commercial systems revenue, compared to $3.2 million, or 48% of commercial systems revenue, for the three-months ended June 30, 2010. Commercial systems gross profit for the six-months ended June 30, 2011 was $1.7 million, or 20% of commercial systems revenue compared to $8.4 million, or 55% of revenue in the comparable periods of 2010. Commercial systems gross profit decreased $3.0 million and $6.7 million for the three- and six-months ended June 30, 2011 compared to the same periods in 2010, mainly due to lower high-margin text messaging license software capacity sales.

Government Segment:


	Three Months												Six Months
	Ended June 30,						2011 vs. 2010						Ended June 30,						2011 vs. 2010
($ in millions)	2011			2010			$			%			2011			2010			$			%
Services revenue	$	32.2		$	22.1		$	10.1			46	%	$	62.7		$	42.7		$	20.0			47	%
Systems revenue		20.9			22.6			(1.7	)		(8	)%		31.7			45.0			(13.3	)		(30	)%

Government segment revenue		53.1			44.7			8.4			19	%		94.4			87.7			6.7			8	%

Direct cost of services revenue		21.2			15.4			5.8			38	%		43.0			30.5			12.5			41	%
Direct cost of systems revenue		18.4			20.2			(1.8	)		(9	)%		27.3			39.7			(12.4	)		(31	)%

Government segment cost of revenue		39.6			35.6			4.0			11	%		70.3			70.2			0.1		NM

Services gross profit		11.0			6.7			4.3			64	%		19.7			12.2			7.5			61	%
% of revenue		34	%		30	%								31	%		29	%
Systems gross profit		2.5			2.4			0.1			4	%		4.4			5.3			(0.9	)		(17	)%

% of revenue		12	%		11	%								14	%		12	%
Government segment gross profit		13.5			9.1			4.4			48	%		24.1			17.5			6.6			38	%

% of revenue		25	%		20	%								26	%		20	%


(NM = not meaningful)

¹		See discussion of segment reporting in Note 7 to the accompanying unaudited consolidated financial statements

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

Government services revenue primarily consists of professional communications engineering and field support, cyber-security training, program management, help desk outsource, network design and management for government agencies, as well as operation of teleport (fixed satellite ground terminal) facilities for data connectivity via satellite including resale of satellite airtime. Systems maintenance fees are usually collected in advance and recognized ratably over the contractual maintenance periods. Government services revenue increased $10.1 million, or 46% and $20.0 million, or 47% for the three- and six-months ended June 30, 2011 compared to the same periods in 2010 as a result of new and expanded-scope contracts for field support and maintenance, professional services, and satellite airtime services using our teleport facilities.

Direct cost of government services revenue consists of compensation, benefits and travel expenses incurred in delivering these services, as well as satellite space segment purchased for resale. These costs increased as a result of the increased volume of services.

Our gross profit from government services increased to $11.0 million and $19.7 in the three- and six-months ended June 30, 2011, respectively, compared to $6.7 million and $12.2 million in the three- and six-months ended June 30, 2010, respectively, as a result of a higher volume of services. Government services gross margin was 34% and 30% of revenue for the three-months ended June 30, 2011 and 2010, respectively. Government services gross margin was 31% compared to 29% of revenue for the six-months ended June 30, 2011 and 2010, respectively.

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

We generate government systems revenue from the design, procurement, assembly and deployment of information processing components and communication systems, mainly deployable satellite-based and line-of-sight communications systems, and integration of those systems into customer networks. These are largely variations on our SwiftLink^® products, which are lightweight, secure, deployable communications systems, sold mainly to units of the U.S. Department of Defense, and other federal agencies. Government systems sales decreased $1.7 million, or 8%, and $13.3 million, or 30%, in the three- and six-months ended June, 30 2011, compared to same periods in 2010 due to lower sales volume of our SwiftLink^® and deployable communication systems resulting from the timing of government project funding offset by sales of our highly reliable electronic parts and materials resulting from the Trident acquisition.

The cost of our government systems revenue consists of costs related to purchased system components, compensation and benefits, the costs of third-party contractors, and travel. These costs have decreased as a direct result of the changes in volume. These equipment and third-party costs are variable for our various types of products, and margins may fluctuate between periods based on pricing and product mixes.

Our government systems gross profit was $2.5 million, or 12% of government systems revenue in the three-months ended June 30, 2011, generally flat compared to $2.4 million, or 11% of revenue in the comparable period of 2010. Our government systems gross profit was $4.4 million, or 14% of government systems revenue in the six-months ended June 30, 2011, was down from $5.3 million, or 12% of government systems revenue in the six-months ended June 30, 2010, due in part to federal government budget process issues leading to funding delays, and to the mix of sales between our SwiftLink^® product line, lower margin equipment pass-throughs, and highly reliable electronic components sold by our Trident acquisition.

Revenue Backlog

As of June 30, 2011 and 2010, we had unfilled orders or backlog as follows:


($ in millions)	2011		2010		$		%
Commercial Segment	$	277.5	$	261.0	$	16.5		6	%
Government Segment		156.3		82.4		73.9		90	%

Total funded contract backlog	$	433.8	$	343.4	$	90.4		26	%

Commercial Segment	$	277.5	$	261.0	$	16.5		6	%
Government Segment		947.4		350.5		596.9		170	%

Total backlog of orders and commitments, including customer options	$	1,224.9	$	611.5	$	613.4		100	%

Expected to be realized within next 12 months	$	277.5	$	201.7	$	75.8		38	%

Funded contract backlog represents contracts for which fiscal year funding has been appropriated by the company’s customers (mainly federal agencies), and for hosted services (mainly for wireless carriers), backlog for which is computed by multiplying the most recent month’s contract or subscription revenue times the remaining months under existing long-term agreements, which we believe is the best available information for anticipating revenue under those agreements. Total backlog, as is typically measured by government contractors, includes orders covering optional periods of service and/or deliverables, but for which budgetary funding may not yet have been approved. Company backlog at any given time may be affected by a number of factors, including the availability of funding, contracts being renewed or new contracts being signed before existing contracts are completed. Some of the company’s backlog could be canceled for causes such as late delivery, poor performance and other factors. For example, the third quarter 2011 termination of the Military Sealift Command contract as a result of a protest will result in a $315 million reduction in the Customer Options and Total Backlog amounts above, if conclusion of the process so indicates when backlog is next reported. Accordingly, a comparison of backlog from period to period is not necessarily meaningful and may not be indicative of eventual actual revenue.

Operating Expenses

Research and development expense:


	Three Months											Six Months
	Ended											Ended
	June 30,						2011 vs. 2010					June 30,						2011 vs. 2010
($ in millions)	2011			2010			$		%			2011			2010			$		%
Research and development expense	$	9.6		$	6.6		$	3.0		45	%	$	18.2		$	15.1		$	3.1		21	%
% of total revenue		10	%		7	%							10	%		8	%

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

We incur R&D expense for software applications which are being marketed to new and existing customers on a global basis. During the three- and six-months ended June 30, 2011 and 2010, research and development was primarily focused on wireless location-based infrastructure, middleware, and applications including navigation, people-locator, cellular E9-1-1 and Voice over IP E9-1-1, text messaging deliverables and highly reliable tactical communication solutions. Management continually assess our spending on R&D to ensure resources are focused on technology that is expected to achieve the highest level of success.

In addition to company deliverables, our research and development expenditures and acquisitions have yielded a portfolio of more than 170 patents, and more than 300 patent applications are pending, primarily for wireless location technology. We believe that the intellectual property represented by these patents is a valuable asset that will contribute positively to our results of operations.

Research and development expenses increased $3.0 million and $3.1 million for the three- and six-months ended June 30, 2011 versus the comparable period of 2010 primarily mainly due to expenditures to improve location-based application and infrastructure software for customers, as well as telematics, messaging and secure, highly reliable tactical communication solutions.

Sales and marketing expense:


	Three Months											Six Months
	Ended											Ended
	June 30,						2011 vs. 2010					June 30,						2011 vs. 2010
($ in millions)	2011			2010			$		%			2011			2010			$		%
Sales and marketing expense	$	6.9		$	6.0		$	0.9		15	%	$	14.3		$	11.9		$	2.4		20	%
% of total revenue		7	%		6	%							7	%		6	%

Our sales and marketing expenses include fixed and variable compensation and benefits, trade show expenses, travel costs, advertising and public relations costs as well as a proportionate share of facility-related costs which are expensed as incurred. Our marketing efforts also include speaking engagements and attending and sponsoring industry conferences including our annual SwiftLink Users Forum. We sell our software products and services through our direct sales force and through indirect channels. We have also historically leveraged our relationships with original equipment manufacturers to market our software products to wireless carrier customers. We sell our products and services to agencies and departments of the U.S. Government primarily through direct sales professionals. Sales and marketing expenses increased $0.9 million and $2.4 for the three- and six-months ended June 30, 2011 versus the comparable periods of 2010 due to increases in sales personnel, higher costs of key trade event visibility, and variable compensation accruals.

General and administrative expense:


	Three Months											Six Months
	Ended											Ended
	June 30,						2011 vs. 2010					June 30,						2011 vs. 2010
($ in millions)	2011			2010			$		%			2011			2010			$		%
General and administrative expense	$	11.4		$	9.8		$	1.6		16	%	$	22.0		$	18.3		$	3.7		20	%
% of total revenue		11	%		11	%							12	%		10	%

General and administrative expense consists primarily of management, finance, legal, human resources and internal information systems functions. These costs include compensation, benefits, professional fees, travel, and a proportionate share of rent, utilities and other facilities costs which are expensed as incurred. The $1.6 million and $3.7 million increase in General and Administrative expense for the three- and six-months ended June 30, 2011 compared to the same periods in 2010 was due the incremental costs associated with the acquisition of the Trident operations, as well as investments in process control, and legal and professional costs associated with the protection and monetization of intellectual property.

Depreciation and amortization of property and equipment:


	Three Months									Six Months
	Ended June 30,				2011 vs. 2010					Ended June 30,				2011 vs. 2010
($ in millions)	2011		2010		$		%			2011		2010		$		%
Depreciation and amortization of property and equipment	$	2.6	$	2.3	$	0.3		13	%	$	5.7	$	4.2	$	1.5		36	%
Average gross cost of property and equipment during the period	$	105.9	$	78.8						$	102.6	$	75.1

Depreciation and amortization of property and equipment represents the period costs associated with our investment in information technology and telecommunications equipment, software, furniture and fixtures, and leasehold improvements, as well as amortization of capitalized software developed for internal use, including hosted applications. We compute depreciation and amortization using the straight-line method over the estimated useful lives of the assets, generally range from five years for furniture, fixtures, and leasehold improvements to three to seven years for other types of assets including computers, software, and telephone equipment. Depreciation expense generally increased year-over-year as a result of cumulative capital expenditures made over time. Our depreciable asset base increased as a result of additions to property and equipment including new purchases of $12.6 million in the first half of 2011.

Amortization of acquired intangible assets:


	Three Months									Six Months
	Ended									Ended
	June 30,				2011 vs. 2010					June 30,				2011 vs. 2010
($ in millions)	2011		2010		$		%			2011		2010		$		%
Amortization of acquired intangible assets	$	1.4	$	1.2	$	0.2		17	%	$	2.7	$	2.3	$	0.4		17	%

The amortization of acquired intangible assets relates to our 2011 acquisition of the Trident operations, the 2009 LocationLogic, Networks In Motion, Solvern, and Sidereal acquisitions and the 2004 Kivera acquisition, and the expense increase results from the 2011 transaction. These assets are being amortized over their estimated useful lives of between five and nineteen years. The expense recognized in the three- and six-months ended June 30, 2011 and 2010 relates to customer lists, customer relationships, courseware, and patents.

Interest expense:


	Three Months										Six Months
	Ended										Ended
	June 30,				2011 vs. 2010						June 30,				2011 vs. 2010
($ in millions)	2011		2010		$			%			2011		2010		$			%
Interest expense incurred on bank and other notes payable	$	0.4	$	0.9	$	(0.5	)		(56	)%	$	1.0	$	1.9	$	(0.9	)		(47	)%
Interest expense incurred on 4.5% convertible note financing		1.2		1.2		—			—			2.3		2.3		—			—
Interest expense incurred on capital lease obligations		0.3		0.2		0.1			50	%		0.5		0.4		0.1			25	%
Amortization of deferred financing fees		0.2		0.2		—			—			0.4		0.4		—			—

Total interest and financing expense	$	2.1	$	2.5	$	(0.4	)		(16	)%	$	4.2	$	5.0	$	(0.8	)		(16	)%

Interest expense is incurred under bank and other notes payable, convertible note financing, and capital lease obligations. Financing expense reflects amortization of deferred up-front financing expenditures at the time of contracting for financing arrangements, which are being amortized over the term of the note or the life of the facility.

Interest on the bank term loan is at 0.5% plus the greater of (i) 4% per annum, or (ii) the bank’s prime rate, or an effective rate of 4.5% for the six-months ended June 30, 2011. Interest on our capital leases is primarily at stated rates averaging about 7% per annum. We have a commercial bank line of credit that has not been used for borrowings since 2007, and has therefore generated no interest expense during the reported periods. Interest on our line of credit borrowing would be at the greater of (i) 4% per annum, or (ii) the bank’s prime rate. Further details of our bank facility are provided under “Liquidity and Capital Resources”.

In November 2009, the Company issued $103.5 million aggregate principal amount of 4.5% Convertible Senior Notes due 2014. Interest on the notes is payable semiannually on November 1 and May 1 of each year, beginning May 1, 2010. The notes will mature on November 1, 2014, unless previously converted in accordance with their terms. The notes are TCS’s senior unsecured obligations and will 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.

In December 2009, we issued $40 million in promissory notes as part of the consideration paid for the acquisition of Networks In Motion (“NIM”). The NIM promissory notes bear simple interest at 6%, to be paid in three installments: $30 million paid December 15, 2010, $5 million paid on June 15, 2011, and $5 million due on December 15, 2011, subject to escrow adjustments. 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 and subsidiaries.

Our capital lease obligations include interest at various amounts depending on the lease arrangement. Our interest under capital leases fluctuates depending on the amount of capital lease obligations in each year.

Overall our interest and financing expense was lower in the three- and six-months ended June 30, 2011 as a result of a lower average borrowing balance due mainly to the $30 million NIM promissory note payment made on December 15, 2010. Interest on the bank term loan also decreased due to lower average borrowing balance. Interest on capital lease financing for the three- and six-months ended June 30, 2011 increased slightly over the three- and six-months ended June 30, 2010 due to additional funding for purchases of property and equipment. Amortization expense in all reported periods reflects the proration of fees to refinance our bank term loan and fees associated with the 4.5% convertible debt financing.

Other income (expenses), net:

Other income (expenses), net, includes adjustments to the estimated payments under earnout arrangements that were part of the consideration for two 2009 acquisitions, as well as interest income earned and realized gains on investment accounts and foreign currency translation/transaction gain or loss, which is dependent on fluctuation in exchange rates. Other income, net also includes the effects of foreign currency revaluation on our cash, receivables and deferred revenues that are stated in currencies other than U.S dollars.

Income taxes:

Income tax expense was $3.4 million for the first half of 2011 against pre-tax income of $7.5 million for the first half of 2011, representing an effective tax rate of approximately 45%. For the first six-months of 2010, we recorded a tax provision of $2.8 million, representing an effective tax rate of about 26%. The tax provision for the first six-months of 2010 was lower than would be normally expected as a result of a discrete adjustment to a deferred tax asset reserve which resulted in a reduction of the reserve against our deferred tax asset by about $1.8 million.

Net income:


	Three Months										Six Months
	Ended June 30,				2011 vs. 2010						Ended June 30,				2011 vs. 2010
($ in millions)	2011		2010		$			%			2011		2010		$			%
Net income	$	2.1	$	3.1	$	(1.0	)		(32	)%	$	4.1	$	8.1	$	(4.0	)		(49	)%

Net income was lower than in the prior year periods for the three- and six-months ended June 30, 2011. The Company’s higher revenue and gross profit were offset by an increase in noncash charges, R&D, and selling, general and administrative expenses primarily related to our 2011 acquisition, and other factors discussed above.

Liquidity and Capital Resources


	Six Months
	Ended
	June 30,						2011 vs. 2010
($ in millions)	2011			2010			$			%
Net cash and cash equivalents provided by/(used in):
Operating activities:
Net Income	$	4.1		$	8.1		$	(4.0	)		(49	)%
Non-cash charges		20.4			18.0			2.4			13	%
Deferred income tax provision		3.8			2.8			1.0			36	%
Net changes in working capital including changes in other assets		(4.7	)		22.8			(27.5	)	NM

Net operating activities		23.6			51.7			(28.1	)		(54	)%
Investing activities:
Acquisition, net of cash acquired		(16.1	)		—			(16.1	)	NM
Purchases of marketable securities, net		(1.2	)		—			(1.2	)	NM
Earnout payment related to 2009 acquisition		(3.2	)		—			(3.2	)	NM
Purchases of property and equipment		(12.6	)		(16.8	)		4.2			25	%
Capital purchases funded through leases		2.2			5.7			(3.5	)		(61	)%

Purchases of property and equipment, net of assets funded through leases		(10.4	)		(11.1	)		0.7			6	%
Capitalized software development costs		(1.4	)		(2.2	)		0.8			36	%

Net investing activities		(32.3	)		(13.2	)		(19.1	)	NM
Financing activities:
Payments on long-term debt and capital leases		(12.3	)		(5.2	)		(7.1	)	NM
Other financing activities		1.1			2.4			(1.3	)		(54	)%

Net financing activities		(11.2	)		(2.8	)		(8.4	)	NM
Net change in cash and cash equivalents	$	(19.9	)	$	35.6		$	(55.5	)	NM


Days revenue outstanding in accounts receivable including unbilled receivables		74			75

Capital resources: We have funded our operations, acquisitions, and capital expenditures primarily using cash generated by our operations, debt and capital leases, and issuance of public equity.

Sources and uses of cash: The Company’s cash and cash equivalents balance was approximately $25.3 million at June 30, 2011, a $71.7 million decrease from $97.0 million at June 30, 2010.

Operations: Cash generated by operating activities was $23.6 million for the first half of 2011 as compared to $51.7 million for the first half of 2010. In the first half of 2010, profit from operations was higher and working capital declined as a result of the collection of a $15.7 million 2009 year-end patent settlement receivable, resulting in unusually high cash from operations. The first half of 2011 increase in working capital over the year end 2010 level was comprised of increased accounts receivable due mainly to the first quarter Trident acquisition, offset by a decline in unbilled receivables and a decreased in accounts payable due to the timing of vendor payments and customer payment terms under business agreement terms.

Investing activities: On January 31, 2011, the company completed the transaction to purchase the Trident operations for seller proceeds of $17.2 million in cash, including $1.1 million of cash acquired, and approximately 3.0 million of Company shares valued at $12.3 million. Also, during the first quarter of 2011 the Company made a $3.2 million earnout payment related to a 2009 acquisition. Fixed asset additions, excluding assets funded by leasing, were approximately $12.6 million and $16.8 million, for the six-months ended June 30, 2011 and 2010, respectively. Also, investments were made in development of software for resale which had reached the stage of development calling for capitalization, in the amounts of $1.4 million and $2.2 million for the six-months ended June 30, 2011 and 2010, respectively.

Financing activities: Financing activities during the six-months ended June 30, 2011 were limited to scheduled term debt service payments, including the $5.0 million installment of the Note payable to Networks In Motion which was paid in June 2011 and capital lease activity. Fixed assets acquired under capital leases were valued at $2.2 million and $5.7 million during the six-months ended June 30, 2011 and 2010, respectively.

Capital Resources: We have a $35 million revolving Line of Credit with our principal bank through June 2012 with borrowing available at the bank’s prime rate which was 3.25% per annum at June 30, 2011. Borrowings at any time are limited to an amount based principally on accounts receivable levels and working capital ratio, each as defined in the Line of Credit agreement. The Line of Credit available is also reduced by the amount of cash management services sublimit, which was $1.5 million June 30, 2011. As of June 30, 2011, we had no borrowings outstanding under our bank Line of Credit and had approximately $33.5 million of unused borrowing availability under the line.

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 Interest 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.

The current bank Loan Agreement is secured by substantially all of the Company’s tangible and intangible assets. The principal amount outstanding under the Term Loan accrues interest at the greater of (i) 4% per annum, or (ii) a floating per annum rate equal to one-half of one percentage point (0.5%) above the Interest Rate (3.25% at June 30, 2011). The principal amount outstanding under the Term Loan is payable in sixty equal monthly installments of principal of $0.6 million beginning on January 2010 through June 2014 plus an additional forty five equal monthly installments of principal of $0.2 million beginning October 2010 through June 2014. Interest is payable on a monthly basis. Funds from the initial $30 million draw on the Term Loan were used primarily to retire a June 2009 term loan and funds from the additional $10 million drawn in September 2010 were used for general corporate purposes.

The 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 requires (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 Company, 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 their business or property; to change their business, liquidate or enter into certain extraordinary transactions; to merge, consolidate or acquire stock or property of another entity; to incur indebtedness; to encumber their property; to pay dividends or other distributions or enter into material transactions with an affiliate of the Company. On March 4, 2011, the Loan Agreements covenants requiring a minimum adjusted quick ratio and a fixed charge coverage ratio were modified. As of June 30, 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. If our performance does not result in compliance with any of these restrictive covenants, we would seek to modify our financing arrangements, but there can be no assurance that lenders would not exercise their rights and remedies under the Loan Agreement, including declaring all outstanding debt due and payable.

The Company’s convertible note financing and seller debt arrangements entered into in 2009 are described in detail in Note 12 to financial statements. The Company paid the June 2011 installment of $5.0 million to the sellers of Networks In Motion and the final $5 million payments is due mid-December 2011.

We currently believe that we have sufficient capital resources with cash generated from operations as well as cash on hand to meet our anticipated cash operating expenses, working capital, and capital expenditure and debt service needs for the next twelve months. We have a bank line of credit arrangement through June 2012, and borrowing capacity available to us under a capital lease facility. We may also consider raising capital in the public markets as a means to meet our capital needs and to invest in our business. Although we may need to return to the capital markets, establish new credit facilities or raise capital in private transactions in order to meet our capital requirements, we can offer no assurances that we will be able to access these potential sources of funds on terms acceptable to us or at all.

The failure to expand the federal government debt ceiling in the future may result in customer directed stoppage of work on existing contracts, or in delayed payments for work performed on existing contracts. The impact of either of these events would be reduced revenues and operating income, and/or delayed receipt of contract receivables and reduced cash flow.

Contractual Commitments

As of June 30, 2011, our most significant commitments consisted of term debt, non-cancelable operating leases, purchase obligations, and obligations under capital leases. Contractual acquisition earnouts consist of contingent consideration included as part of the purchase price of certain acquisitions. We lease certain furniture and computer equipment under capital leases. We lease office space and equipment under non-cancelable operating leases. Purchase obligations represent contracts for parts and services in connection with our government satellite services and systems offerings. As of June 30, 2011 our commitments consisted of the following:


	Within 12		1-3		3-5		More than
($ in millions)	Months		Years		Years		5 Years		Total
4.5% Convertible notes obligation	$	4.7	$	9.3	$	105.8	$	—	$	119.8
Term loan		10.4		19.5		—		—		29.9
Operating leases		6.6		12.9		5.1		0.5		25.1
Purchase obligations		16.9		1.3		—		—		18.2
Capital lease obligations		6.3		8.1		0.7		—		15.1
Promissory notes payable		5.3		—		—		—		5.3
Contractual acquisition earnouts		3.4		—		—		—		3.4

Total contractual commitments	$	53.6	$	51.1	$	111.6	$	0.5	$	216.8

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

There have not been any material changes to our interest rate risk as described in Item 7A of our 2010 Annual Report on Form 10-K.

Foreign Currency Risk

For the three- and six-months ended June 30, 2011, we generated $8.9 million and $17.6 million, respectively, of revenue outside the U.S, mostly denominated in U.S. dollars. A change in exchange rates would not have a material impact on our Consolidated Financial Statements. As of June 30, 2011, we had approximately $1.5 million of billed accounts receivable that are denominated in foreign currencies and would be exposed to foreign currency exchange risk. During the six-months ended June 30, 2011, our average receivables subject to foreign currency exchange risk was $1.4 million and our average deferred revenue balances subject to foreign currency exchange risk was $0.4 million. We had an average balance of $0.2 million of unbilled receivables denominated in foreign currency during the six-months ended June 30, 2011. We recorded immaterial transaction gains or losses on foreign currency denominated receivables and deferred revenue for the six-months ended June 30, 2011.

There have not been any other material changes to our foreign currency risk as described in Item 7A of our 2010 Annual Report on Form 10-K.

Item 4. Controls and Procedures

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

As required by Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2011.

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

PART II. — OTHER INFORMATION

Item 1. Legal Proceedings


Item 1A. *Risk Factors*

There have not been any material changes to the information previously disclosed in “Item 1A. Risk Factors” in our 2010 Annual Report on Form 10-K.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 5. Other Information

(a) None

(b) None.

Item 6. Exhibits


Exhibit
Numbers		Description

31.1		Certification of CEO required by the Securities and Exchange Commission Rule 13a-14(a) or 15d-14(a)

31.2		Certification of CFO required by the Securities and Exchange Commission Rule 13a-14(a) or 15d-14(a)

32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on the 4th day of August 2011.


	TELECOMMUNICATION SYSTEMS, INC.
	By:	/s/ Maurice B. Tosé
		Maurice B. Tosé
		Chairman, President and Chief Executive Officer

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


/s/ Maurice B. Tosé		Chairman, President and Chief Executive Officer

Maurice B. Tosé August 4, 2011		(Principal Executive Officer)

/s/ Thomas M. Brandt, Jr.		Senior Vice President and Chief Financial Officer

Thomas M. Brandt, Jr. August 4, 2011		(Principal Financial Officer)

TELECOMMUNICATION SYSTEMS INC /FA/ - FORM 10-Q - August 4, 2011

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TELECOMMUNICATION SYSTEMS INC /FA/ Reports