##### 



SECURITIES AND
    EXCHANGE COMMISSIONWASHINGTON, D.C.
    20549
    FORM 10-K
  (Mark
    One)þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
    THE SECURITIES EXCHANGE ACT OF 1934For the year ended December 31, 2006ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
    THE SECURITIES EXCHANGE ACT OF 1934   Commission File
    No. 0-30821
  TELECOMMUNICATION SYSTEMS,
    INC.
 (Exact name of registrant as
    specified in its charter)
  Maryland

52-1526369(State or Other Jurisdiction of
    Incorporation or Organization)

(I.R.S. Employer Identification No.)275 West Street, Annapolis,
    MD

21401(Address of principal executive
    offices)

(Zip Code)   (410) 263-7616
 Registrants telephone number,
    including area code)
      o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
   o þ o
  rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE
  Document

Part
    of 10-K
    into which incorporatedDefinitive Statement related to
    registrants Annual Meeting of
    Stockholders to be held on June 14, 2007

Part III




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##### 



TABLE OF
    CONTENTS
  Page
    NumberPart IItem 1

Business


2Item 1A

Risk
    Factors


11Item 1B

Unresolved Staff
    Comments


23Item 2

Properties


23Item 3

Legal
    Proceedings


24Item 4

Submission of
    Matters to a Vote of Security Holders


24Part IIItem 5

Market for
    Registrants Common Equity, Related Stockholder Matters and
    Issuer Purchases of Equity Securities


25Item 6

Selected Financial
    Data


28Item 7

Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


29Item 7A

Qualitative and
    Quantitative Disclosure About Market Risk


43Item 8

Financial Statements
    and Supplementary Data


43Item 9

Changes In and
    Disagreements With Accountants on Accounting and Financial
    Disclosure


43Item 9A

Controls and
    Procedures


44Part IIIItem 10

Directors and
    Executive Officers of the Registrant


46Item 11

Executive
    Compensation.


46Item 12

Security Ownership
    of Certain Beneficial Owners and Management


46Item 13

Certain
    Relationships and Related Transactions and Director
    Independence


46Item 14

Principal Accountant
    Fees and Services


46Part IVItem 15

Exhibits, Financial
    Statement Schedules


47Signatures


F-32Exhibit Index


F-33Index to
    Consolidated Financial Statements


F-1  i




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##### 



Form 10-K turn-by-turn
  Form 10-K Form 10-K
 1




---



##### 



Item 1.
    Business  Recent
    Developments
  Form 10-K.
  Overview
    Form 10-K. Form 10-K
  Form 10-K
  Commercial Segment: tm T-Mobile,
  Government Segment: ® ®
 2




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##### 



Discontinued Operations. ® tm behind-the-enterprise-firewall 20/20 tm Form 10-K. Form 10-K.
    ® ® ® tm 20/20 tm tm tm Form 10-K
  I.
    Commercial
    Segment:  A.
    Commercial
    Product and Service Offerings  1. Commercial services. IP E9-1-1, tm
  a. Hosted Location-Based Services, including
    E9-1-1. E9-1-1
  b. Customer subscriptions to application-based
    services such as Traffic and
    Points-of-Interest. tm
 3




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##### 



c. Software and system maintenance.
  d. Location-based technical service
    projects.
  2. Commercial Licensed Software-based
    Systems:
  a. Xypoint®
    Location Platform (XLP) and Applications for Location-based
    Services: ®
  b. Short Message Service Center and Wireless
    Messaging Gateway.
  B.
    Commercial Market
    Opportunities and Strategy    Growth in Wireless and Voice over Internet Protocol (VoIP)
    Subscribers.
 4




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##### 



The FCCs E9-1-1 Mandates.
  Cellular Network Improvements to Third Generation
    Capabilities.
  Improving Wireless Device
    Functionality.
  Growing Use of Commercial Location-Based Wireless Services
    (LBS). ® tm
  Growing Use of Short Messaging,
    E-mail and
    Internet
    Applications. E-mail e-mail
    
    Focus our Software and Integration Resources on Evolving
    Carrier Network Capabilities. Mobile operators and the
    federal government increasingly seek integrated solutions that
    can harness both 5




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##### 



messaging capabilities of networks and location information of
    end-users. We are well positioned to address the evolving
    integration needs of our commercial and government clients
    through our demonstrated expertise in both messaging and
    location determination. Mobile operators have made large capital
    expenditure investments in infrastructure for wireless data and
    location determination technologies. While originally envisioned
    as separate technologies, messaging and location determination
    technologies can be integrated to provide value-added services
    and applications for the operators end-users.  
    Expand Our Sales and Marketing Relationships. We are
    developing relationships with communication infrastructure
    providers in order to expand our sales channels for our carrier
    software products and services. We have historically leveraged
    our strategic relationships with original equipment
    manufacturers to market our Commercial Segment products to
    wireless carriers worldwide. We are adding partnerships for our
    location technologies.
    Grow Our Wireless Carrier and Voice Over IP Customer
    Base. We now serve or are under contract with 55
    wireless carrier networks in 15 countries, and with 13 VoIP
    service providers. We intend to expand our domestic and
    international carrier base by capitalizing on our relationships
    with original equipment manufacturers and establish new
    distribution partnerships and by expanding our own sales and
    marketing initiatives. We will continue to develop network
    software for wireless carriers that operate on all major types
    of networks.
    Leverage Our Expertise in Accessing Information Stored Inside
    Wireless Networks. We will continue to leverage our
    knowledge of complex call control technology, including
    Signaling System 7 and Internet protocol standards, to unlock
    valuable information such as user location, device on/off
    status, and billing and transaction records that reside inside
    wireless networks and are difficult to retrieve and utilize.
    Using this information, we intend to expand the range of
    capabilities that wireless data technology can accomplish for
    our customers.
    Develop and Enhance Our Technology. We will continue
    to invest in our underlying technology and to capitalize on our
    expertise to meet the growing demand for sophisticated wireless
    applications. As of January 1, 2007, our staff included
    approximately 400 personnel with technical expertise in wireless
    network, client software development, hosted wireless
    operations, satellite-based communication technology and
    integrated network solutions. We also have research and
    development relationships with wireless handset manufacturers,
    wireless carriers, and content and electronic commerce
    providers. Our
    Xypoint®
    platform architecture efficiently integrates our presence,
    location, call control and messaging technology, resulting in
    reduced costs, increased reliability, more efficient
    deployments, compatibility with our existing products and a
    migration path to third-generation services.
    Pursue Select Acquisitions. We intend to continue to
    selectively pursue acquisitions of companies and technologies in
    order to increase the scale and scope of our operations, market
    presence, products, services and customer base.  II.
    Government
    Segment:  A.
    Government
    Products and Services  1. Government Services. fee-for-service
  a. Network Operation and Telecom Expense Management
    Support.
 6




---



##### 



b. Custom Software.
  c. Secure Satellite Teleport Data Landing and
    Transmission Services.
  d. Maintenance Services. ®
  2. Government Systems. ® ® ®
  B.
    Government Market
    Opportunities and Strategy  Growing Use of Secure Wireless Communications and Location
    Technology for Defense, Intelligence and Homeland
    Security. ® ®
  Government Outsourcing of Network and Telecom Technical
    Functions.
  Expanded Need for Secure, Interoperable Deployable
    Communication Solutions. ®
 7




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##### 



Secure Teleport and Integration Capabilities along with
    Deployable Systems as a Bundled
    Offering.
  Application of Commercially Proven Technology to
    Government Solutions.
  Customers
  Commercial Segment.
  Government Segment.
  Backlog
    December 31,($ in
    millions)

2006


2005Commercial segment

$
42.8


$
69.0Government segment


40.9



52.8Total backlog

$
83.7


$
121.8Expected to be realized within
    12 months

$
51.3


$
59.1     Sales and
    Marketing
   8




---



##### 



Competition
      
    Commercial Segment. West Corporations Intrado
    subsidiary, Ericsson, Openwave, Logica CMG, Huawei Technologies,
    Comverse, NEC, InfoSpace. Enterprise division competitors
    include IBM, Bloomberg, and UPS Logistics.
    Government Segment. Computer Sciences Corporation;
    Electronic Data Systems Corporation; Keane, Inc.; Northrop
    Grumman; DataPath, Tactical Communications, a division of Sierra
    Nevada Corporation, Globecomm Systems, Inc.    e-mail
  Research
    and Development
   9




---



##### 



E9-1-1 Peer-to-Peer
    Intellectual
    Property Rights
          Employees
    Geographical
    Information
     10




---



##### 



Item 1A. Risk
    Factors  You should consider carefully each of the following risks and
    all of the other information in this Annual Report on
    Form 10-K
    and the documents incorporated by reference herein. If any of
    the following risks and uncertainties develops into actual
    events, our business, financial condition or results of
    operations could be materially adversely affected.
  Risks Related
    to Our Business
  We have a
    history of losses and can offer no assurance that we will
    achieve profitability in the near
    future.
    Our stock
    price, like that of many technology companies, has been and may
    continue to be
    volatile.
    
    announcements of new wireless data communications technologies
    and new providers of wireless data communications;
    announcements of the issuance of new patents
    acquisitions of, or strategic alliances among, providers of
    wireless data communications;
    changes in recommendations by securities analysts regarding the
    results or prospects of providers of wireless data
    communications;
    changes in investor perceptions of the acceptance or
    profitability of wireless data communications; and
    other global economic uncertainties.  If wireless
    carriers do not continue to provide additional products and
    services to their subscribers, our business could be
    harmed.
   11




---



##### 



We may fail
    to support our anticipated growth in operations which could
    reduce demand for our services and materially adversely affect
    our
    revenue.
    We could
    incur substantial costs from product liability claims relating
    to our
    software.
    Our
    operating results could be adversely affected by any
    interruption of our data delivery services or system
    failure.
      Because we
    rely on a few key customers, our revenue may decline if we fail
    to retain those
    customers.
     12




---



##### 



Because we
    rely on key partners to expand our marketing and sales efforts,
    if we fail to maintain or expand our relationships with
    strategic partners and indirect distribution channels our
    license revenues could
    decline.
    Because our
    business may not generate sufficient cash to fund operations, we
    may not be able to continue to grow our business if we are
    unable to obtain additional capital when
    needed.
  and/or
    Variations
    in quarterly operating results due to factors such as changes in
    demand for our products and changes in our mix of revenues and
    costs may cause our Class A common stock price to
    decline.
  quarter-to-quarter. quarter-to-quarter quarter-to-quarter.
 13




---



##### 




    changes in our relationships with wireless carriers, the
    U.S. government or other customers;
    timing of introduction of new products and services;
    changes in pricing policies and product offerings by us or our
    competitors;
    changes in projected profitability of acquired assets that would
    require the write down of the value of the goodwill reflected on
    our balance sheet.
    costs associated with advertising, marketing and promotional
    efforts to acquire new customers;
    capital expenditures and other costs and expenses related to
    improving our business, expanding operations and adapting to new
    technologies and changes in consumer preferences; and
    our lengthy and unpredictable sales cycle.  Growing
    market acceptance of open source software could
    cause a decline in our revenues and operating
    margins.
      Because our
    product offerings are sold internationally, we are subject to
    risks of conducting business in foreign
    countries.
    
    inability to adapt our products and services to local business
    practices, customs and mobile user preferences;
    costs of adapting our product and service offerings for foreign
    markets;
    inability to locate qualified local employees, partners and
    suppliers;
    reduced protection of intellectual property rights;
    the potential burdens of complying with a variety of U.S. and
    foreign laws, trade standards and regulatory requirements,
    including the regulation of wireless communications and the
    Internet and uncertainty regarding liability for information
    retrieved and replicated in foreign countries;
    general geopolitical risks, such as political and economic
    instability and changes in diplomatic and trade
    relations; and
    unpredictable fluctuations in currency exchange rates.   14




---



##### 



We derive a
    significant portion of our revenue from sales to various
    agencies of the U.S. government which has special rights
    unlike other customers and exposes us to additional risks that
    could have a material adverse effect on our business, financial
    condition and operating
    results.
    
    The U.S. government may terminate the contracts it has
    with us. All of the contracts we have with the
    U.S. government are, by their terms, subject to termination
    by the U.S. government either for its convenience or in the
    event of a default by us. In the event of termination of a
    contract by the U.S. government, we may have little or no
    recourse.
    Our contracts with the U.S. government may be terminated
    due to Congress failing to appropriate funds. Our
    U.S. government contracts are conditioned upon the
    continuing availability of Congressional appropriations.
    Congress usually appropriates funds for a given program on a
    fiscal-year basis even though contract performance may take more
    than one year. Any failure by Congress to appropriate funds to
    any program that we participate in could materially delay or
    terminate the program and have a material adverse effect on our
    business.
    We are subject to procurement and other related laws and
    regulations which carry significant penalties for
    non-compliance. We are subject to extensive and complex
    U.S. government procurement laws and regulations. Failure
    to comply with these laws and regulations and with laws
    governing the export of controlled products and commodities, and
    any significant violations of any other federal law, could
    subject us to potential contract termination, civil and criminal
    penalties, and under certain circumstances, suspension and
    debarment from future U.S. government contracts.    Because
    several of our competitors have significantly greater resources
    than we do, we could lose customers and market
    share.
      and/or
 15




---



##### 



While we
    characterize a significant portion of our revenue as being
    recurring there is no guarantee that we will
    actually achieve this
    revenue.
  month-to-month
  The loss of
    key personnel or any inability to attract and retain additional
    personnel could harm our
    business.
    Risks Related
    to Acquisitions
  Our past
    and future acquisitions of companies or technologies could prove
    difficult to integrate, disrupt our business, dilute stockholder
    value or adversely affect operating results or the market price
    of our Class A common
    stock.
    
    properly evaluate the technology;
    accurately forecast the financial impact of the transaction,
    including accounting charges and transaction expenses;
    integrate and retain personnel;
    retain and cross-sell to acquired customers;
    combine potentially different corporate cultures; and
    effectively integrate products and services, and research and
    development, sales and marketing and support operations.  day-to-day
 16




---



##### 



We could incur additional costs or be required to reclassify
    prior earnings in selling, or if we are unable to sell, our
    discontinued operations.
    Industry
    Risks
  Because the
    wireless data industry is a new and rapidly evolving market, our
    product and service offerings could become obsolete unless we
    respond effectively and on a timely basis to rapid technological
    changes.
        Concerns
    about personal privacy and commercial solicitation may limit the
    growth of mobile location services and reduce demand for our
    products and
    services.
   17




---



##### 



Because
    many providers are not in compliance with current regulatory
    mandates and because our industry is undergoing rapid
    technological and regulatory change, our future performance is
    uncertain.
        Our E9-1-1
    business is dependent on state and local governments and the
    regulatory environment for Voice over Internet Protocol (VoIP)
    services is
    developing.
      Because the
    industries which we serve are currently in a cycle of
    consolidation, the number of customers may be reduced which
    could result in a loss of revenue for our
    business.
   18




---



##### 



Technology
    Risks
  Because our
    software may contain defects or errors, our sales could decrease
    if these defects or errors adversely affect our reputation or
    delays shipments of our
    software.
    If we are
    unable to integrate our products with wireless service
    providers systems we may lose sales to
    competitors.
  E9-1-1
  Because our
    systems may be vulnerable to systems failures and security
    risks, we may incur significant costs to protect against the
    threat of these
    problems.
    life-and-death
   19




---



##### 



If mobile
    equipment manufacturers do not overcome capacity, technology and
    equipment limitations, we may not be able to sell our products
    and
    services.
    Because the
    market for most mobile content delivery and mobile location
    products is new, our future success is
    uncertain.
    If wireless
    handsets pose health and safety risks, we may be subject to new
    regulations and demand for our products and services may
    decrease.
    If we are
    unable to protect our intellectual property rights or are sued
    by third parties for infringing upon intellectual property
    rights, we may incur substantial
    costs.
   20




---



##### 



Pursuing
    infringers of our intellectual property rights can be
    costly.
    Third
    parties may claim we are infringing their intellectual property
    rights, and we could be prevented from selling our products, or
    suffer significant litigation expense, even if these claims have
    no
    merit.
    The security
    measures we have implemented to secure information we collect
    and store may be breached, which could cause us to breach
    agreements with our partners and expose us to potential
    investigation and penalties by authorities and potential claims
    by persons whose information was disclosed.
   21




---



##### 



Risks Related
    to Our Capital Structure and Common Stock
  A majority
    of our Class A common stock is beneficially owned by a
    small number of holders, and those holders could thereby
    transfer control of us to a third party without anyone
    elses approval or prevent a third party from acquiring
    us.
    Our
    governing corporate documents contain certain anti-takeover
    provisions that could prevent a change of control that may be
    favorable to
    shareholders.
    
    authorization of the board of directors to issue blank
    check preferred stock;
    prohibition of cumulative voting in the election of directors;
    our classified board of directors;
    limitation of the persons who may call special meetings of
    stockholders; and
    prohibition on stockholders acting without a meeting other than
    through unanimous written consent;
    supermajority voting requirement on various charter and by-law
    provisions;
    establishment of advance notice requirements for nominations for
    election to the board of directors or for proposing matters that
    can be acted on by stockholders at stockholder meetings.    Because
    this report contains forward-looking statements, it may not
    prove to be
    accurate.
   22




---



##### 



turn-by-turn
  Item 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties   23




---



##### 



7-acre
  Item 3.
    Legal
    Proceedings  Highstein v. Telecommunication Systems, Inc.,
    et al. No. 01-CV-9500. Rule 10b-5 Rule 10b-5 En Banc
  successor-in-interest
    Item 4.
    Submission
    of Matters to a Vote of Security Holders   24




---



##### 



Part II  Item 5.
    Market for
    Registrants Common Equity, Related Stockholder Matters and
    Issuer Purchases of Equity Securities    High


Low2007First Quarter 2007 (through
    February 28, 2007)

$
3.82


$
2.992006First Quarter 2006

$
2.56


$
2.00Second Quarter 2006

$
3.26


$
2.23Third Quarter 2006

$
2.83


$
2.03Fourth Quarter 2006

$
3.58


$
2.662005First Quarter 2005

$
3.22


$
2.12Second Quarter 2005

$
2.65


$
2.17Third Quarter 2005

$
3.01


$
2.27Fourth Quarter 2005

$
2.84


$
2.12     Dividend
    Policy
    Change in
    Securities and Use of Proceeds
    Form 10-K
   25




---



##### 



Issuer Purchases
    of Equity Securities
       26




---



##### 



27




---



##### 



Item 6. Selected
    Financial Data  Form 10-K. Form 10-K. Form 10-K. Form 10-K, Form 10-K.
  Year Ended
    December 31,2006


2005


2004


2003


2002(in millions,
    except share and per share data)Statement of Operations
    Data:RevenueServices

$
88.4


$
75.0


$
60.2


$
51.6


$
35.7Systems


36.6



27.2



36.7



40.5



56.3Total revenue


124.9



102.2



96.9



92.1



92.0Direct cost of services revenue


52.5



39.2



30.9



28.0



21.5Direct cost of systems revenue


17.9



17.7



21.2



32.3



40.3Total direct cost of revenue


70.4



56.9



52.1



60.2



61.7Services gross profit


35.8



35.8



29.3



23.6



14.2Systems gross profit


18.7



9.5



15.5



8.2



16.0Total gross profit


54.5



45.2



44.8



31.8



30.3Research and development expense


12.6



13.9



18.1



17.2



17.4Sales and marketing expense


11.7



10.5



9.0



9.1



10.3General and administrative expense


17.0



15.0



15.0



12.3



13.0Depreciation and amortization of
    property and equipment


8.0



8.6



7.4



6.6



6.2Amortization of goodwill and other
    intangible assets


0.1



0.1







0.5



0.6Total operating costs and expenses


49.3



48.2



49.6



45.7



47.6Income (loss) from operations


5.2



(3.0
)


(4.8
)


(13.9
)


(17.3
)Interest expense


(3.2
)


(1.2
)


(3.2
)


(1.1
)


(0.9
)Debt conversion expense










(7.9
)






Other (expense)/income, net


0.0



(0.1
)






1.5



0.4Income (loss) from continuing
    operations


2.0



(4.3
)


(15.9
)


(13.5
)


(17.8
)Loss from discontinued operations


(23.7
)


(7.2
)


(2.6
)






Net loss

$
(21.7
)

$
(11.5
)

$
(18.5
)

$
(13.5
)

$
(17.8
)Income (loss) from continuing
    operations per share

$
0.05


$
(0.11
)

$
(0.48
)

$
(0.45
)

$
(0.61
)Loss from discontinued operations
    per share

$
(0.60
)

$
(0.19
)

$
(0.08
)

$



$
Net loss per share  basic

$
(0.55
)

$
(0.30
)

$
(0.56
)

$
(0.45
)

$
(0.61
)Income (loss) from continuing
    operations per share

$
0.05


$
(0.11
)

$
(0.48
)

$
(0.45
)

$
(0.61
)Loss from discontinued operations
    per share

$
(0.59
)

$
(0.19
)

$
(0.08
)

$



$
Net loss per share 
    diluted

$
(0.54
)

$
(0.30
)

$
(0.56
)

$
(0.45
)

$
(0.61
)Basic shares used in computation
    (in thousands)


39,430



38,823



33,381



29,796



29,149Diluted shares used in computation
    (in thousands)


40,166



38,823



33,381



29,796



29,149  28




---



##### 



As of
    December 31,2006


2005


2004


2003


2002(in
    millions)Balance Sheet Data:Cash and cash equivalents

$
10.4


$
9.3


$
18.3


$
18.9


$
27.4Working capital


25.4



27.5



20.2



28.5



31.7Total assets


83.6



90.6



102.4



65.3



81.4Capital leases and long-term debt
    (including current portion)


17.6



16.5



18.4



14.6



10.3Total liabilities


48.6



41.5



42.9



28.4



33.8Total stockholders equity


35.1



49.1



59.5



36.9



47.6  Item 7. Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Critical
    Accounting Policies and Estimates
  percentage-of-completion
  percentage-of-completion
  Overview and
    Recent Developments
    slower-than-anticipated ® Form 10-K.
 29




---



##### 



Form 10-K.
      
    Revenue and gross profit. We derive revenue from the
    sales of systems and services including recurring monthly
    service and subscriber fees, software licenses and related
    service fees for the design, development, and deployment of
    software and communication systems, and products and services
    derived from the delivery of information processing and
    communication systems to governmental agencies.
    Gross profit represents revenue minus direct cost of revenue,
    including certain non-cash expenses. The major items
    comprising our cost of revenue are compensation and benefits,
    third-party hardware and software, amortization of software
    development costs, non-cash stock-based compensation, and
    overhead expenses. The costs of hardware and third-party
    software are primarily associated with the delivery of systems,
    and fluctuate from period to period as a result of the relative
    volume, mix of projects, level of service support required and
    the complexity of customized products and services delivered.
    Amortization of software development costs, including acquired
    technology, is associated with the recognition of systems
    revenue from our Commercial Applications segment.
    Operating expenses. Our operating expenses are
    primarily compensation and benefits, professional fees, facility
    costs, marketing and sales-related expenses, and travel costs as
    well as certain non-cash expenses such as non-cash stock
    compensation expense, depreciation and amortization of property
    and equipment, and amortization of acquired intangible assets.
    Liquidity and cash flows. The primary driver of our
    cash flows is the results of our operations including
    discontinued operations. Important sources of our liquidity have
    been cash raised from our 2006 debt financing and our 2004
    financings in connection with our 2004 acquisitions, all as
    described below under Liquidity and Capital
    Resources, and borrowings under our bank credit agreement
    and lease financings secured for the purchase of equipment.
    Balance sheet. We view cash, working capital, and
    accounts receivable balances and days revenues outstanding as
    important indicators of our financial health. 30




---



##### 



Results of
    Operations
  Revenue and Cost
    of Revenue
  Discontinued Operations  Enterprise assets
  Commercial Segment:
  2006 vs.





2005 vs.2005





2004($ in
    millions)

2006


2005


$


%


2004


$


%Services revenue

$
59.7


$
54.2


$
5.5



10
%

$
44.7


$
9.6



21
%Systems revenue


17.2



11.7



5.5



47
%


13.1



(1.4
)


(11
%)Total Commercial Segment revenue


77.0



65.9



11.1



17
%


57.7



8.2



14
%Direct cost of services


31.4



25.9



5.5



21
%


21.5



4.4



20
%Direct cost of systems


5.2



5.7



(0.5
)


(9
%)


5.8



(0.1
)


(2
%)Total Commercial Segment cost of
    revenue


36.6



31.6



5.0



16
%


27.3



4.3



16
%Services gross profit


28.3



28.3



0.0



NM



23.2



5.2



22
%Systems gross profit


12.0



6.0



6.0



100
%


7.2



(1.3
)


(18
%)Total Commercial Segment gross
    profit*

$
40.3


$
34.3


$
6.0



18
%

$
30.4


$
3.9



13
%Segment gross profit as a
    percent of revenue


52
%


52
%










53
%     *
    
    See discussion of segment reporting in Note 20 to the
    audited Consolidated Financial Statements presented elsewhere in
    this Annual Report on
    Form 10-K.
    (NM = Not meaningful)  Commercial
    Services Revenue and Cost of Revenue:
  E9-1-1, tm
   31




---



##### 



Commercial
    Systems Revenue and Cost of Revenue
    percentage-of-completion
     32




---



##### 



Government Segment:
  2006 vs.
    2005





2005 vs.
    2004($ in
    millions)

2006


2005


$


%


2004


$


%Services revenue

$
28.6


$
20.8


$
7.8



38
%

$
15.6


$
5.2



33
%Systems revenue


19.3



15.5



3.8



25
%


23.6



(8.1
)


(34
%)Total Government Segment revenue


48.0



36.3



11.7



32
%


39.2



(2.9
)


(8
%)Direct cost of services


21.1



13.4



7.7



58
%


9.5



3.9



41
%Direct cost of systems


12.7



12.0



0.7



6
%


15.4



(3.4
)


(22
%)Total Government Segment cost of
    revenue


33.8



25.4



8.4



33
%


24.9



0.5



2
%Services gross profit


7.5



7.4



0.1



1
%


6.1



1.3



21
%Systems gross profit


6.7



3.5



3.2



91
%


8.2



(4.7
)


(57
%)Total Government Segment gross
    profit*

$
14.2


$
10.9


$
3.3



30
%

$
14.3


$
(3.4
)


(24
%)Segment gross profit as a
    percent of revenue


30
%


30
%










37
%     *
    
    See discussion of segment reporting in Note 20 to the
    audited Consolidated Financial Statements presented elsewhere in
    this Annual Report on
    Form 10-K.  percentage-of-completion
  sub-contractor
 33




---



##### 



Government
    Services Revenue and Cost of Revenue:
          Government
    Systems Revenue and Cost of Revenue:
  ® percentage-of-completion ®
   34




---



##### 



Operating Expenses:
  Research and
    Development Expense:
  2006 vs.
    2005





2005 vs.
    2004($ in
    millions)

2006


2005


$


%


2004


$


%Research and development expense

$
12.6


$
13.9


$
(1.3
)


(9
%)

$
18.1


$
(4.2
)


(23
%)Percent of revenue


10
%


14
%










19
%     product-by-product
     35




---



##### 



Sales and
    Marketing Expense:
  2006 vs.
    2005





2005 vs.
    2004($ in
    millions)

2006


2005


$


%


2004


$


%Sales and marketing expense

$
11.7


$
10.5


$
1.2



11
%

$
9.0


$
1.5



17
%Percent of revenue


9
%


10
%










9
%     General and
    Administrative Expense:
  2006 vs.
    2005





2005 vs.
    2004($ in
    millions)

2006


2005


$


%


2004


$


%General and administrative expense

$
17.0


$
15.0


$
2.0



13
%

$
15.0


$
0.0



0
%Percent of revenue


14
%


15
%










15
%     Depreciation and
    Amortization of Property and Equipment:
  2006 vs.
    2005





2005 vs.
    2004($ in
    millions)

2006


2005


$


%


2004


$


%Depreciation and amortization of
    property and equipment

$
8.0


$
8.6


$
(0.6
)


7
%

$
7.4


$
1.2



16
%Average gross cost of property and
    equipment

$
52.0


$
47.4


$
4.6



10
%

$
38.3


$
9.1



24
%   year-over-year
 36




---



##### 



Amortization of
    Acquired Intangible Assets:
  2006 vs.
    2005





2005 vs.
    2004($ in
    millions)

2006


2005


$


%


2004


$


%Amortization of acquired intangible
    assets

$
0.1


$
0.2


$
(0.1
)


(50
%)

$



$
0.2



NM     Interest
    Expense:
  2006 vs.
    2005





2005 vs.
    2004($ in
    millions)

2006


2005


$


%


2004


$


%Interest expense incurred on notes
    payable and under our bank revolving credit agreement

$
1.5


$
0.5


$
1.0



200
%

$
1.2


$
(0.8
)


(67
%)Interest expense incurred on
    capital lease obligations


0.3



0.3







NM



0.2



0.1



50
%Amortization of debt discount


1.0







1.0



100
%


1.3



(1.3
)


(100
%)Amortization of deferred financing
    fees


0.4



0.5



(0.1
)


(20
%)


0.5







NMLess: capitalized interest


(0.1
)


(0.1
)






NM







(0.1
)


NMTotal Interest and Financing Expense

$
3.1


$
1.2


$
1.9



158
%

$
3.2


$
(2.0
)


(63
%)   .
     37




---



##### 



Debt Conversion
    Expense:
  Form 10-K.
  Other(Expense)/Income,
    Net:
  2006 vs.
    2005





2005 vs.
    2004($ in
    millions)

2006


2005


$


%


2004


$


%Foreign currency translation/
    transaction (loss)/gain

$
(0.1
)

$
(0.2
)

$
(0.1
)


50
%

$
0.1


$
(0.3
)


(300
%)Miscellaneous other (expense)/
    income


0.1



0.1







NM



(0.1
)


0.2



(200
%)Total other (expense)/income, net

$
(0.0
)

$
(0.1
)


0.1



(100
%)

$
(0.1
)






100
%Revenues billed in foreign currency

$
7.3


$
6.9


$
0.4



6
%

$
6.5


$
0.4



6
%     Income
    Taxes:
  Form 10-K.
 38




---



##### 



Discontinued
    Operations:
  slower-than-anticipated slower-than-anticipated Form 10-K.
    2006 vs.
    2005





2005 vs.
    2004($ in
    millions)

2006


2005


$


%


2004


$


%Services revenue

$
15.3


$
22.5


$
(7.2
)


(32
%)

$
38.5


$
(16.0
)


(42
%)Systems revenue


10.7



5.6



5.1



91
%


7.5



(1.9
)


(25
%)Total Enterprise revenue


26.0



28.1



(2.1
)


(7
%)


46.0



(17.9
)


(39
%)Direct cost of services


12.0



15.7



(3.7
)


(24
%)


29.9



(14.2
)


(48
%)Direct cost of systems


9.5



6.3



3.2



51
%


5.4



1.0



19
%Total Enterprise cost of revenue


21.5



22.1



(0.6
)


(3
%)


35.3



(13.2
)


(38
%)Services gross profit


3.3



6.9



(3.6
)


52
%


8.6



(1.9
)


(20
%)Systems gross profit


1.2



(0.8
)


2.0



250
%


2.1



(2.9
)


(138
%)Total Enterprise gross profit


4.5



6.0



(1.5
)


25
%


10.7



(4.7
)


(43
%)Research and development, sales,
    marketing, and general and administrative expenses


12.6



9.9



3.0



30
%


10.8



(0.9
)


(8
%)Depreciation and amortization


(0.0
)


3.3



(3.3
)


(100
%)


2.5



0.8



32
%Write-down of goodwill and other
    long-lived assets


(15.5
)










NM











NMLoss from discontinued
    operations

$
(23.7
)

$
(7.2
)


(16.5
)


229
%

$
(2.6
)

$
(4.6
)


177
%    39




---



##### 



Net
    Loss:
  2006 vs.
    2005





2005 vs.
    2004($ in
    millions)

2006


2005


$


%


2004


$


%Net income (loss) from continuing
    operations

$
2.0


$
(4.3
)

$
6.3



(146
%)

$
(15.9
)

$
11.6



(73
%)Loss from discontinued operations


(23.7
)


(7.2
)


(16.5
)


229
%


(2.6
)


(4.6
)


NMNet loss

$
(21.7
)

$
(11.5
)

$
(10.2
)


88
%

$
(18.5
)

$
7.0



(38
%)     Liquidity and
    Capital Resources
    ($ in
    millions)

2006


2005


2004Net cash and cash equivalents
    provided by (used in):Net loss

$
(21.7
)

$
(11.5
)

$
(18.5
)Less: loss from discontinued
    operations


(23.7
)


(7.1
)


(2.6
)Income (loss) from continuing
    operations


2.0



(4.4
)


(15.9
)Non-cash charges


13.9



11.3



18.1Net changes in working capital


(2.9
)


1.1



0.1Operating activities from
    continuing operations


13.0



8.0



2.3Operating activities from
    discontinued operations


(8.0
)


(3.2
)


0.6Net operating activities


5.0



4.8



2.9Acquisitions, net of cash acquired










(23.9
)Purchases of property and equipment


(2.8
)


(4.6
)


(7.0
)Capitalized software development
    costs


(1.8
)


(2.0
)


Investing activities from
    continuing operations


(4.6
)


(6.6
)


(30.9
)Investing activities from
    discontinued operations


(1.4
)


(2.1
)


(0.8
)Net investing activities


(6.0
)


(8.7
)


(31.7
)Payments on debt and leases


(13.6
)


(7.4
)


(8.9
)Proceeds from/(finance fees related
    to) issuance of stock and debentures, net


(1.5
)


(0.1
)


28.2Proceeds from borrowings


16.0



2.0



7.5Proceeds from employee option
    exercises


0.7



0.7



1.4Financing activities from
    continuing operations


1.6



(4.9
)


28.2Effect of exchange rates from
    discontinued operations


0.3



(0.1
)


0.1Change in cash and cash equivalents
    from continuing operations


10.1



(3.5
)


(0.5
)Change in cash and cash equivalents
    from discontinued operations


(9.1
)


(5.4
)


0.0Net change in cash and cash
    equivalents

$
1.0


$
(8.9
)

$
(0.5
)Days revenues outstanding in
    accounts receivable including unbilled receivables


82



91



122   Capital resources:
  
    our January 2004 private placement of convertible subordinated
    debentures and common stock (described below), which generated
    net proceeds of approximately $19.9 million;
    our August 2004 placement of our common stock (described below),
    which generated net proceeds of approximately $8.3 million,
    our March 10, 2006 issuance of secured notes and warrants
    (described below) which generated net cash proceeds of
    approximately $9.3 million, and 40




---



##### 




    our December 28, 2006 issuance of a $5 million note
    for a term of three years secured by accounts receivable of one
    customer.    Form 10-K
    Sources and uses of cash:
     41




---



##### 



Off-Balance Sheet
    Arrangements
    Contractual
    Commitments
    ($ in
    millions)

2007


2008-2009


2010-2011


Beyond


TotalNotes payable

$
2.6


$
11.4


$



$



$
14.0Capital lease obligations


2.9



1.7



0.1







4.7Operating leases, primarily for
    office space


3.3



4.2



1.2







8.7Total contractual commitments

$
8.8


$
17.3


$
1.3


$



$
27.4  42




---



##### 



Related Party
    Transactions
    Item 7A.
    Qualitative
    and Quantitative Disclosures about Market Risk  Interest Rate
    Risk
      Foreign Currency
    Risk
    Item 8.
    Financial
    Statements and Supplementary Data  Form 10-K page F-1.
  Item 9.
    Changes In
    and Disagreements With Accountants on Accounting and Financial
    Disclosure   43




---



##### 



Item 9A.
    Controls
    and Procedures  Evaluation of
    Disclosure Controls and Procedures
  Form 10-K, Rule 13a-15(e) 15d-15(e)
  Managements
    Report on Internal Control over Financial Reporting
  Rules 13a-15(f) 15d-15(f).
  Changes in
    Internal Control over Financial Reporting
   44




---



##### 



Report of
    Independent Registered Public Accounting Firm
  The Board of
    Directors and Stockholders
               
    45




---



##### 



Part III  Item 10.
    Directors
    and Executive Officers of the Registrant    Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and
    Management    Item 13.
    Certain
    Relationships and Related Transactions and Director
    Independence    Item 14.
    Principal
    Accountant Fees and Services   46




---



##### 



Part IV  Item 15.
    Exhibits,
    Financial Statement Schedules  (a)(1) Financial
    Statements
  Form 10-K page F-1.
  (a)(2) Financial
    Statement Schedules
  Form 10-K.
  Exhibits
   47




---



##### 



Index to
    Consolidated Financial Statements  Report of
    Independent Registered Public Accounting Firm


F-2Consolidated Balance
    Sheets as of December 31, 2006 and 2005


F-3Consolidated
    Statements of Operations for each of the three years in the
    period ended December 31, 2006


F-4Consolidated
    Statements of Stockholders Equity for each of the three
    years in the period ended December 31, 2006


F-5Consolidated
    Statements of Cash Flows for each of the three years in the
    period ended December 31, 2006


F-7Notes to
    Consolidated Financial Statements


F-8  F-1




---



##### 



Report of
    Independent Registered Public Accounting Firm  The Board of
    Directors and Stockholders
             
    F-2




---



##### 



TeleCommunication
    Systems, Inc.
  Consolidated Balance Sheets
 (amounts in thousands, except share data)
  December 31,


December 31,2006


2005AssetsCurrent assets:Cash and cash equivalents

$
10,358


$
9,320Accounts receivable, net of
    allowance of $290 in 2006 and $233 in 2005


21,544



20,886Unbilled receivables


7,636



6,361Inventory


5,293



3,197Other current assets


2,818



2,970Current assets of discontinued
    operations


13,596



22,891Total current assets


61,245



65,625Property and equipment, net of
    accumulated depreciation and amortization of $40,594 in 2006 and
    $34,134 in 2005


12,853



16,323Software development costs, net of
    accumulated amortization of $3,262 in 2006 and $1,990 in 2005


4,402



3,825Acquired intangible assets, net of
    accumulated amortization of $362 in 2006 and $214 in 2005


856



1,004Goodwill


1,813



1,813Other assets


2,526



1,982Total assets

$
83,695


$
90,572Liabilities and
    stockholders equityCurrent liabilities:Accounts payable and accrued
    expenses

$
10,421


$
10,175Accrued payroll and related
    liabilities


5,663



3,971Deferred revenue


3,485



4,123Bank line of credit borrowings






8,005Current portion of notes payable


2,160



2,175Current portion of capital lease
    obligations


2,740



3,001Current liabilities of discontinued
    operations


11,400



6,719Total current liabilities


35,869



38,169Capital lease obligations and notes
    payable, less current portion


12,721



3,341Stockholders equity:Class A Common Stock;
    $0.01 par value:Authorized shares 
    225,000,000; issued and outstanding shares of 32,267,893 in 2006
    and 31,381,575 in 2005


322



314Class B Common Stock;
    $0.01 par value:Authorized shares 
    75,000,000; issued and outstanding shares of 7,525,672 in 2006
    and 8,035,983 in 2005


76



80Deferred compensation






(231
)Additional paid-in capital


217,739



210,275Accumulated other comprehensive
    loss:Cumulative foreign currency
    translation adjustment






(40
)Accumulated deficit


(183,032
)


(161,336
)Total stockholders equity


35,105



49,062Total liabilities and
    stockholders equity

$
83,695


$
90,572   See accompanying Notes to
    Consolidated Financial Statements.
 F-3




---



##### 



TeleCommunication
    Systems, Inc.
  Consolidated Statements of Operations
 (amounts in thousands, except per share data)
  Year ended
    December 31,2006


2005


2004RevenueServices

$
88,380


$
74,972


$
60,234Systems


36,556



27,181



36,678Total revenue


124,936



102,153



96,912Direct costs of
    revenueDirect cost of services


52,540



39,230



30,972Direct cost of systems, including
    amortization of software development costs of $1,273, $786, and
    $445, respectively


17,883



17,719



21,234Total direct cost of revenue


70,423



56,949



52,206Services gross profit


35,840



35,742



29,262Systems gross profit


18,673



9,462



15,444Total gross profit


54,513



45,204



44,706Operating costs and
    expensesResearch and development expense


12,586



13,863



18,106Sales and marketing expense


11,713



10,535



8,973General and administrative expense


16,959



15,044



14,996Depreciation and amortization of
    property and equipment


7,956



8,625



7,353Amortization of acquired intangible
    assets


147



177



37Total operating costs and expenses


49,360



48,244



49,465Operating Income
    (Loss)


5,153



(3,040
)


(4,759
)Interest expense


(3,198
)


(1,172
)


(3,196
)Debt conversion expense










(7,886
)Other (expense)/income, net


22



(104
)


(61
)Income (Loss) from continuing
    operations


1,976



(4,316
)


(15,902
)Loss from discontinued operations


(23,671
)


(7,151
)


(2,646
)Net loss

$
(21,695
)

$
(11,467
)

$
(18,548
)Income (Loss) per share 
    basic:Income (Loss) per share from
    continuing operations

$
0.05


$
(0.11
)

$
(0.48
)Loss per share from discontinued
    operations


(0.60
)


(0.19
)


(0.08
)Net loss per share 
    basic

$
(0.55
)

$
(0.30
)

$
(0.56
)Income (Loss) per share 
    diluted:Income (Loss) per share from
    continuing operations

$
0.05


$
(0.11
)

$
(0.48
)Loss per share from discontinued
    operations


(0.59
)


(0.19
)


(0.08
)Net loss per
    share-diluted

$
(0.54
)

$
(0.30
)

$
(0.56
)Weighted average shares
    outstanding-basic


39,430



38,823



33,381Weighted average shares
    outstanding-diluted


40,166



38,823



33,381Composition of non-cash stock
    compensation expense:Direct costs of revenue

$
1,509


$
16


$
53Research and development expense


558



11



140Sales and marketing expense


326



18



56General and administrative expense


723



675



946Total non-cash stock compensation
    expense

$
3,116


$
720


$
1,195   See accompanying Notes to
    Consolidated Financial Statements.
 F-4




---



##### 



TeleCommunication
    Systems, Inc.
  Consolidated Statements of Stockholders
    Equity
 (amounts in thousands, except share data)
  AccumulatedClass A


Class B





Additional


OtherCommon


Common


Deferred


Paid-In


Comprehensive


AccumulatedStock


Stock


Compensation


Capital


Loss


Deficit


TotalBalance at January 1,
    2004

$
221


$
94


$
(1,399
)

$
169,256


$



$
(131,321
)

$
36,851Options exercised for the purchase
    of 537,333 shares of Class A Common Stock


5











1,053











1,058Issuance of 85,901 shares of
    Class A Common Stock under Employee Stock Purchase Plan


1











344











345Issuance of 1,568,308 shares
    of Class A Common Stock in connection with the Enterprise
    acquisition and related financing, net of issuance costs


16











8,366











8,382Issuance of 2,500,000 shares
    of Class A Common Stock in connection with a private
    financing, net of issuance costs


25











9,317











9,342Issuance of 2,990,544 shares
    of Class A Common Stock for the conversion of the
    convertible subordinated debentures


29











15,871











15,900Issuance of 45,376 shares of
    Class A Common Stock for accrued interest for convertible
    subordinated debentures














209











209Surrender of 79,563 restricted
    shares of Class A Common Stock as payment for payroll tax
    withholdings


(1
)










(449
)










(450
)Fair value of beneficial conversion
    feature of convertible subordinated debentures














3,662











3,662Issuance of warrants to purchase
    341,072 shares of Class A Common Stock














1,395











1,395Conversion of 954,687 shares
    of Class B Common Stock to Class A Common Stock


10



(10
)


















Stock compensation expense for
    issuance of Class A Common Stock options at below fair
    market value














583











583Amortization of deferred
    compensation expense










612















612Fair value of stock options issued
    to non-employees for service














171











171Foreign currency translation
    adjustment


















(6
)






(6
)Net loss for 2004






















(18,548
)


(18,548
)Balance at December 31,
    2004

$
306


$
84


$
(787
)

$
209,778


$
(6
)

$
(149,869
)

$
59,506Options exercised for the purchase
    of 290,980 shares of Class A Common Stock


3











310











313Issuance of 176,851 shares of
    Class A Common Stock under Employee Stock Purchase Plan


2











380











382Issuance of 14,816 restricted
    shares of Class A Common Stock to directors and key
    executives










(41
)


41











Issuance costs related to
    2,500,000 shares of Class A Common Stock in connection
    with a private financing














(81
)










(81
) (statement continued on following page)
 F-5




---



##### 



TeleCommunication
    Systems, Inc.
  Consolidated Statements of Stockholders
    Equity  (Continued)
 (amounts in thousands, except share data)
  AccumulatedClass A


Class B





Additional


OtherCommon


Common


Deferred


Paid-In


Comprehensive


AccumulatedStock


Stock


Compensation


Capital


Loss


Deficit


TotalSurrender of 100,564 restricted
    shares of Class A Common Stock as payment for payroll tax
    withholdings


(1
)










(249
)










(250
)Conversion of 373,038 shares
    of Class B Common Stock to Class A Common Stock


4



(4
)


















Stock compensation expense for
    issuance of Class A Common Stock options at below fair
    market value














123











123Amortization of deferred
    compensation expense










597















597Valuation adjustment to stock
    options issued to non-employees for service














(27
)










(27
)Foreign currency translation
    adjustment


















(34
)






(34
)Net loss for 2005






















(11,467
)


(11,467
)Balance at December 31,
    2005

$
314


$
80


$
(231
)

$
210,275


$
(40
)

$
(161,336
)

$
49,062Elimination of deferred
    compensation upon adoption of SFAS No. 123(R)










231



(231
)










Options exercised for the purchase
    of 209,632 shares of Class A Common Stock


2











343











345Issuance of 212,194 shares of
    Class A Common Stock under Employee Stock Purchase Plan


2











388











390Issuance of warrants to purchase
    1,750,000 shares of Class A Common Stock














3,455











3,455Surrender of 67,827 restricted
    shares of Class A Common Stock as payment for payroll tax
    withholdings


(1
)










(187
)










(188
)Conversion of 510,291 shares
    of Class B Common Stock to Class A Common Stock


5



(5
)


















Stock compensation expense for
    issuance of Class A Common Stock options at below fair
    market value for continuing operations














2,872











2,872Stock compensation expense for
    issuance of Class A Common Stock options at below fair
    market value for discontinued operations














504











504Vesting of employee stock options














244











244Valuation adjustment to stock
    options issued to non-employees for service














76











76Foreign currency translation
    adjustment


















40







40Net loss for 2006






















(21,695
)


(21,695
)Balance at December 31,
    2006

$
322


$
76


$



$
217,739


$



$
(183,032
)

$
35,105    See accompanying Notes to
    Consolidated Financial Statements.
  F-6




---



##### 



TeleCommunication
    Systems, Inc.
  Consolidated Statements of Cash Flows
 (amounts in thousands)
  Year ended
    December 31,2006


2005


2004Operating activities:Net loss

$
(21,695
)

$
(11,467
)

$
(18,548
)Less: Loss from discontinued
    operations


(23,671
)


(7,151
)


(2,646
)Income (Loss) from continuing
    operations


1,976



(4,316
)


(15,902
)Adjustments to reconcile net loss
    to net cash used in operating activities:Depreciation and amortization of
    property and equipment


7,956



8,625



7,353Amortization of acquired intangible
    assets


147



177



37Non-cash stock compensation expense


3,116



720



1,195Amortization of software
    development costs


1,273



786



445Non-cash debt conversion expense










6,886Amortization of debt discount


960







1,344Amortization of deferred financing
    fees included in interest expense


487



470



464Other non-cash expenses


(17
)


485



501State of Maryland loan forgiveness










(100
)Changes in operating assets and
    liabilities:Accounts receivable, net


(658
)


(2,639
)


2,155Unbilled receivables


(1,275
)


3,524



(1,023
)Inventory


(2,094
)


(635
)


(2,972
)Other current assets


152



(1,140
)


392Other assets


111



(439
)


2,701Accounts payable and accrued
    expenses


246



1,423



(2,490
)Accrued payroll and related
    liabilities


1,302



195



175Deferred revenue


(638
)


758



1,134Net cash provided by operating
    activities of continuing operations


13,044



7,994



2,295Net cash provided by/(used in)
    operating activities of discontinued operations


(8,037
)


(3,240
)


613Total net cash provided by
    operating activities


5,007



4,754



2,908Investing activities:Acquisitions, net of cash acquired










(23,952
)Purchases of property and equipment


(2,760
)


(4,636
)


(7,000
)Capitalized software development
    costs


(1,849
)


(1,960
)


Net cash used in investing
    activities of continuing operations


(4,609
)


(6,596
)


(30,952
)Net cash used in investing
    activities of discontinued operations


(1,442
)


(2,117
)


(799
)Net cash used in investing
    activities


(6,051
)


(8,713
)


(31,751
)Financing activities:Proceeds from issuance of long-term
    debt


16,000



2,000



2,500Proceeds from issuance of
    Class A Common Stock and Convertible subordinated debentures










31,000Proceeds from/(payments on) draws
    on revolving line of credit, net


(8,004
)


3,004



5,000Payments on long-term debt and
    capital lease obligations


(5,589
)


(10,451
)


(8,985
)Financing fees related to issuance
    of Class A Common Stock and Convertible subordinated
    debentures


(1,470
)


(81
)


(1,758
)Payment to induce conversion of
    convertible subordinated debenture










(1,000
)Proceeds from exercise of employee
    stock options and sale of stock


731



696



1,403Net cash (used in)/provided by
    financing activities of continuing operations


1,668



(4,832
)


28,160Net cash provided by financing
    activities of discontinued operations


58







Net cash (used in)/provided by
    financing activities


1,726



(4,832
)


28,160Effect of exchange rates on cash
    and cash equivalents of discontinued operations


357



(140
)


149Net increase (decrease) in cash
    from continuing operations


10,103



(3,434
)


(497
)Net decrease in cash from
    discontinued operations


(9,064
)


(5,497
)


(37
)Net increase (decrease) in
    cash


1,038



(8,931
)


(534
)Cash and cash equivalents at the
    beginning of the period


9,320



18,251



18,785Cash and cash equivalents at the
    end of the period

$
10,358


$
9,320


$
18,251   See accompanying Notes to
    Consolidated Financial Statements.
  F-7




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to Consolidated Financial Statements
 (amounts in thousands, except share and per share
    data)
  1.
    Significant
    Accounting Policies  Description of
    Business
    Commercial Segment. Voice-over-Internet-Protocol tm T-Mobile, tm
  Government Segment. ® ®
  Discontinued Operations.
  Use of Estimates.
  Principles of Consolidation.
  Reclassifications.
  Cash and Cash Equivalents.
  F-8




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
 (amounts in thousands, except share and per share data)
    Allowances for Doubtful Accounts Receivable.
  Inventory.
  Property and Equipment.
  Goodwill. Goodwill and Other Intangible Assets.
  Software Development Costs.
    F-9




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
 (amounts in thousands, except share and per share data)
  product-by-product
        Acquired Intangible Assets.
    Impairment of Long-Lived Assets.
    Other Comprehensive Income/loss.
  F-10




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
 (amounts in thousands, except share and per share data)
  end-of-period
  Revenue Recognition.
  Services Revenue.
    Systems Revenue. 90-day
  percentage-of-completion
    F-11




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
 (amounts in thousands, except share and per share data)
   00-21 00-21)
  Deferral of Costs Incurred.
  Advertising Costs.
  Capitalized Interest.
  Stock-Based Compensation.
  Share Based Payment
  out-of-the-money
    (Accounting for Stock Issued to Employees)
  F-12




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
 (amounts in thousands, except share and per share data)
     ®
  For the Years
    Ended December 31,2005


2004Net loss attributable to common
    stockholders, as reported

$
(11,467
)

$
(18,548
)Add: Stock-based employee
    compensation expense included in reported net loss


720



1,195Deduct: Total stock-based employee
    compensation expense determined under fair value based method
    for all awards


(4,898
)


(8,477
)Pro forma net loss attributable to
    common stockholders

$
(15,646
)

$
(25,830
)Loss per share  basic
    and diluted:As reported

$
(0.30
)

$
(0.56
)Pro forma

$
(0.40
)

$
(0.77
)     For the Years
    EndedDecember 31,2006


2005


2004Expected life (in years)


5.5



5.5



5.5Risk-free interest rate(%)


4.56
%


4.25
%


3.35
%Volatility(%)


78
%


105
%


114
%Dividend yield(%)


0
%


0
%


0
%   Research and Development Expense.
  Income Taxes.
  Recent Accounting
    Pronouncements.
    F-13




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
 (amounts in thousands, except share and per share data)
     2.
    Enterprise
    Assets-Discontinued Operations  slower-than-anticipated
  ®
    F-14




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
 (amounts in thousands, except share and per share data)
     Assets:Tangible assets

$
11,573Acquired technology and intangible
    assets


7,612Goodwill


12,633Total assets


31,818Liabilities:Current liabilities


9,518Total liabilities


9,518Net assets acquired

$
22,300     December 31,


December 31,2006


2005Assets:Current assets

$
8,739


$
5,306Long-lived assets and goodwill


4,816



17,545Other long term assets


41



40Assets of discontinued operations


13,596



22,891Liabilities:Accounts payable and accrued
    liabilities


9,036



5,358Deferred revenue and other
    liabilities


2,364



1,361Liabilities of discontinued
    operations


11,400



6,719Net assets of discontinued
    operations

$
2,196


$
16,172     F-15




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
 (amounts in thousands, except share and per share data)
    Year ended
    December 31,2006


2005


2004Revenue

$
26,020


$
28,127


$
46,013Gross profit


4,469



6,025



10,679Research and development, sales and
    marketing, and general and administrative expenses


12,640



9,851



10,755Depreciation and amortization






3,325



2,570Impairment of goodwill and
    long-lived assets


15,500







Loss from discontinued operations

$
(23,671
)

$
(7,151
)

$
(2,646
)       3.
    Kivera
    Acquisition  ®
    F-16




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
 (amounts in thousands, except share and per share data)
     Assets:Tangible assets

$
590Acquired intangible assets


3,771Goodwill


1,813Total assets


6,174Liabilities:Current liabilities


639Total liabilities


639Net assets acquired

$
5,535     4.
    Loss Per Common
    Share    F-17




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
 (amounts in thousands, except share and per share data)
    2006


2005


2004Income (Loss) from continuing
    operations

$
1,976


$
(4,316
)

$
(15,902
)Loss from discontinued operations


(23,671
)


(7,151
)


(2,646
)Net loss

$
(21,695
)

$
(11,467
)

$
(18,548
)Income (Loss) per share 
    basic:Income (Loss) per share from
    continuing operations

$
0.05


$
(0.11
)

$
(0.48
)Loss per share from discontinued
    operations


(0.60
)


(0.19
)


(0.08
)Net loss per share  basic

$
(0.55
)

$
(0.30
)

$
(0.56
)Denominator for basic earnings per
    share  weighted-average common shares outstanding


39,430



38,823



33,381Net effect of dilutive stock
    options based on treasury stock method


632







Net effect of dilutive warrants
    based on treasury stock method


104







Denominator for diluted earnings
    per share  weighted-average common shares outstanding
    and assumed conversions


40,166



38,823



33,381Income (Loss) per share 
    diluted:Income (Loss) per share from
    continuing operations

$
0.05


$
(0.11
)

$
(0.48
)Loss per share from discontinued
    operations


(0.59
)


(0.19
)


(0.08
)Net loss per share-diluted

$
(0.54
)

$
(0.30
)

$
(0.56
)   5.
    Supplemental
    Disclosure of Cash Flow Information      6.
    Unbilled
    Receivables    2006


2005Amounts billable at specified
    contract milestones

$
7,596


$
6,060Contract retentions


1



28Rate variances


39



273$
7,636


$
6,361     F-18




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
 (amounts in thousands, except share and per share data)
   7.
    Inventory    2006


2005Component parts

$
2,942


$
1,934Finished goods


2,351



1,263Total inventory at year end

$
5,293


$
3,197   8.
    Property and
    Equipment    2006


2005Computer equipment

$
31,320


$
31,487Computer software


16,370



13,257Furniture and fixtures


2,159



2,140Leasehold improvements


2,491



2,466Land


1,000



1,000Vehicles


107



107Total property and equipment at
    cost at year end


53,447



50,457Less: accumulated depreciation and
    amortization


(40,594
)


(34,134
)Net property and equipment at year
    end

$
12,853


$
16,323   9.
    Acquired
    Intangible Assets and Capitalized Software Development
    Costs    December 31,
    2006


December 31,
    2005Gross








GrossCarrying


Accumulated





Carrying


AccumulatedAmount


Amortization


Net


Amount


Amortization


NetAcquired intangible assets:Customer Lists

$
606


$
290


$
316


$
576


$
144


$
432Trademarks & Patents


612



72



540



612



40



572Software development costs,
    including acquired technology


7,664



3,262



4,402



5,845



2,020



3,825Total

$
8,882


$
3,624


$
5,258


$
7,033


$
2,204


$
4,829   Estimated future amortization
    expense:Year ending December 31, 2007

$
1,600Year ending December 31, 2008

$
1,686Year ending December 31, 2009

$
1,102Year ending December 31, 2010

$
205Year ending December 31, 2011

$
205Thereafter

$
460   F-19




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
 (amounts in thousands, except share and per share data)
    10.
    Accounts Payable
    and Accrued Expenses    December 31,
    2006


December 31,
    2005Accounts payable

$
4,388


$
6,672Accrued expenses


6,033



3,503Total accounts payable and accrued
    expenses at year end

$
10,421


$
10,175     11.
    Line of
    Credit      F-20




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
 (amounts in thousands, except share and per share data)
     12. Long-Term
    Debt
    2006


2005Note payable dated March 10,
    2006 due March 10, 2009, and bearing interest at
    14% per annum, or non-cash interest, in the form of
    additional notes, bearing interest of 16% and warrants to
    purchase Class A common Stock (net of $2,496 discount
    ascribed to warrants) See further description of arrangements
    below

$
7,504



Note payable dated
    December 28, 2006, due December 28, 2009, and bearing
    interest at 10.35% per annum. The note requires monthly
    installments of principal and interest of $162 through
    December 28, 2009. This note is secured by accounts
    receivable of one customer


5,000



Note payable dated April 17,
    2006, due April 17, 2007, and bearing interest at
    11.75% per annum. The note requires monthly installments of
    principal and interest of $168 through April 1, 2007. This
    note is secured by accounts receivable of one customer


657



Note payable dated January 16,
    2003, due January 16, 2008, and bearing interest at
    6.0% per annum. The note requires monthly installments of
    principal and interest of $0.3 through January 16, 2008


5


$
8Note payable dated
    September 30, 2005, paid in full April 30, 2006






1,345Note payable dated
    December 30, 2003, paid in full December 31, 2006






833Note payable dated November 7,
    2005, paid in full April 30, 2006






472Total long term debt


13,166



2,658Less: current portion


(2,160
)


(2,176
)Non current portion of long term
    debt

$
11,006


$
482     2007

$
2,1602008


1,6612009


9,345Total

$
13,166     F-21




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
 (amounts in thousands, except share and per share data)
          13.
    Capital
    Leases    2006


2005Computer equipment

$
9,925


$
8,922Computer software


2,072



1,469Furniture and fixtures


237



227Leasehold improvements


46



46Total equipment under capital lease
    at cost


12,280



10,664Less: accumulated amortization


(7,268
)


(4,631
)Net property and equipment under
    capital leases

$
5,012


$
6,033     F-22




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
 (amounts in thousands, except share and per share data)
     2007

$
2,9102008


1,2882009


4732010


34Total minimum lease payments


4,705Less: amounts representing interest


(250
)Present value of net minimum lease
    payments (including current portion of $2,740)

$
4,455   14.
    Common
    Stock    15.
    Fair Value of
    Financial Instruments    16.
    Income
    Taxes    F-23




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
 (amounts in thousands, except share and per share data)
     2006


2005Deferred tax assets:Reserves and accrued expenses

$
1,047


$
1,011Depreciation and amortization


1,123



924Deferred revenue


396



547Charitable contributions


92



124Stock options


231



42Research and development tax credit


2,753



2,764Net deferred tax assets from
    discontinued operations


6,289



6,421Net operating loss carryforward


40,174



38,953Total deferred tax assets


52,105



50,786Deferred tax liabilities:Capitalized software development
    costs


(775
)


(243
)Other


(6
)


(4
)Total deferred tax liabilities


(781
)


(247
)Net deferred tax asset


51,324



50,539Valuation allowance for net
    deferred tax asset


(51,324
)


(50,539
)Net deferred tax asset recognized
    in the consolidated balance sheets

$



$
     F-24




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
 (amounts in thousands, except share and per share data)
     2006


2005


2004Income tax (benefit) at statutory
    rate

$
653


$
(1,467
)

$
(5,407
)State tax (benefit)


52



(135
)


(202
)Change in state apportionment tax
    rates on deferred assets/liabilities


807



(537
)


1,597Non deductible stock compensation
    expense


689







Research and development tax credit


(43
)


(70
)


(2,694
)Non deductible items


55



48



2,884Change in valuation allowance


(2,241
)


2,161



4,159Other


28







(337
)Total

$



$



$
   17.
    Stock-based
    Compensation Plans    Stock Options.
  2006


2005


2004Weighted





Weighted





WeightedAverage





Average





AverageNumber of


Exercise


Number of


Exercise


Number of


ExerciseOptions


Price


Options


Price


Options


PriceOutstanding, beginning of year


9,793


$
3.86



8,650


$
4.25



6,148


$
2.95Granted


2,908



2.42



2,786



2.55



3,800



6.00Exercised


(199
)


1.75



(291
)


1.08



(535
)


1.97Forfeited


(880
)


3.26



(1,352
)


4.30



(763
)


3.88Outstanding, end of year


11,622


$
3.62



9,793


$
3.86



8,650


$
4.25Exercisable, at end of year


6,823


$
4.33



5,997


$
4.55



3,382


$
3.25Estimated weighted-average grant-
    date fair value of options granted during the year

$
2.42






$
2.06






$
4.98Weighted-average remaining
    contractual life of options outstanding at end of year


7.0 years







7.3 years







7.5 years   F-25




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
 (amounts in thousands, except share and per share data)
    Weighted-AverageWeighted-Average


Remaining





Weighted-AverageExercise
    Prices


Contractual
    Life





Exercise
    PricesOptions


of Options


of Options


Options


of OptionsExercise
    Prices

Outstanding


Outstanding


Outstanding
    (years)


Exercisable


Exercisable$ 0.01  $ 2.61


5,449


$
2.29



7.93



1,616


$
2.01$ 2.61  $ 5.21


3,662


$
3.38



5.90



2,699


$
3.39$ 5.21  $ 7.82


2,456


$
6.74



6.55



2,453


$
6.74$ 7.82  $10.42


25


$
8.30



6.59



25


$
8.30$10.42  $26.05


30


$
14.07



3.57



30


$
14.07Total end of year


11,622











6,823       Employee Stock Purchase Plan.
    (in
    thousands)Stock compensation plan


3,151Warrants (see Note 12)


2,637Employee stock purchase plan


600Total shares restricted for future
    use


6,388   F-26




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
 (amounts in thousands, except share and per share data)
  18.
    Operating
    Leases    2007

$
3,3042008


2,4952009


1,7342010


1,164$
8,697       19.
    Concentrations of
    Credit Risk and Major Customers    % of Total
    Revenues Forthe Year EndedDecember 31,Customer

Segment

2006


2005


2004U.S. Government

Government


25
%


17
%


23
%Verizon Wireless

Commercial


20
%


17
%


20
%Cingular Wireless

Commercial


10
%


10
%


< 10
%   As of
    December 31, 2006


As of
    December 31, 2005Accounts


Unbilled


Accounts


UnbilledCustomer

Receivable


Receivables


Receivable


ReceivablesU.S. Government


24
%


36
%


35
%


16
%Customer A


<10
%


<10
%


<10
%


30
%Customer B


11
%


<10
%


<10
%


<10
%Customer C


<10
%


<10
%


<10
%


<10
%     F-27




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
 (amounts in thousands, except share and per share data)
   20.
    Business and
    Geographic Segment Information          Year Ended
    December 31,2006


2005


2004Comm.


Gvmt


Total


Comm.


Gvmt


Total


Comm.


Gvmt


TotalRevenueServices

$
59,741


$
28,639


$
88,380


$
54,198


$
20,774


$
74,972


$
44,621


$
15,613


$
60,234Systems


17,219



19,337



36,556



11,668



15,513



27,181



13,061



23,617



36,678Total revenue


76,960



47,976



124,936



65,866



36,287



102,153



57,682



39,230



96,912Direct costs of
    revenueDirect cost of services


31,409



21,131



52,540



25,885



13,345



39,230



21,472



9,500



30,972Direct cost of systems


5,211



12,672



17,883



5,710



12,009



17,719



5,843



15,391



21,234Total Direct Costs


36,620



33,803



70,423



31,595



25,354



56,949



27,315



24,891



52,206Gross profitServices gross profit


28,332



7,508



35,840



28,313



7,429



35,742



23,149



6,113



29,262Systems gross profit


12,008



6,665



18,673



5,958



3,504



9,462



7,218



8,226



15,444Total Gross Profit

$
40,340


$
14,173


$
54,513


$
34,271


$
10,933


$
45,204


$
30,367


$
14,339


$
44,706    F-28




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
 (amounts in thousands, except share and per share data)
  Year Ended
    December 31,2006


2005


2004Total segment gross
    profit

$
54,513


$
45,204


$
44,706Research and development expense


(12,586
)


(13,863
)


(18,106
)Sales and marketing expense


(11,713
)


(10,535
)


(8,973
)General and administrative expense


(16,959
)


(15,044
)


(14,997
)Depreciation and amortization of
    property and equipment


(7,956
)


(8,625
)


(7,353
)Amortization of acquired intangible
    assets


(147
)


(177
)


(37
)Interest expense


(3,198
)


(1,172
)


(3,196
)Debt conversion expense










(7,886
)Other income/(expense), net


22



(104
)


(61
)Income (Loss) from continuing
    operations


1,976



(4,316
)


(15,902
)Loss from discontinued operations


(23,671
)


(7,151
)


(2,646
)Net loss

$
(21,695
)

$
(11,467
)

$
(18,548
)   21.
    Quarterly
    Financial Information (Unaudited)    2006Three Months
    Ended(unaudited)March 31


June 30


September 30


December 31Revenue

$
31,686


$
31,943


$
31,810


$
30,496Gross profit

$
13,562


$
14,240


$
13,574


$
13,136Income from continuing operations

$
342


$
759


$
761


$
111Loss from discontinued operations


(2,054
)


(2,314
)


(14,510
)


(4,793
)Net loss

$
(1,712
)

$
(1,555
)

$
(13,749
)

$
(4,682
)Earnings per share 
    basic from continuing operations

$
0.01


$
0.02


$
0.02


$
0.00Loss per share  basic
    from discontinued operations

$
(0.05
)

$
(0.06
)

$
(0.37
)

$
(0.12
)Net loss per share  basic

$
(0.04
)

$
(0.04
)

$
(0.35
)

$
(0.12
)Earnings per share 
    diluted from continuing operations

$
0.01


$
0.02


$
0.02


$
0.00Loss per share  diluted
    from discontinued operations

$
(0.05
)

$
(0.06
)

$
(0.37
)

$
(0.11
)Net loss per share 
    diluted

$
(0.04
)

$
(0.04
)

$
(0.35
)

$
(0.11
)    F-29




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
 (amounts in thousands, except share and per share data)
  2005Three Months
    Ended(unaudited)March 31


June 30


September 30


December 31Revenue

$
24,856


$
21,404


$
29,169


$
26,724Gross profit

$
12,793


$
9,831


$
11,660


$
10,936Loss from continuing operations

$
(575
)

$
(2,316
)

$
(313
)

$
(1,112
)Loss form discontinued operations


(1,512
)


(1,722
)


(1,899
)


(2,018
)Net loss

$
(2,087
)

$
(4,038
)

$
(2,212
)

$
(3,130
)Loss per share from continuing
    operations

$
(0.01
)

$
(0.05
)

$
(0.02
)

$
(0.03
)Loss per share from discontinued
    operations

$
(0.04
)

$
(0.05
)

$
(0.04
)

$
(0.05
)Net loss per share 
    basic and diluted

$
(0.05
)

$
(0.10
)

$
(0.06
)

$
(0.08
)   22.
    Commitments and
    Contingencies  Highstein v. Telecommunication Systems, Inc.,
    et al. No. 01-CV-9500. Rule 10b-5 Rule 10b-5 En Banc
    F-30




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
 (amounts in thousands, except share and per share data)
  successor-in-interest
    23.
    Related Party
    Transactions    24.
    Subsequent
    Events  ®
    F-31




---



##### 



SIGNATURES      By:
    /s/  Maurice
    B. Tosé   Chief Executive Officer, President and
 Chairman of the Board
  attorneys-in-fact attorneys-in-fact, attorneys-in-fact,
  Name

Title

Date/s/  Maurice
    B. ToséMaurice
    B. Tosé

Chief Executive Officer, President
    and Chairman of the Board (Principal Executive Officer)

March 12, 2007/s/  Thomas
    M.
    Brandt, Jr.Thomas
    M. Brandt, Jr.

Chief Financial Officer and Senior
    Vice President (Principal Financial Officer)

March 12, 2007/s/  James
    M. BethmannJames
    M. Bethmann

Director

March 12, 2007/s/  Clyde
    A.
    HeintzelmanClyde
    A. Heintzelman

Director

March 12, 2007/s/  Richard
    A. KozakRichard
    A. Kozak

Director

March 12, 2007/s/  Weldon
    H. LathamWeldon
    H. Latham

Director

March 12, 2007/s/  Byron
    F. MarchantByron
    F. Marchant

Director

March 12, 2007   F-32




---



##### 



EXHIBIT INDEX  ExhibitNumbers

Description4
.1

Amended and Restated Articles of
    Incorporation. (Incorporated by reference to the companys
    Quarterly Report on
    Form 10-Q
    for the quarter ended June 30, 2004)4
.2

Second Amended and Restated Bylaws.
    (Incorporated by reference to the companys Quarterly
    Report on
    Form 10-Q
    for the quarter ended June 30, 2004)4
.3

Form of Class A Common Stock
    certificate. (Incorporated by reference to the companys
    Registration Statement on
    Form S-1
    (No. 333-35522))4
.5

Warrants to Purchase Common Stock
    issued pursuant to the Securities Purchase Agreement for each of
    the investors party to the Securities Purchase Agreement dated
    January 13, 2004. (Incorporated by reference to the
    companys Current Report on
    Form 8-K
    filed on January 23, 2004)4
.6

Note Purchase Agreement dated
    March 13, 2006 by and among the company and the Purchasers
    named therein (Incorporated by reference to the companys
    Annual Report on
    Form 10-K,
    as amended, for the year ended December 31, 2005)4
.7

Warrants to Purchase Common Stock
    issued pursuant to the Note Purchase Agreement dated
    March 13, 2006 to each of the Purchasers named therein
    (Incorporated by reference to the companys Annual Report
    on
    Form 10-K,
    as amended, for the year ended December 31, 2005)4
.8

Notes issued pursuant to the
    Note Purchase Agreement dated March 13, 2006 to each
    of the Purchasers named therein (Incorporated by reference to
    the companys Annual Report on
    Form 10-K,
    as amended, for the year ended December 31, 2005)4
.9

Registration Rights Agreement dated
    March 13, 2006 by and among the company and the Investors
    named therein (Incorporated by reference to the companys
    Annual Report on
    Form 10-K,
    as amended, for the year ended December 31, 2005)4
.10

Intellectual Property Security
    Agreement dated March 13, 2006 by and among the company,
    Bonanza Master Fund Ltd., as Agent, and the Secured Parties
    named therein (Incorporated by reference to the companys
    Annual Report on
    Form 10-K,
    as amended, for the year ended December 31, 2005)4
.11

Subordination Agreement dated
    March 13, 2006 by and among the company, Silicon Valley
    Bank, and the Purchasers named therein (Incorporated by
    reference to the companys Annual Report on
    Form 10-K,
    as amended, for the year ended December 31, 2005)10
.1

West Garrett Office Building Full
    service Lease Agreement dated October 1, 1997 by and
    between the company and West Garrett Joint Venture.
    (Incorporated by reference to the companys Registration
    Statement on
    Form S-1
    (No. 333-35522))10
.2

Form of Indemnification Agreement.
    (Incorporated by reference to the companys Registration
    Statement on
    Form S-1
    (No. 333-35522))10
.3

Fourth Amended and Restated 1997
    Stock Incentive Plan. (Incorporated by reference to
    Appendix A to the companys definitive proxy statement
    for its 2004 Annual Meeting of stockholders as filed with the
    SEC on June 17, 2004
    (No. 000-30821))10
.4

First Amended and Restated Employee
    Stock Purchase Plan. (Incorporated by reference to the
    companys Registration Statement on Form S-8
    (No. 333-136072))10
.5

Optionee Agreement dated
    October 1, 1997 by and between the company and Richard A.
    Young. (Incorporated by reference to the companys
    Registration Statement on
    Form S-1
    (No. 333-35522))10
.6

Optionee Agreement dated
    July 29, 1998 by and between the company and Richard A.
    Young. (Incorporated by reference to the companys
    Registration Statement on
    Form S-1
    (No. 333-35522))10
.7

Optionee Agreement dated
    October 1, 1997 by and between the company and Thomas M.
    Brandt, Jr. (Incorporated by reference to the
    companys Registration Statement on
    Form S-1
    (No. 333-35522))10
.8

Optionee Agreement dated
    July 29, 1998 by and between the company and Thomas M.
    Brandt, Jr. (Incorporated by reference to the
    companys Registration Statement on
    Form S-1
    (No. 333-35522))10
.9

Optionee Agreement dated
    April 1, 1999 by and between the company and Thomas M.
    Brandt, Jr. (Incorporated by reference to the
    companys Registration Statement on
    Form S-1
    (No. 333-35522))  F-33




---



##### 



ExhibitNumbers

Description10
.10

401(k) and Profit Sharing Plan of
    the company dated January 1, 1999. (Incorporated by
    reference to the companys Registration Statement on
    Form S-4
    (No. 333-51656))10
.11

Employment Agreement dated
    February 1, 2001 by and between the company and Richard A.
    Young. (Incorporated by reference to the companys
    Quarterly Report on
    Form 10-Q
    for the quarter ended September 30, 2001)10
.12

Employment Agreement dated
    February 1, 2001 by and between the company and Thomas M.
    Brandt. (Incorporated by reference to the companys
    Quarterly Report on
    Form 10-Q
    for the quarter ended September 30, 2001)10
.13

Employment Agreement dated
    February 1, 2001 by and between the company and Drew A.
    Morin. (Incorporated by reference to the companys
    Quarterly Report on
    Form 10-Q
    for the quarter ended September 30, 2001)10
.14

Employment Agreement dated
    February 1, 2001 by and between the company and Timothy J.
    Lorello. (Incorporated by reference to the companys
    Quarterly Report on
    Form 10-Q
    for the quarter ended September 30, 2001)10
.15

Services Integration Agreement
    dated January 31, 2002 by and between the company and
    Hutchison 3G. (Incorporated by reference to the companys
    Annual Report on
    Form 10-K
    for the year ended December 31, 2001)10
.16

Deed of Lease by and between
    Annapolis Partner, LLC and the company. (Incorporated by
    reference to the companys Annual Report on
    Form 10-K
    for the year ended December 31, 2002)10
.17

Restricted stock award certificate
    to Mr. Thomas M. Brandt, Jr. (Incorporated by
    reference to the companys Quarterly Report on
    Form 10-Q
    for the quarter ended September 30, 2003)10
.18

Restricted stock award certificate
    to Mr. Thomas M. Brandt, Jr. (Incorporated by
    reference to the companys Quarterly Report on
    Form 10-Q
    for the quarter ended September 30, 2003)10
.19

Restricted stock award certificate
    to Mr. Clyde A. Heintzelman. (Incorporated by reference to
    the companys Quarterly Report on
    Form 10-Q
    for the quarter ended September 30, 2003)10
.20

Restricted stock award certificate
    to Mr. Richard A. Kozak. (Incorporated by reference to the
    companys Quarterly Report on
    Form 10-Q
    for the quarter ended September 30, 2003)10
.21

Restricted stock award certificate
    to Mr. Weldon H. Latham. (Incorporated by reference to the
    companys Quarterly Report on
    Form 10-Q
    for the quarter ended September 30, 2003)10
.22

Restricted stock award certificate
    to Mr. Timothy J. Lorello. (Incorporated by reference to
    the companys Quarterly Report on
    Form 10-Q
    for the quarter ended September 30, 2003)10
.23

Restricted stock award certificate
    to Mr. Timothy J. Lorello. (Incorporated by reference to
    the companys Quarterly Report on
    Form 10-Q
    for the quarter ended September 30, 2003)10
.24

Restricted stock award certificate
    to Mr. Bryon F. Marchant. (Incorporated by reference to the
    companys Quarterly Report on
    Form 10-Q
    for the quarter ended September 30, 2003)10
.25

Restricted stock award certificate
    to Mr. Drew A. Morin. (Incorporated by reference to the
    companys Quarterly Report on
    Form 10-Q
    for the quarter ended September 30, 2003)10
.26

Restricted stock award certificate
    to Mr. Drew A. Morin. (Incorporated by reference to the
    companys Quarterly Report on
    Form 10-Q
    for the quarter ended September 30, 2003)10
.27

Restricted stock award certificate
    to Mr. Maurice B. Tosé. (Incorporated by reference to
    the companys Quarterly Report on
    Form 10-Q
    for the quarter ended September 30, 2003)10
.28

Restricted stock award certificate
    to Mr. Maurice B. Tosé. (Incorporated by reference to
    the companys Quarterly Report on
    Form 10-Q
    for the quarter ended September 30, 2003)10
.29

Restricted stock award certificate
    to Mr. Kevin M. Webb. (Incorporated by reference to the
    companys Quarterly Report on
    Form 10-Q
    for the quarter ended September 30, 2003)10
.30

Restricted stock award certificate
    to Mr. Kevin M. Webb. (Incorporated by reference to the
    companys Quarterly Report on
    Form 10-Q
    for the quarter ended September 30, 2003)10
.31

Restricted stock award certificate
    to Mr. Richard A. Young. (Incorporated by reference to the
    companys Quarterly Report on
    Form 10-Q
    for the quarter ended September 30, 2003)  F-34




---



##### 



ExhibitNumbers

Description10
.32

Restricted stock award certificate
    to Mr. Richard A. Young. (Incorporated by reference to the
    companys Quarterly Report on
    Form 10-Q
    for the quarter ended September 30, 2003)10
.33

Registration Rights Agreement dated
    as of December 18, 2003 by and among the company and the
    investors party to the 2003 SPA. (Incorporated by reference to
    Exhibit 10 to the companys Current Report on
    Form 8-K
    dated December 18, 2003)10
.34

Trademark License Agreement by and
    among Aether, TSYS and the company dated as of January 13,
    2004. (Incorporated by reference to the companys Current
    Report on
    Form 8-K
    filed on January 23, 2004)10
.35

Registration Rights Agreement by
    and between the company and Aether dated as of January 13,
    2004. (Incorporated by reference to the companys Current
    Report on
    Form 8-K
    filed on January 23, 2004)10
.36

Amended and Restated Loan and
    Security Agreement by and between the company and Silicon Valley
    Bank. (Incorporated by reference to the companys Quarterly
    Report on
    Form 10-Q
    for the quarter ended September 30, 2004)10
.37

Restricted stock award certificate
    to Mr. Clyde A. Heintzelman (Incorporated by reference to
    the companys Annual Report on
    Form 10-K,
    as amended, for the year ended December 31, 2005)10
.38

Restricted stock award certificate
    to Mr. Richard A. Kozak (Incorporated by reference to the
    companys Annual Report on
    Form 10-K,
    as amended, for the year ended December 31, 2005)10
.39

Restricted stock award certificate
    to Mr. Weldon F. Latham (Incorporated by reference to the
    companys Annual Report on
    Form 10-K,
    as amended, for the year ended December 31, 2005)10
.40

Restricted stock award certificate
    to Mr. Byron F. Marchant (Incorporated by reference to the
    companys Annual Report on
    Form 10-K,
    as amended, for the year ended December 31, 2005)10
.46

Second Amended and Restated Loan
    and Security Agreement by and between the Company and Silicon
    Valley Bank (Incorporated by reference to the companys
    Quarterly Report on
    Form 10-Q
    for the quarter ended September 30, 2005)10
.47

Form of Incentive Stock Option
    Agreement10
.48

Form of Non-Qualified Stock Option
    Agreement10
.49

Form of Restricted Stock Grant
    Agreement12
.1

Supplemental Financial Statement
    Schedule II21
.1

Subsidiaries of the Registrant23
.1

Consent of Ernst & Young
    LLP23
.2

Consent of James Cowper31
.1

Certification pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 200231
.2

Certification pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 200232
.1

Certification pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 200232
.2

Certification pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 200299
.01

Report of Independent Auditors-
    James Cowper     
    
    Management contract, compensatory plans or arrangement required
    to be filed as an exhibit pursuant to Item 15(a)(3) of
    Form 10-K.
    
    Confidential treatment has been requested for certain portions
    of this Exhibit pursuant to
    Rule 24b-2
    of the Securities Exchange Act of 1934, as amended, which
    portions have been omitted and filed separately with the
    Securities and Exchange Commission.  F-35