##### 



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 1934For the quarter ended
    September 30, 2006ORTRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
    THE SECURITIES EXCHANGE ACT OF 1934   Commission File
    No. 0-30821
  TELECOMMUNICATION SYSTEMS,
    INC.
   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
   þ o
  Rule 12b-2
 o þ o
   Rule 12b-2 o þ
    Shares
    outstandingas of
    September 30,Title of Each
    Class

2006Class A Common Stock, par
    value
    $0.01 per share


32,026,254Class B Common Stock, par
    value
    $0.01 per share


7,656,152Total Common Stock Outstanding


39,682,406




---



##### 



INDEX
  TELECOMMUNICATION SYSTEMS, INC.
  PagePART I. FINANCIAL INFORMATIONItem 1.

Financial StatementsConsolidated
    Statements of Operations for the three- and nine-months ended
    September 30, 2006 and 2005 (Unaudited)


1Consolidated
    Balance Sheets as of September 30, 2006 (Unaudited) and
    December 31, 2005


2Consolidated
    Statement of Stockholders Equity for the nine-months ended
    September 30, 2006 (Unaudited)


3Consolidated
    Statements of Cash Flows for the nine-months ended
    September 30, 2006 and 2005 (Unaudited)


4Notes to
    Consolidated Financial Statements (Unaudited)


5Item 2.

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


19Item 3.

Quantitative and
    Qualitative Disclosures About Market Risk


35Item 4.

Controls and
    Procedures.


35PART II. OTHER
    INFORMATIONItem 1.

Legal
    Proceedings


36Item 1A.

Risk
    Factors


36Item 6.

Exhibits


36SIGNATURES


37




---



##### 



TeleCommunication
    Systems, Inc.
 Consolidated
    Statements of Operations

(amounts in thousands, except per share data)

(unaudited) Three Months
    Ended


Nine Months
    EndedSeptember 30,


September 30,2006


2005


2006


2005RevenueServices

$
21,473


$
20,028


$
66,060


$
54,427Systems


9,337



9,141



28,380



21,002Total revenue


30,810



29,169



94,440



75,429Direct costs of
    revenueDirect cost of services
    revenue1


12,813



10,660



39,565



28,212Direct cost of systems revenue,
    including amortization of software development costs of $369,
    $156, $931 and $504,
    respectively1


4,423



6,849



13,497



12,949Total direct cost of revenue


17,236



17,509



53,062



41,161Services gross profit


8,660



9,368



26,495



26,215Systems gross profit


4,914



2,292



14,883



8,053Total gross profit


13,574



11,660



41,378



34,268Operating costs and
    expensesResearch and development
    expense1


2,994



3,456



9,403



10,919Sales and marketing
    expense1


2,787



2,604



8,976



8,204General and administrative
    expense1


4,275



3,494



12,649



11,025Depreciation and amortization of
    property and equipment


1,895



2,133



6,196



6,187Amortization of acquired
    intangible assets


37



66



111



140Total operating costs and expenses


11,988



11,753



37,335



36,475Income/(loss) from
    operations


1,586



(93
)


4,043



(2,207
)Interest expense


(871
)


(249
)


(2,317
)


(737
)Other income/(expense), net


46



29



137



(259
)Income/(loss) from continuing
    operations


761



(313
)


1,863



(3,203
)Loss from discontinued operations,
    including write-down of goodwill in
    20061


(14,510
)


(1,899
)


(18,878
)


(5,134
)Net loss

$
(13,749
)

$
(2,212
)

$
(17,015
)

$
(8,337
)Income/(loss) per share-basic and
    dilutedIncome/(loss) per share from
    continuing operations

$
0.02


$
(0.01
)

$
0.05


$
(0.08
)Loss per share from discontinued
    operations


(0.37
)


(0.05
)


(0.48
)


(0.13
)Net loss per
    share-basic

$
(0.35
)

$
(0.06
)

$
(0.43
)

$
(0.22
)Weighted average shares
    outstanding-basic


39,468



39,003



39,290



38,743Weighted average shares
    outstanding-diluted


39,813



39,003



39,838



38,743     1
    
    Includes non-cash stock compensation expense as detailed in
    Note 2 to Consolidated Financial Statements   1




---



##### 



TeleCommunication
    Systems, Inc.
 Consolidated
    Balance Sheets

(amounts in thousands, except share data) September 30,


December 31,2006


2005(unaudited)AssetsCurrent assets:Cash and cash equivalents

$
10,675


$
9,320Accounts receivable, net of
    allowance of $402 in 2006 and $233 in 2005


21,076



20,886Unbilled receivables


7,051



6,361Inventory


3,892



3,197Other current assets


3,707



2,970Assets of discontinued operations


13,154



22,891Total current assets


59,555



65,625Property and equipment, net of
    accumulated depreciation and amortization of $40,330 in 2006 and
    $34,134 in 2005


12,587



16,323Software development costs, net of
    accumulated amortization of $2,921 in 2006 and $1,990 in 2005


4,218



3,825Acquired intangible assets, net of
    accumulated amortization of $325 in 2006 and $214 in 2005


893



1,004Goodwill


1,813



1,813Other assets


2,157



1,982Total assets

$
81,223


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

$
10,722


$
10,175Accrued payroll and related
    liabilities


1,927



3,971Deferred revenue


4,164



4,123Current portion of notes payable,
    including line of credit


6,845



10,180Current portion of capital lease
    obligations


2,827



3,001Liabilities of discontinued
    operations


7,470



6,719Total current liabilities


33,955



38,169Notes payable, less current
    portion and net of debt discount of $2,784 at September 30,
    2006


7,219



483Capital lease obligations, less
    current portion


1,280



2,858Total liabilities


42,454



41,510Class A Common Stock;
    $0.01 par value:Authorized shares 
    225,000,000; issued and outstanding shares of 32,026,254 in 2006
    and 31,381,575 in 2005


320



314Class B Common Stock;
    $0.01 par value:Authorized shares 
    75,000,000; issued and outstanding shares of 7,656,152 in 2006
    and 8,035,963 in 2005


77



80Additional paid-in capital


216,720



210,044Accumulated other comprehensive
    loss:Cumulative foreign currency
    translation adjustment


3



(40
)Accumulated deficit


(178,351
)


(161,336
)Total stockholders equity


38,769



49,062Total liabilities and
    stockholders equity

$
81,223


$
90,572    2




---



##### 



TeleCommunication
    Systems, Inc.
 Consolidated
    Statement of Stockholders Equity

(amounts in thousands, except share data)

(unaudited) AccumulatedClass A


Class B


Additional


OtherCommon


Common


Paid-In


Comprehensive


AccumulatedStock


Stock


Capital


Loss


Deficit


TotalBalance at January 1,
    2006

$
314


$
80


$
210,044


$
(40
)

$
(161,336
)

$
49,062Options exercised for the purchase
    of 167,369 shares of Class A Common Stock


2







286











288Issuance of 142,156 shares of
    Class A Common Stock under Employee Stock Purchase Plan


1







253











254Conversion of 379,811 shares
    of Class B Common Stock to Class A Common Stock


4



(4
)














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










2,861











2,861Adjustment of terms for warrants
    to purchase 886,787 shares of Class A Common Stock










594











594Stock compensation expense for
    continuing operations










2,428











2,428Stock compensation expense of
    discontinued operations










385











385Surrender of 66,682 restricted
    shares of Class A Common Stock as payment for payroll tax
    withholdings


(1
)






(187
)










(188
)Stock compensation for options
    issued to non- employees for service










56











56Foreign currency translation
    adjustment














44







44Net loss for the nine months ended
    September 30, 2006


















(17,015
)


(17,015
)Balance at September 30,
    2006

$
320


$
77


$
216,720


$
3


$
(178,351
)


38,769    3




---



##### 



TeleCommunication
    Systems, Inc.
 Consolidated
    Statements of Cash Flows

(amounts in thousands)

(unaudited) Nine Months
    EndedSeptember 30,2006


2005Operating activities:Net loss

$
(17,015
)

$
(8,337
)Less: Loss from discontinued
    operations


(18,878
)


(5,134
)Income/(loss) from continuing
    operations


1,863



(3,203
)Adjustments to reconcile net loss
    from continuing operations to net cash provided by operating
    activities:Depreciation and amortization of
    property and equipment


6,196



6,187Non-cash stock compensation expense


2,428



565Amortization of software
    development costs


931



504Amortization of debt discount


673



Amortization of deferred financing
    fees included in interest expense


369



259Amortization of acquired intangible
    assets


111



140Other non-cash income


(15
)


(102
)Changes in operating assets and
    liabilities:Accounts receivable, net


(192
)


(2,984
)Unbilled receivables


(690
)


(1,198
)Inventory


(695
)


534Other current assets


(737
)


(933
)Other assets


481



(1,269
)Accounts payable and accrued
    expenses


547



2,556Accrued payroll and related
    liabilities


(2,296
)


(1,872
)Deferred revenue


41



2,273Net cash provided by operating
    activities of continuing operations


9,015



1,457Net cash used in by operating
    activities of discontinued operations


(6,985
)


(1,326
)Total net cash provided by
    operating activities


2,030



131Investing activities:Purchases of property and equipment


(1,960
)


(2,876
)Capitalized software development
    costs


(1,324
)


(1,815
)Net cash used in investing
    activities of continuing operations


(3,284
)


(4,691
)Net cash used in investing
    activities of discontinued operations


(1,217
)


(1,202
)Total net cash used in investing
    activities


(4,501
)


(5,893
)Financing activities:Payments on long-term debt and
    capital lease obligations


(4,160
)


(7,517
)Payments on short-term line of
    credit, net


(2,504
)


3,000Proceeds from issuance of long-term
    debt


11,000



Financing fees related to issuance
    of long-term debt and Class A Common Stock


(1,320
)


(81
)Proceeds from exercise of employee
    stock options and sale of stock


536



582Net cash (used in)/provided by
    financing activities of continuing operations


3,552



(4,016
)Net cash provided by financing
    activities of discontinued operations


76



Total net cash (used in) provided
    by financing activities


3,628



(4,016
)Effect of exchange rates on cash of
    discontinued operations


198



(88
)Net increase/(decrease) in cash
    from continuing operations


9,283



(7,250
)Net decrease in cash from
    discontinued operations


(7,928
)


(2,616
)Total net increase/(decrease) in
    cash


1,355



(9,866
)Cash and cash equivalents at the
    beginning of the period


9,320



18,251Cash and cash equivalents at the
    end of the period

$
10,675


$
8,385    4




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to Consolidated Financial Statements
 September 30, 2006
 (amounts in thousands, except per share amounts)
 (unaudited)
  1.
    Basis of
    Presentation and Summary of Significant Accounting
    Policies  Basis of Presentation. Form 10-Q Regulation S-X. Form 10-K.
  Capital Resource Risks. and/or and/or
    Reclassifications.
 5




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
    Use of Estimates.
    Software Development Costs.
    Stock-Based Compensation. Share Based
    Payment
    Earnings per share.
 6




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
    Nine MonthsThree Months
    Ended


EndedSeptember 30,


September 30,2006


2005


2006


2005Basic weighted average common
    shares outstanding


39,468



39,003



39,290



38,743Dilutive common shares outstanding


345







548



Diluted weighted average common
    shares outstanding used in the calculation of diluted
    income/(loss)


39,813



39,003



39,838



38,743   Recent Accounting Pronouncements.
    2.
    Stock-Based
    Compensation  Accounting for Stock
    Issued to Employees Accounting
    for Stock-Based Compensation-Transition and Disclosure
     7




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
        Three Months


Nine MonthsEnded
    September 30,


Ended
    September 30,2006


2005


2006


2005Continuing
    operations:Stock options granted at fair value

$
674


$



$
2,159


$
Restricted stock


16



107



231



397Employee stock purchase plan


11







38



Options granted at less than fair
    value prior to our initial public offering






46







168Total stock compensation expense
    included in continuing operations

$
701


$
153


$
2,428


$
565Discontinued
    operations:Stock options granted at fair value

$
120


$



$
385


$
Total stock compensation expense
    included in discontinued operations

$
120


$



$
385


$
  8




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
    Three Months
    Ended September 30,2006


2005Comm.








Comm.Apps


Gvmt


Total


Apps


Gvmt


TotalStock compensation included in
    direct cost of revenue:Direct cost of services

$
187


$
129


$
316


$



$



$
Direct cost of systems


24



14



38











Total stock compensation included
    in direct costs of revenue

$
211


$
143


$
354


$



$



$
   Nine Months Ended
    September 30,2006


2005Comm.








Comm.Apps


Gvmt


Total


Apps


Gvmt


TotalStock compensation included in
    direct cost of revenue:Direct cost of services

$
611


$
423


$
1,034


$
13


$
3


$
16Direct cost of systems


80



46



126











Total stock compensation included
    in direct costs of revenue

$
691


$
469


$
1,160


$
13


$
3


$
16   Three Months


Nine MonthsEnded


EndedSeptember 30,


September 30,2006


2005


2006


2005Stock compensation included in
    operating expenses:Research and development expense

$
143


$



$
416


$
11Sales and marketing expense


80







248



18General and administrative expense


124



153



604



520Total stock compensation included
    in operating expenses

$
347


$
153


$
1,268


$
549  9




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
    WeightedAverage


AggregateNumber of


Exercise


Intrinsic(Share amounts in
    thousands)

Options


Price


ValueOutstanding, beginning of year


9,974


$
3.86Granted


2,729


$
2.40Exercised


(167
)

$
1.73Forfeited


(905
)

$
3.28Outstanding, at September 30,
    2006


11,631


$
3.59


$
41,807Exercisable, at September 30,
    2006


6,770


$
4.31


$
29,180Vested and expected to vest at
    September 30, 2006


8,234


$
3.59


$
29,597Estimated weighted-average grant-
    date fair value of options granted during the period

$
2.40Weighted-average remaining
    contractual life of options outstanding at end of period


7.19 years     Weighted-AverageWeighted-Average


Remaining
    Contractual





Weighted-AverageOptions


Exercise Prices
    of


Life of
    Options


Options


Exercise Prices
    ofExercise
    Prices

Outstanding


Options
    Outstanding


Outstanding
    (Years)


Exercisable


Options
    Exercisable$ 0.01 - $ 2.61


5,548


$
2.29



8.15



1,627


$
2.02$ 2.61 - $ 5.21


3,616


$
3.37



5.97



2,679


$
3.34$ 5.21 - $ 7.82


2,411


$
6.76



6.86



2,408


$
6.76$ 7.82 - $10.42


25


$
8.30



6.85



25


$
8.30$10.42 - $26.05


31


$
14.07



3.82



31


$
14.07    10




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
  Accounting for Stock-Based Compensation
  Three Months
    Ended


Nine Months
    EndedSeptember 30,


September 30,2005


2005Net loss, as reported

$
(2,212
)

$
(8,338
)Add: Stock-based employee
    compensation expense included in reported net loss


153



565Deduct: Total stock-based employee
    compensation expense determined under fair value based method
    for all awards


(1,326
)


(3,721
)Pro forma net loss

$
(3,385
)

$
(11,494
)Loss per common share:Basic and diluted  as
    reported

$
(0.06
)

$
(0.22
)Basic and diluted  pro
    forma

$
(0.09
)

$
(0.30
)Weighted average shares
    outstanding:Basic and diluted  as
    reported and pro forma


39,003



38,743     Nine MonthsEndedSeptember 30,2006


2005Expected life (in years)


5.5



5.5Risk-free interest rate (%)


4.6
%


4.0
%Volatility (%)


90.6
%


107.0
%Dividend yield (%)


0
%


0
%   3.
    Supplemental
    Disclosure of Cash Flow Information      4.
    Enterprise
    Assets-Discontinued Operations   11




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
  Form 10-Q Accounting for the Impairment or Disposal of
    Long-Lived Assets
  ®
    September 30,


December 31,2006


2005Assets:Accounts receivable, net

$
3,730


$
3,263Unbilled receivables


15



260Inventory


682



558Other current assets


2,838



1,225Property and equipment, net of
    accumulated depreciation


3,166



1,863Software development costs, net of
    accumulated amortization


533



533Acquired intangible assets, net of
    accumulated amortization


2,149



2,516Goodwill






12,633Other assets


41



40Assets of discontinued operations


13,154



22,891Liabilities:Accounts payable and accrued
    expenses


4,103



4,514Accrued payroll and related
    liabilities


650



844Deferred revenue


2,596



1,361Capital leases


76



Other


45



Liabilities of discontinued
    operations


7,470



6,719Net assets of discontinued
    operations

$
5,684


$
16,172  12




---



##### 





TeleCommunication
    Systems, Inc.




Notes to Consolidated Financial
    Statements  (Continued)








|                                                              |  |          |       |  |              |   |       |     |  |   |       | 
|------------------------------------------------------------- |  | -------- | ----- |  | ------------ | - | ----- | --- |  | - | ----- | 
|                                                              |  | Gross    |       |  |              |   |       |     | 
|                                                              |  | Carrying |       |  | Accumulated  |   |       |     | 
|                                                              |  | Amount   |       |  | Amortization |   |       | Net | 
|                                                             
|Acquired intangible assets:                                   |  |          |       |  |              |   |       |     |  |   |       | 
|Customer Contracts                                            |  | $        | 4,152 |  |              | $ | 3,043 |     |  | $ | 1,109 | 
|Customer Lists                                                |  |          | 2,165 |  |              |   | 1,458 |     |  |   | 707   | 
|Trademarks                                                    |  |          | 630   |  |              |   | 297   |     |  |   | 333   | 
|                                                              |  |          |       |  |              |   |       |     |  |   |       | 
|Subtotal                                                      |  |          | 6,947 |  |              |   | 4,798 |     |  |   | 2,149 | 
|Software development costs,
    including acquired technology |  |          | 844   |  |              |   | 311   |     |  |   | 533   | 
|                                                              |  |          |       |  |              |   |       |     |  |   |       | 
|Total acquired intangible assets                              |  | $        | 7,791 |  |              | $ | 5,109 |     |  | $ | 2,682 | 
|                                                              |  |          |       |  |              |   |       |     |  |   |       | 













|                                                                                                                     |  |                        |        |   |                       |   |        |      |  |   |        |   |  |   |        |  
|-------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------ | - | --------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                                     |  | Three Months
    Ended |        |   | Nine Months
    Ended |  
|                                                                                                                     |  | September 30,          |        |   | September 30,         |  
|                                                                                                                     |  | 2006                   |        |   | 2005                  |   |        | 2006 |  |   | 2005   |  
|                                                                                                                    
|Services revenue                                                                                                     |  | $                      | 3,554  |   |                       | $ | 5,090  |      |  | $ | 11,665 |   |  | $ | 18,162 |  
|Systems revenue                                                                                                      |  |                        | 2,459  |   |                       |   | 287    |      |  |   | 5,286  |   |  |   | 2,090  |  
|                                                                                                                     |  |                        |        |   |                       |   |        |      |  |   |        |   |  |   |        |  
|Total revenue                                                                                                        |  |                        | 6,013  |   |                       |   | 5,377  |      |  |   | 16,951 |   |  |   | 20,252 |  
|                                                                                                                     |  |                        |        |   |                       |   |        |      |  |   |        |   |  |   |        |  
|Services gross profit                                                                                                |  |                        | 554    |   |                       |   | 1,543  |      |  |   | 2,433  |   |  |   | 5,910  |  
|Systems gross profit/ (loss)                                                                                         |  |                        | 346    |   |                       |   | (396   | )    |  |   | 235    |   |  |   | (899   | )
|                                                                                                                     |  |                        |        |   |                       |   |        |      |  |   |        |   |  |   |        |  
|Total gross profit                                                                                                   |  |                        | 900    |   |                       |   | 1,147  |      |  |   | 2,668  |   |  |   | 5,011  |  
|                                                                                                                     |  |                        |        |   |                       |   |        |      |  |   |        |   |  |   |        |  
|Research and development, sales,
    marketing, general and administrative expenses and other
    operating expenses |  |                        | 2,410  |   |                       |   | 2,286  |      |  |   | 8,546  |   |  |   | 7,673  |  
|Depreciation and amortization                                                                                        |  |                        |       |   |                       |   | 760    |      |  |   |       |   |  |   | 2,472  |  
|                                                                                                                     |  |                        |        |   |                       |   |        |      |  |   |        |   |  |   |        |  
|Loss from discontinued operations
    before impairment charge                                                       |  | $                      | (1,510 | ) |                       | $ | (1,899 | )    |  | $ | (5,878 | ) |  | $ | (5,134 | )
|                                                                                                                     |  |                        |        |   |                       |   |        |      |  |   |        |   |  |   |        |  









|   |                           
|-- | --------------------------
|5. | Financing
    Arrangements





13



---



##### 



TeleCommunication
    Systems, Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
               14




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
    6.
    Segment
    Information    ® tm
  ®
      Three Months
    Ended September 30,2006


2005Comm.








Comm.Apps


Gvmt


Total


Apps


Gvmt


TotalRevenueServices

$
14,153


$
7,320


$
21,473


$
14,328


$
5,700


$
20,028Systems


5,471



3,866



9,337



2,873



6,268



9,141Total revenue


19,624



11,186



30,810



17,201



11,968



29,169Operating costs and
    expensesDirect cost of
    services1


7,464



5,349



12,813



6,798



3,862



10,660Direct cost of
    systems1


1,786



2,637



4,423



2,142



4,707



6,849Total direct costs


9,250



7,986



17,236



8,940



8,569



17,509Gross profitServices gross profit


6,689



1,971



8,660



7,530



1,838



9,368Systems gross profit


3,685



1,229



4,914



731



1,561



2,292Total gross profit

$
10,374


$
3,200


$
13,574


$
8,261


$
3,399


$
11,660   15




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
  Nine Months Ended
    September 30,2006


2005Comm.








Comm.Apps


Gvmt


Total


Apps


Gvmt


TotalRevenueServices

$
44,838


$
21,222


$
66,060


$
39,461


$
14,966


$
54,427Systems


12,701



15,679



28,380



9,394



11,608



21,002Total revenue


57,539



36,901



94,440



48,855



26,574



75,429Direct costsDirect cost of
    services1


23,938



15,627



39,565



18,797



9,414



28,212Direct cost of
    systems1


3,548



9,949



13,497



4,325



8,625



12,949Total direct costs


27,486



25,576



53,062



23,122



18,039



41,161Gross profitServices gross profit


20,900



5,595



26,495



20,663



5,552



26,215Systems gross profit


9,153



5,730



14,883



5,069



2,983



8,053Total gross profit

$
30,053


$
11,325


$
41,378


$
25,732


$
8,535


$
34,268   Three Months
    Ended


Nine Months
    EndedSeptember 30,


September 30,2006


2005


2006


2005Total gross profit

$
13,574


$
11,660


$
41,378


$
34,268Research and development
    expense1


(2,994
)


(3,456
)


(9,403
)


(10,919
)Sales and marketing
    expense1


(2,787
)


(2,604
)


(8,976
)


(8,204
)General and administrative
    expense1


(4,275
)


(3,494
)


(12,649
)


(11,025
)Depreciation and amortization of
    property and equipment


(1,895
)


(2,133
)


(6,196
)


(6,187
)Amortization of acquired
    intangible assets


(37
)


(66
)


(111
)


(140
)Interest expense


(871
)


(249
)


(2,317
)


(737
)Other income/(expense), net


46



29



137



(259
)Income/(loss) from continuing
    operations


761



(313
)


1,863



(3,203
)Loss from discontinued operations
    including impairment charge in
    20061


(14,510
)


(1,899
)


(18,878
)


(5,134
)Net loss

$
(13,749
)

$
(2,212
)

$
(17,015
)

$
(8,337
)     1
    
    includes non-cash stock compensation expense as detailed in
    Note 2 16




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
  7.
    Inventory    Sep. 30,


Dec. 31,2006


2005Component parts

$
3,313


$
1,934Finished goods


579



1,263Total inventory at period end

$
3,892


$
3,197   8.
    Acquired
    Intangible Assets and Capitalized Software Development
    Costs    September 30,
    2006


December 31,
    2005Gross








GrossCarrying


Accumulated





Carrying


AccumulatedAmount


Amortization


Net


Amount


Amortization


NetAcquired intangible assets:Customer Lists

$
606


$
261


$
345


$
606


$
174


$
432Trademarks & Patents


612



64



548



612



40



572Software development costs,
    including acquired technology


7,139



2,921



4,218



5,815



1,990



3,825Total

$
8,357


$
3,246


$
5,111


$
7,033


$
2,204


$
4,829Estimated future amortization
    expense:Three-months ending
    December 31, 2006

$
652Year ending December 31, 2007

$
1,603Year ending December 31, 2008

$
1,078Year ending December 31, 2009

$
1,334Year ending December 31, 2010

$
444     9.
    Concentrations
    of Credit Risk and Major Customers   17




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
    % of Total
    Revenue For the

% of Total
    Revenue For theThree Months
    Ended

Nine Months
    EndedSeptember
    30,

September
    30,Customer

Segment

2006

2005

2006

2005Federal agencies

Government

23%

13%

27%

17%Verizon Wireless, including
    indirect sales

Commercial Applications

21%

19%

22%

17%Cingular Wireless

Commercial Applications

10%

Less than 10%

Less than 10%

10%   As of September
    30, 2006Accounts

UnbilledCustomer

Segment

Receivable

ReceivablesFederal agencies

Government

27%

42%Customer A

Commercial Applications

23%

Less than 10%Customer B

Commercial Applications

13%

Less than 10%Customer C

Commercial Applications

Less than 10%

Less than 10%  18




---



##### 



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Form 10-Q Form 10-Q). Form 10-Q
  Form 10-Q and/or
  Critical
    Accounting Policies and Estimates
  percentage-of-completion
 19




---



##### 



percentage-of-completion Form 10-K Form 10-K).
  Overview
    ®
  slower-than-anticipated Form 10-Q.
 20




---



##### 



and/or and/or
  Form 10-K Form 10-Q.
  Indicators of Our
    Financial and Operating Performance
    
    Revenue and gross profit.  We derive revenue
    from products 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 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 2004 financings in connection with our
    2004 acquisitions and our 2006 debt financing, 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.  ® ® Form 10-Q
 21




---



##### 



Results of
    Operations
  Recent
    Developments:
    Share Based Payment, Form 10-Q
  Revenue and Cost
    of Revenue
  Discontinued Operations  Enterprise assets
  Commercial
    Applications Segment:
  Three Months





Nine MonthsEnded
    September 30,


2006 vs.
    2005


Ended
    September 30,


2006 vs.
    2005($ in
    millions)

2006


2005


$


%


2006


2005


$


%Services revenue

$
14.2


$
14.3


$
(0.1
)


(1
)%

$
44.8


$
39.5


$
5.3



13
%Systems revenue


5.4



2.9



2.5



86
%


12.7



9.4



3.3



35
%Commercial Applications segment
    revenue


19.6



17.2



2.4



14
%


57.5



48.9



8.6



18
%Direct cost of services revenue


7.5



6.8



0.7



10
%


23.9



18.8



5.1



27
%Direct cost of systems revenue


1.8



2.1



(0.3
)


(14
)%


3.5



4.3



(0.8
)


(19
)%Commercial Applications segment
    cost of revenue


9.3



8.9



(0.4
)


(4
)%


27.5



23.1



4.4



19
%Services gross profit


6.7



7.5



(1.0
)


(13
)%


20.9



20.7



0.2



1
%% of revenue


47
%


52
%










47
%


52
%Systems gross profit


3.7



0.7



3.0



429
%


9.2



5.1



4.1



80
%% of revenue


69
%


25
%










72
%


54
%Commercial Applications segment
    gross profit

$
10.4


$
8.2


$
2.2



27
%

$
30.1


$
25.7


$
4.4



17
%% of revenue


53
%


48
%










52
%


53
%     1 See
    discussion of the allocation of non-cash stock compensation
    expense in Note 2 to the accompanying unaudited
    consolidated financial statements.2 See
    discussion of segment reporting in Note 6 to the
    accompanying unaudited consolidated financial statements (NM =
    Not meaningful) 22




---



##### 



Commercial
    Applications Segment:
 Services Revenue, Cost of Revenue, and Gross Profit:
    tm
      Commercial
    Applications Segment:
 Systems Revenue, Cost of Revenue, and Gross Profit:
   23




---



##### 



percentage-of-completion
     24




---



##### 



Government
    Segment:
  Three Months





Nine MonthsEnded
    September 30,


2006 vs.
    2005


Ended
    September 30,


2006 vs.
    2005($ in
    millions)

2006


2005


$


%


2006


2005


$


%Services revenue

$
7.3


$
5.7


$
1.6



28
%

$
21.2


$
15.0


$
6.2



41
%Systems revenue


3.9



6.3



(2.4
)


(38
)%


15.7



11.6



4.1



35
%Government segment revenue


11.2



12.0



(0.8
)


(7
)%


36.9



26.6



10.3



39
%Direct cost of services revenue


5.3



3.9



1.4



36
%


15.6



9.4



6.2



66
%Direct cost of systems revenue


2.6



4.7



(2.1
)


(45
)%


9.9



8.6



1.3



15
%Government segment cost of revenue


7.9



8.6



(0.7
)


(8
)%


25.6



18.0



7.5



42
%Services gross profit


2.0



1.8



0.2



11
%


5.6



5.6







NM% of revenue


27
%


32
%










26
%


37
%Systems gross profit


1.2



1.6



(0.4
)


(25
)%


5.7



3.0



2.7



90
%% of revenue


31
%


25
%










36
%


26
%Government segment gross profit

$
3.2


$
3.4


$
(0.2
)


(6
)%

$
11.3


$
8.5


$
2.8



33
%% of revenue


29
%


28
%










31
%


32
%     1 See
    discussion of the allocation of non-cash stock compensation
    expense in Note 2 to the accompanying unaudited
    consolidated financial statements2 See
    discussion of segment reporting in Note 6 to the
    accompanying unaudited consolidated financial statements  percentage-of-completion
  Government
    Segment:
 Services Revenue, Cost of Revenue, and Gross Profit:
   25




---



##### 



Government
    Segment:
 Systems Revenue, Cost of Revenue, and Gross Profit:
  Year-to-date
  ®
    year-to-date
  Major
    Customers
   26




---



##### 



Revenue
    Backlog
    September 30,($ in
    millions)

2006


2005Commercial Applications segment

$
50.4


$
76.0Government segment


44.2



50.0Total backlog

$
94.6


$
126.0Expected to be realized during the
    current fiscal year

$
23.0


$
20.0Expected to be realized within
    12 months

$
60.2


$
60.0     Operating
    Expenses
  Research and
    development expense:
  Three Months


2006 vs.


Nine MonthsEnded
    September 30,


2005


Ended
    September 30,


2006 vs.
    2005($ in
    millions)

2006


2005


$


%


2006


2005


$


%Research and development expense

$
3.0


$
3.5


$
(0.5
)


(14
)%

$
9.4



10.9


$
(1.5
)


(14
)%% of total revenue


10
%


12
%










10
%


15
%          27




---



##### 



product-by-product
  Sales and
    marketing expense:
  Three Months





Nine Months


2006 vs.Ended
    September 30,


2006 vs.
    2005


Ended
    September 30,


2005($ in
    millions)

2006


2005


$


%


2006


2005


$


%Sales and marketing expense

$
2.8


$
2.6


$
0.2



8
%

$
9.0


$
8.2


$
0.8



10
%% of total revenue


9
%


9
%










10
%


11
%     General and
    administrative expense:
  Three Months


2006 vs.


Nine Months


2006 vs.Ended
    September 30,


2005


Ended
    September 30,


2005($ in
    millions)

2006


2005


$


%


2006


2005


$


%General and administrative expense

$
4.3


$
3.5


$
0.8



23
%

$
12.6


$
11.0


$
1.6



15
%% of total revenue


14
%


12
%










13
%


15
%   year-to-date
 28




---



##### 



Depreciation and
    amortization of property and equipment:
  Three Months


2006 vs.


Nine Months


2006 vs.Ended
    September 30,


2005


Ended
    September 30,


2005($ in
    millions)

2006


2005


$


%


2006


2005


$


%Depreciation and amortization of
    property and equipment

$
1.9


$
2.1


$
(0.2
)


(10
)%

$
6.2


$
6.2


$
0.00



NMAverage gross cost of property and
    equipment during the period

$
51.7


$
46.6










$
50.9


$
45.8   year-over-year
  Interest
    expense:
  Three Months





Nine MonthsEnded
    September 30,


2006 vs.
    2005


Ended
    September 30,


2006 vs.
    2005($ in
    millions)

2006


2005


$


%


2006


2005


$


%Interest expense on convertible
    subordinated debentures

$
0.3


$



$
0.3



NM


$
0.8







0.8



NMAmortization of debt discount


0.3







0.3



NM



0.3







0.3



NMAmortization of deferred financing
    fees


0.1







0.1



NM



0.8



0.3



0.5



NMInterest expense on notes payable
    and bank line of credit borrowings


0.1



0.1







NM



0.2



0.3



(0.1
)


NMInterest expense on capital lease
    obligations


0.1



0.1







NM



0.2



0.2







NMTotal interest expense

$
0.9


$
0.2


$
0.7



NM


$
2.3


$
0.8


$
1.5



NM   Form 10-Q,
   29




---



##### 



Other
    income/(expense), net:
    Income
    taxes:
    Discontinued
    Operations  Enterprise assets
  slower-than-anticipated ®
 30




---



##### 



Three Months





Nine MonthsEnded
    September 30,


2006 vs.
    2005


Ended
    September 30,


2006 vs.
    2005($ in
    millions)

2006


2005


$


%


2006


2005


$


%Services revenue

$
3.6


$
5.1


$
(1.5
)


(29
)%

$
11.7


$
18.1


$
(6.4
)


(35
)%Systems revenue


2.4



0.3



2.1



700
%


5.3



2.1



3.2



152
%Total Enterprise revenue


6.0



5.4



0.6



11
%


17.0



20.2



(3.2
)


(16
)%Services gross profit


0.6



1.5



(0.9
)


(60
)%


2.4



5.9



(3.5
)


(59
)%Systems gross profit


0.3



(0.4
)


0.7



(175
)%


0.3



(0.9
)


1.2



(133
)%Total Enterprise gross profit


0.9



1.1



(0.2
)


(18
)%


2.7



5.0



(2.3
)


(46
)%Research and development, sales,
    marketing, and general and administrative expenses


2.4



2.2



0.2



9
%


8.6



7.7



0.9



12
%Depreciation and amortization






0.8



(0.8
)


100
%






2.6



(2.6
)


100
%Write-down of discontinued
    operations goodwill


13.0







13.0



100
%


13.0







13.0



100
%Loss from discontinued
    operations

$
(14.5
)

$
(1.9
)

$
(12.6
)


663
%

$
(18.9
)

$
(5.3
)

$
(13.6
)


257
%      31




---



##### 



Net
    loss:
  Three Months





Nine MonthsEnded
    September 30,


2006 vs.
    2005


Ended
    September 30,


2006 vs.
    2005($ in
    millions)

2006


2005


$


%


2006


2005


$


%Net (loss)/income

$
(13.7
)

$
(2.2
)

$
(11.5
)


523
%

$
(17.0
)

$
(8.3
)

$
(8.7
)


105
%     Liquidity and
    Capital Resources
  Nine MonthsEndedSeptember 30,


2006 vs.
    2005($ in
    millions)

2006


2005


$Net cash and cash equivalents
    provided by/(used in):Continuing operationsIncome (loss)

$
1.9


$
(3.2
)

$
5.1Non-cash charges


10.7



7.6



3.1Net changes in working capital


(3.6
)


(2.9
)


(0.7
)Operating activities


9.0



1.5



7.5Purchases of property and equipment


(2.0
)


(2.9
)


0.9Capitalized software development
    costs


(1.3
)


(1.8
)


0.5Proceeds from new borrowings


11.0







11.0Other financing activities


(7.4
)


(4.0
)


(3.4
)Cash provided by/(used in)
    continuing operations


9.3



(7.2
)


16.5Discontinued
    operationsOperating activities


(7.0
)


(1.3
)


(5.7
)Investing and financing activities


(0.9
)


(1.3
)


(0.4
)Cash Provided by/(used in)
    discontinued operations


(7.9
)


(2.6
)


(5.3
)Net increase/(decrease) in cash

$
1.4


$
(9.8
)

$
11.2Days revenue in accounts
    receivable including unbilled receivables


82



99     Form 10-Q,
 32




---



##### 



33




---



##### 



and/or and/or
      Off-Balance Sheet
    Arrangements
    Contractual
    Commitments
    Within 12


1-3


3-5($ in
    millions)

Months


Years


Years


TotalNotes payable

$
1.3


$



$
10.0


$
11.3Capital lease obligations


3.0



1.4







4.4Operating leases


3.3



5.8



0.3



9.4Total contractual commitments

$
7.6


$
7.2


$
10.3


$
25.1  34




---



##### 



Item 3.
    Quantitative
    and Qualitative Disclosures About Market Risk  Interest Rate
    Risk
  Form 10-K.
  Foreign Currency
    Risk
  Form 10-K.
  Item 4.
    Controls and
    Procedures    Rule 13a-15(b),
   35




---



##### 

PART II. 
    OTHER INFORMATION

|        |                      
|------- | ---------------------
|Item 1. | Legal
    Proceedings



form 10-K








|         |                 
|-------- | ----------------
|Item 1A. | Risk
    Factors



Form 10-K.




|        |         
|------- | --------
|Item 6. | Exhibits



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



36



---



##### 

SIGNATURES













| |     |                         
| | --- | ------------------------
| | By: | /s/  Maurice
    B. Tosé















|                                                                                 |  |                                                                                        
|-------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------
|/s/  Maurice
    B.
    ToséMaurice
    B. Tosé
    November 7, 2006             |  | Chairman, President and Chief
    Executive Officer
    (Principal Executive Officer)  
|                                                                                 |  |                                                                                        
|                                                                                 |  |                                                                                        
|                                                                                 |  |                                                                                        
|/s/  Thomas
    M.
    Brandt, Jr.Thomas
    M. Brandt, Jr.
    November 7, 2006 |  | Senior Vice President and Chief
    Financial Officer
    (Principal Financial Officer)



37