##### 



SECURITIES AND EXCHANGE
    COMMISSIONWashington, 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
    June 30, 2007ORTRANSACTION 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 (Registrants
    telephone number, including area code)
  þ o
  Rule 12b-2
  Large accelerated filer
    o


Accelerated filer þ



Non-accelerated filer o   Rule 12b-2 o þ
    Shares
    outstandingas of
    July 31,Title of Each
    Class

2007Class A Common Stock, par
    value
    $0.01 per share


34,326,618Class B Common Stock, par
    value
    $0.01 per share


7,425,672Total Common Stock Outstanding


41,752,290




---



##### 



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

Financial
    StatementsConsolidated
    Statements of Operations for the three-and six months ended
    June 30, 2007 and 2006 (Unaudited)


1Consolidated
    Balance Sheets as of June 30, 2007 (Unaudited) and
    December 31, 2006


2Consolidated
    Statement of Stockholders Equity for the six-months ended
    June 30, 2007 (Unaudited)


3Consolidated
    Statements of Cash Flows for the six-months ended June 30,
    2007 and 2006 (Unaudited)


4Notes to
    Consolidated Financial Statements (Unaudited)


5Item 2.

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


14Item 3.

Quantitative and
    Qualitative Disclosures About Market Risk


28Item 4.

Controls and
    Procedures


28PART II. OTHER
    INFORMATIONItem 1.

Legal
    Proceedings


29Item 1A.

Risk
    Factors


29Item 4.

Submission of
    Matters to a Vote of Security Holders


29Item 6.

Exhibits


29SIGNATURES


30




---



##### 



TeleCommunication
    Systems, Inc.
 Consolidated
    Statements of Operations
    (amounts in thousands, except per share data)
    (unaudited)  Three Months
    Ended


Six Months
    EndedJune 30,


June 30,2007


2006


2007


2006RevenueServices

$
22,618


$
22,642


$
43,503


$
44,586Systems


12,718



9,301



25,952



19,043Total revenue


35,336



31,943



69,455



63,629Direct costs of
    revenueDirect cost of services revenue


13,650



13,579



26,598



26,753Direct cost of systems revenue,
    including amortization of software development costs of $372,
    $281, $716 and $562, respectively


11,005



4,124



17,881



9,074Total direct cost of revenue


24,655



17,703



44,479



35,827Services gross profit


8,968



9,063



16,905



17,833Systems gross profit


1,713



5,177



8,071



9,969Total gross profit


10,681



14,240



24,976



27,802Operating costs and
    expensesResearch and development expense


3,266



3,477



6,371



6,409Sales and marketing expense


3,157



3,140



6,320



6,188General and administrative expense


5,499



4,149



10,151



8,376Depreciation and amortization of
    property and equipment


1,556



1,857



3,224



4,302Amortization of acquired
    intangible assets


37



37



74



74Total operating costs and expenses


13,515



12,660



26,140



25,349Income/(loss) from
    operations


(2,834
)


1,580



(1,164
)


2,453Interest and financing expenses


(794
)


(890
)


(1,757
)


(1,449
)Write-off of unamortized debt
    discount and debt issuance expenses


(2,458
)






(2,458
)


Other income/(expense), net


93



69



153



97Income/(loss) from continuing
    operations


(5,993
)


759



(5,226
)


1,101Loss from discontinued operations


(145
)


(2,314
)


(269
)


(4,368
)Net loss

$
(6,138
)

$
(1,555
)

$
(5,495
)

$
(3,267
)Income/(loss) per share-basic and
    dilutedIncome/(loss) per share from
    continuing operations

$
(0.15
)

$
0.02


$
(0.13
)

$
0.03Loss per share from discontinued
    operations


(0.00
)


(0.06
)


(0.01
)


(0.11
)Net loss per share-basic and
    diluted

$
(0.15
)

$
(0.04
)

$
(0.14
)

$
(0.08
)Weighted average shares
    outstanding-basic


41,166



39,313



40,990



39,200Weighted average shares
    outstanding-diluted


41,166



40,336



40,990



39,831    1




---



##### 



TeleCommunication
    Systems, Inc.
 Consolidated
    Balance Sheets
    (amounts in thousands, except share data)  June 30,


December 31,2007


2006(unaudited)AssetsCurrent assets:Cash and cash equivalents

$
17,046


$
10,358Accounts receivable, net of
    allowance of $321 in 2007 and $290 in 2006


18,475



21,544Unbilled receivables


6,680



7,636Inventory


5,928



5,293Investment in marketable securities


2,085



Other current assets


4,852



2,818Current assets of discontinued
    operations






13,596Total current assets


55,066



61,245Property and equipment, net of
    accumulated depreciation and amortization of $43,640 in 2007 and
    $40,594 in 2006


11,207



12,853Software development costs, net of
    accumulated amortization of $3,954 in 2007 and $3,262 in 2006


4,574



4,402Acquired intangible assets, net of
    accumulated amortization of $435 in 2007 and $362 in 2006


783



856Goodwill


1,813



1,813Other assets


3,021



2,526Total assets

$
76,464


$
83,695Liabilities and
    stockholders equityCurrent liabilities:Accounts payable and accrued
    expenses

$
12,120


$
10,421Accrued payroll and related
    liabilities


2,205



5,663Deferred revenue


6,673



3,485Current portion of notes payable


3,413



2,160Current portion of capital lease
    obligations


2,137



2,740Current liabilities of
    discontinued operations






11,400Total current liabilities


26,548



35,869Capital lease obligations and
    notes payable less current portion


12,201



12,721Total liabilities


38,749



48,590Stockholders Equity:Class A Common Stock;
    $0.01 par value:Authorized shares 
    225,000,000; issued and outstanding shares of 34,329,208 in 2007
    and 32,267,893 in 2006


343



322Class B Common Stock;
    $0.01 par value:Authorized shares 
    75,000,000; issued and outstanding shares of 7,425,672 in 2007
    and 7,525,672 in 2006


75



76Additional paid-in capital


224,745



217,739Accumulated other comprehensive
    Income


1,079



Accumulated deficit


(188,527
)


(183,032
)Total stockholders equity


37,715



35,105Total liabilities and
    stockholders equity

$
76,464


$
83,695    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


Income
    (Loss)


Deficit


TotalBalance at January 1,
    2007

$
322


$
76


$
217,739


$



$
(183,032
)

$
35,105Options exercised for the purchase
    of 900,303 shares of Class A Common Stock


9







2,147











2,156Issuance of 102,203 shares of
    Class A Common Stock under Employee Stock Purchase Plan


1







294











295Conversion of 100,000 shares
    of Class B Common Stock to Class A Common Stock


1



(1
)














Exercise of warrants to purchase
    886,787 shares of Class A Common Stock


9







2,208











2,217Surrender of 6,778 Restricted
    shares of Class A Common Stock as payment for tax
    withholdings










(37
)










(37
)Issuance of 78,800 Restricted
    Class A Common Stock


1







(1
)










Stock compensation expense for
    continuing operations










2,041











2,041Stock compensation expense of
    discontinued operations










132











132Valuation adjustment for stock
    options issued to non-employee for service










222











222Unrealized gain on securities














1,060







1,060Foreign currency translation
    adjustment














19







19Net loss for the six months ended
    June 30, 2007


















(5,495
)


(5,495
)Balance at June 30,
    2007

$
343


$
75


$
224,745


$
1,079


$
(188,527
)

$
37,715    3




---



##### 



TeleCommunication
    Systems, Inc.
 Consolidated
    Statements of Cash Flows
    (amounts in thousands)
    (unaudited)  Six Months
    EndedJune 30,2007


2006Operating activities:Net loss

$
(5,495
)

$
(3,267
)Less: Loss from discontinued
    operations


(269
)


(4,368
)Income/(loss) from continuing
    operations


(5,226
)


1,101Adjustments to reconcile net loss
    from continuing operations to net cash provided by operating
    activities:Depreciation and amortization of
    property and equipment


3,224



4,302Non-cash stock compensation expense


2,121



1,728Amortization of software
    development costs


716



562Amortization of debt discount


480



384Amortization of deferred financing
    fees


210



260Write-off of unamortized debt
    discount and debt issuance expenses


2,458



Amortization of acquired intangible
    assets


74



74Other non-cash income(expense)


42



(41
)Changes in operating assets and
    liabilities:Accounts receivable, net


3,069



2,109Unbilled receivables


956



66Inventory


(635
)


(965
)Other current assets


(2,034
)


446Other assets


(744
)


409Accounts payable and accrued
    expenses


1,699



(1,612
)Accrued payroll and related
    liabilities


(3,458
)


(2,282
)Deferred revenue


3,188



956Net cash provided by operating
    activities of continuing operations


6,140



7,497Net cash used in operating
    activities of discontinued operations


(3,280
)


(3,240
)Total net cash provided by
    operating activities


2,860



4,257Investing activities:Purchases of property and equipment


(950
)


(1,076
)Capitalized software development
    costs


(888
)


(864
)Net cash used in investing
    activities of continuing operations


(1,838
)


(1,940
)Net cash (used in)/provided by
    investing activities of discontinued operations


4,000



(677
)Total net cash (used in)/provided
    by investing activities


2,162



(2,617
)Financing activities:Payments on long-term debt and
    capital lease obligations


(12,993
)


(2,871
)Proceeds from issuance of long-term
    debt


10,000



11,000Proceeds from exercise of warrants


2,208



Payments on short-term line of
    credit, net






(8,004
)Financing fees related to issuance
    of long-term debt and Class A Common Stock






(1,320
)Proceeds from exercise of stock
    options and sale of stock


2,451



359Total net cash (used in)/provided
    by financing activities


1,666



(836
)Effect of exchange rates on cash of
    discontinued operations






190Net increase in cash from
    continuing operations


5,968



4,721Net increase/(decrease) in cash
    from discontinued operations


720



(3,727
)Total net increase in
    cash


6,688



994Cash and cash equivalents at the
    beginning of the period


10,358



9,320Cash and cash equivalents at the
    end of the period

$
17,046


$
10,314    4




---



##### 



TeleCommunication
    Systems, Inc.
 Notes to
    Consolidated Financial StatementsJune 30, 2007
    (amounts in thousands, except share and 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.
  Use of Estimates.
  Accounting Changes and Error Corrections
  Software Development Costs.
  Stock-Based Compensation. Share Based
    Payment
    Earnings per share.
 5




---



##### 



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


Six Months
    EndedJune 30,


June 30,2007


2006


2007


2006Basic weighted average common
    shares outstanding


41,166



39,313



40,900



39,200Dilutive common shares outstanding






1,023







631Diluted weighted average common
    shares outstanding used in the calculation of diluted
    income/(loss)


41,166



40,336



40,900



39,831   Recent Accounting
    Pronouncements.
        2.
    Stock-Based
    Compensation   6




---



##### 



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


Six MonthsEnded
    June 30,


Ended
    June 30,2007


2006


2007


2006Continuing
    operations:Stock options granted at fair value

$
1,013


$
839


$
1,913


$
1,485Restricted stock


92



60



157



215Employee stock purchase plan


28



17



51



28Total stock compensation expense
    included in continuing operations

$
1,133


$
916


$
2,121


$
1,728Discontinued
    operations:Stock options granted at fair value

$
53


$
150


$
132


$
265Total stock compensation expense
    included in discontinued operations

$
53


$
150


$
132


$
265     Three Months
    Ended June 30,2007


2006Comm.


Gvmt


Total


Comm.


Gvmt


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

$
295


$
181


$
476


$
233


$
161


$
394Direct cost of systems


45



23



68



31



17



48Total stock compensation included
    in direct costs of revenue

$
340


$
204


$
544


$
264


$
178


$
442   Six Months Ended
    June 30,2007


2006Comm.


Gvmt


Total


Comm.


Gvmt


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

$
551


$
339


$
890


$
425


$
294


$
719Direct cost of systems


85



43



128



56



32



88Total stock compensation included
    in direct costs of revenue

$
636


$
382


$
1,018


$
481


$
326


$
807   7




---



##### 



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


Six MonthsEnded


EndedJune 30,


June 30,2007


2006


2007


2006Stock compensation included in
    operating expenses:Research and development expense

$
227


$
179


$
425


$
273Sales and marketing expense


164



99



307



168General and administrative expense


198



196



371



480Total stock compensation included
    in operating expenses

$
589


$
474


$
1,103


$
921     WeightedAverageNumber of


Exercise(Share amounts in
    thousands)

Options


PriceOutstanding, beginning of year


11,662


$
3.62Granted


2,306


$
3.63Exercised


(900
)

$
2.39Forfeited


(881
)

$
3.85Outstanding, at June 30, 2007


12,187


$
3.69Exercisable, at June 30, 2007


7,140


$
4.17Vested and expected to vest at
    June 30, 2007


8,520


$
3.69Estimated weighted-average
    grant-date fair value of options granted during the period

$
3.69Weighted-average remaining
    contractual life of options outstanding at end of period


6.95 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


4,476


$
2.30



7.53



2,166


$
2.20$ 2.61 - $ 5.21


5,290


$
3.45



6.89



2,554


$
3.36$ 5.21 - $ 7.82


2,390


$
6.74



6.03



2,390


$
6.74$ 7.82 - $10.42


25


$
8.30



6.01



25


$
8.30$10.42 - $26.05


6


$
23.37



2.91



5


$
23.3712,187











7,140    8




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  3.
    Supplemental
    Disclosure of Cash Flow Information      4.
    Enterprise
    Assets-Discontinued Operations  Form 10-Q Accounting for the Impairment or Disposal of
    Long-Lived Assets
  18-month ®
  Three Months
    Ended


Six Months
    EndedJune 30,


June 30,2007


2006


2007


2006Total revenue

$
1,683


$
6,349


$
5,569


$
10,938Total gross profit

$
361


$
921


$
833


$
1,768Loss from discontinued operations

$
(145
)

$
(2,314
)

$
(269
)

$
(4,368
)     5.
    Financing
    Arrangements   9




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    6.
    Segment
    Information    tm
  ®
      Three Months
    Ended June 30,2007


2006Comm.


Gvmt


Total


Comm.


Gvmt


TotalRevenueServices

$
14,665


$
7,953


$
22,618


$
15,535


$
7,107


$
22,642Systems


1,291



11,427



12,718



3,764



5,537



9,301Total revenue


15,956



19,380



35,336



19,299



12,644



31,943Operating costs and
    expensesDirect cost of services


7,517



6,133



13,650



8,277



5,302



13,579Direct cost of systems


1,207



9,798



11,005



873



3,251



4,124Total direct costs


8,724



15,931



24,655



9,150



8,553



17,703Gross profitServices gross profit


7,148



1,820



8,968



7,258



1,805



9,063Systems gross profit


84



1,629



1,713



2,891



2,286



5,177Total gross profit

$
7,232


$
3,449


$
10,681


$
10,149


$
4,091


$
14,240   10




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  Six Months Ended
    June 30,2007


2006Comm.


Gvmt


Total


Comm.


Gvmt


TotalRevenueServices

$
28,306


$
15,197


$
43,503


$
30,684


$
13,902


$
44,586Systems


8,101



17,851



25,952



7,230



11,813



19,043Total revenue


36,407



33,048



69,455



37,914



25,715



63,629Operating costs and
    expensesDirect cost of services


14,839



11,758



26,597



16,474



10,279



26,753Direct cost of systems


2,649



15,233



17,882



1,762



7,312



9,074Total direct costs


17,488



26,991



44,479



18,236



17,591



35,827Gross profitServices gross profit


13,467



3,439



16,906



14,210



3,623



17,833Systems gross profit


5,452



2,618



8,070



5,468



4,501



9,969Total gross profit

$
18,919


$
6,057


$
24,976


$
19,678


$
8,124


$
27,802   Three Months
    Ended


Six Months
    EndedJune 30,


June 30,2007


2006


2007


2006Total segment gross profit

$
10,681


$
14,240


$
24,976


$
27,802Research and development expense


(3,266
)


(3,477
)


(6,371
)


(6,409
)Sales and marketing expense


(3,157
)


(3,140
)


(6,320
)


(6,188
)General and administrative expense


(5,499
)


(4,149
)


(10,151
)


(8,376
)Depreciation and amortization of
    property and equipment


(1,556
)


(1,857
)


(3,224
)


(4,302
)Amortization of acquired
    intangible assets


(37
)


(37
)


(74
)


(74
)Interest expense


(3,252
)


(890
)


(4,215
)


(1,449
)Other income/(expense), net


93



69



153



97Income/(loss) from continuing
    operations


(5,993
)


759



(5,226
)


1,101Loss from discontinued operations


(145
)


(2,314
)


(269
)


(4,368
)Net loss

$
(6,138
)

$
(1,555
)

$
(5,495
)

$
(3,267
)   7.
    Inventory    June 30,


Dec. 31,2007


2006Component parts

$
3,821


$
2,942Finished goods


2,107



2,351Total inventory at period end

$
5,928


$
5,293  11




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  8.
    Acquired
    Intangible Assets and Capitalized Software Development
    Costs    June 30,
    2007


December 31,
    2006Gross








GrossCarrying


Accumulated





Carrying


AccumulatedAmount


Amortization


Net


Amount


Amortization


NetAcquired intangible assets:Customer Lists

$
606


$
347


$
259


$
606


$
290


$
316Trademarks & Patents


612



88



524



612



72



540Software development costs,
    including acquired technology


8,528



3,954



4,574



7,664



3,262



4,402Total

$
9,746


$
4,389


$
5,357


$
8,882


$
3,624


$
5,258Estimated future amortization
    expense:Six-months ending
    December 31, 2007

$
895Year ending December 31, 2008

$
1,791Year ending December 31, 2009

$
1,198Year ending December 31, 2010

$
298Thereafter

$
1,175     9.
    Concentrations
    of Credit Risk and Major Customers      % of Total
    Revenue For

% of Total
    Revenue Forthe Three

the SixMonths Ended

Months EndedJune 30,

June 30,Customer

Segment

2007

2006

2007

2006Federal Agencies

Government

44%

29%

35%

30%Customer A

Commercial

12%

22%

19%

22%   12




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  As of
    June 30,2007Accounts

UnbilledCustomer

Segment

Receivable

ReceivablesFederal Agencies

Government

38%

40%Customer A

Commercial

10%

Less than 10%Customer B

Commercial

15%

16%   10.
    Line of
    Credit          13




---



##### 



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
  Critical
    Accounting Policies and Estimates
   14




---



##### 



Form 10-K Form 10-K).
  Overview
    ® Form 10-Q.
    Form 10-K Form 10-Q.
  Indicators of Our
    Financial and Operating Performance
    
    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 15




---



##### 



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 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 2007 debt financing, 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.  Results of
    Operations
  Revenue and Cost
    of Revenue
  Discontinued Operations  Enterprise assets
  Commercial
    Segment:
  Three Months








Six MonthsEnded
    June 30,


2007 vs.
    2006


Ended
    June 30,


2007 vs.
    2006($ in
    millions)

2007


2006


$


%


2007


2006


$


%Services revenue

$
14.7


$
15.5


$
(0.8
)


(5
)%

$
28.3


$
30.7


$
(2.4
)


(8
)%Systems revenue


1.3



3.8



(2.5
)


(66
)%


8.1



7.2



0.9



13
%Commercial segment revenue


16.0



19.3



(3.3
)


(17
)%


36.4



37.9



(1.5
)


(4
)%Direct cost of services revenue


7.6



8.3



(0.7
)


(8
)%


14.8



16.5



(1.7
)


(10
)%Direct cost of systems revenue


1.2



0.9



0.3



33
%


2.7



1.8



0.9



50
%Commercial segment cost of revenue


8.8



9.2



(0.4
)


(4
)%


17.5



18.3



(0.8
)


(4
)%Services gross profit


7.1



7.2



(0.1
)


(1
)%


13.5



14.2



(0.7
)


(5
)%% of revenue


48
%


46
%










48
%


46
%Systems gross profit


0.1



2.9



(2.8
)


(97
)%


5.4



5.5



(0.1
)


(2
)%% of revenue


8
%


76
%










67
%


76
%Commercial segment gross
    profit1

$
7.2


$
10.1


$
(2.9
)


(29
)%

$
18.9


$
19.7


$
(0.8
)


(4
)%% of revenue


45
%


52
%










52
%


52
%  16




---



##### 



1 See
    discussion of segment reporting in Note 6 to the
    accompanying unaudited consolidated financial statements  Commercial
    Services Revenue, Cost of Revenue, and Gross Profit:
    E-911, tm ®
      Commercial
    Systems Revenue, Cost of Revenue, and Gross Profit:
     17




---



##### 



18




---



##### 



Government
    Segment:
  Three Months








Six MonthsEnded
    June 30,


2007 vs.
    2006


Ended
    June 30,


2007 vs.
    2006($ in
    millions)

2007


2006


$


%


2007


2006


$


%Services revenue

$
8.0


$
7.1


$
0.9



13
%

$
15.2


$
13.9


$
1.3



9
%Systems revenue


11.4



5.5



5.9



107
%


17.9



11.8



6.1



52
%Government segment revenue


19.4



12.6



6.8



54
%


33.1



25.7



7.4



29
%Direct cost of services revenue


6.1



5.3



0.8



15
%


11.8



10.3



1.5



15
%Direct cost of systems revenue


9.8



3.2



6.6



206
%


15.2



7.3



7.9



108
%Government segment cost of revenue


15.9



8.5



7.4



87
%


27.0



17.6



9.4



53
%Services gross profit


1.9



1.8



0.1



6
%


3.4



3.6



(0.2
)


(6
)%% of revenue


24
%


25
%










22
%


26
%Systems gross profit


1.6



2.3



(0.7
)


(304
)%


2.7



4.5



(1.8
)


(4
)%% of revenue


14
%


42
%










15
%


38
%Government segment gross
    profit1

$
3.5


$
4.1


$
(0.6
)


(15
)%

$
6.1


$
8.1


$
(2.0
)


(25
)%% of revenue


18
%


32
%










18
%


32
%     1 See
    discussion of segment reporting in Note 6 to the
    accompanying unaudited consolidated financial statements    Government
    Services Revenue, Cost of Revenue, and Gross Profit:
     19




---



##### 



Government
    Systems Revenue, Cost of Revenue, and Gross Profit:
  ® 5-year
      Major
    Customers
   20




---



##### 



Revenue
    Backlog
    June 30,($ in
    millions)

2007


2006Commercial Segment

$
96.8


$
58.9Government Segment


25.9



16.3Total backlog

$
122.7


$
75.2Expected to be realized during the
    current fiscal year

$
39.1


$
37.6Expected to be realized within
    12 months

$
71.3


$
57.4     Operating
    Expenses
  Research and
    development expense:
  Three Months
    Ended





Six MonthsJune 30,


2007 vs.
    2006


Ended
    June 30,


2007 vs.
    2006($ in
    millions)

2007


2006


$


%


2007


2006


$


%Research and development expense

$
3.3


$
3.5


$
(0.2
)


(6
)%

$
6.4


$
6.4


$




% of total revenue


9
%


11
%










9
%


10
%       product-by-product
 21




---



##### 



Sales and
    marketing expense:
  Three Months





Six MonthsEnded
    June 30,


2007 vs.
    2006


Ended
    June 30,


2007 vs.
    2006($ in
    millions)

2007


2006


$


%


2007


2006


$


%Sales and marketing expense

$
3.2


$
3.1


$
0.1



3
%

$
6.3


$
6.2


$
0.1



2
%% of total revenue


9
%


10
%










9
%


10
%     General and
    administrative expense:
  Six MonthsThree Months





Ended


2007 vs.Ended
    June 30,


2007 vs.
    2006


June 30,


2006($ in
    millions)

2007


2006


$


%


2007


2006


$


%General and administrative expense

$
5.5


$
4.1


$
1.4



34
%

$
10.2


$
8.4


$
1.8



21.4
%% of total revenue


16
%


13
%










15
%


13
%    22




---



##### 



Depreciation and
    amortization of property and equipment:
  Three Months





Six MonthsEnded
    June 30,


2007 vs.
    2006


Ended
    June 30,


2007 vs.
    2006($ in
    millions)

2007


2006


$


%


2007


2006


$


%Depreciation and amortization of
    property and equipment

$
1.6


$
1.9


$
(0.3
)


(16
)%

$
3.2


$
4.3


$
(1.1
)


(26
)%Average gross cost of property and
    equipment during the period

$
54.5


$
50.8










$
54.1


$
50.4     Amortization of
    acquired intangible assets:
  Three Months





Six MonthsEnded
    June 30,


2007 vs.
    2006


Ended
    June 30,


2007 vs.
    2006($ in
    millions)

2007


2006


$


%


2007


2006


$


%Amortization of acquired
    intangible assets

$
0.1


$
0.1


$







$
0.1


$
0.1


$




     Interest
    expense:
  Three Months





Six MonthsEnded
    June 30,


2007 vs.
    2006


Ended
    June 30,


2007 vs.
    2006($ in
    millions)

2007


2006


$


%


2007


2006


$


%Interest expense incurred on notes
    payable and line of credit

$
0.4



0.4


$




NM


$
1.0


$
0.6


$
0.4



67
%Interest expense incurred on
    capital lease obligations


0.1



0.1







NM



0.1



0.1







NMAmortization of deferred financing
    fees


0.1



0.1







NM



0.2



0.4



(0.2
)


(50
)%Amortization of debt discount


0.2



0.3



(0.1
)


(33
)%


0.5



0.3



0.2



67
%Write-off of unamortized debt
    discount and debt issuance expenses


2.4







2.4



100
%


2.4







2.4



100
%Total interest expense

$
3.2


$
0.9


$
2.3



256
%

$
4.2


$
1.4


$
2.8



200
%    23




---



##### 



Other
    income/(expense), net:
    Income
    taxes:
    Discontinued
    Operations  Enterprise assets
   24




---



##### 



®
    Three Months





Six MonthsEnded
    June 30,


2007 vs.
    2006


Ended
    June 30,


2007 vs.
    2006($ in
    millions)

2007


2006


$


%


2007


2006


$


%Enterprise revenue

$
1.7


$
6.4


$
(4.7
)


(73
)%

$
5.6


$
10.9


$
(5.3
)


(49
)%Enterprise gross profit


0.4



0.9



(0.5
)


(56
)%


0.9



1.8



(0.9
)


(50
)%Research and development, sales,
    marketing, and general and administrative expenses


0.4



3.2



(2.8
)


(88
)%


1.1



6.2



(5.1
)


(82
)%Other income/(expenses), net


(0.1
)






(0.1
)


NM



(0.1
)






(0.1
)


NMLoss from discontinued
    operations

$
(0.1
)

$
(2.3
)

$
2.2



96
%

$
(0.3
)

$
(4.4
)

$
4.1



93
%     Net
    loss:
  Three Months





Six MonthsEnded
    June 30,


2007 vs.
    2006


Ended
    June 30,


2007 vs.
    2006($ in
    millions)

2007


2006


$


%


2007


2006


$


%Net (loss)/income

$
(6.1
)

$
(1.6
)

$
(4.5
)


(281
)%

$
(5.5
)

$
(3.3
)

$
(2.2
)


(67
)%    25




---



##### 



Liquidity and
    Capital Resources
  Six MonthsEndedJune 30,


2007 vs.
    2006($ in
    millions)

2007


2006


$


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

$
(5.2
)

$
1.1


$
(6.3
)


573
%Non-cash charges


9.3



7.3



2.0



27
%Net changes in working capital
    including changes in other assets


2.0



(0.9
)


2.9



322
%Operating activities


6.1



7.5



(1.7
)


(19
)%Purchases of property and equipment


(1.0
)


(1.1
)


0.1



10
%Capitalized software development
    costs


(0.9
)


(0.9
)






NMProceeds from new borrowings


10.0



11.0



(1.0
)


(9
)%Other financing activities


(8.2
)


(11.8
)


3.6



31
%Cash provided by/(used in)
    continuing operations


6.0



4.7



1.3



28
%Discontinued
    operationsOperating activities


(3.3
)


(3.2
)


(0.1
)


(3
)%Investing activities


4.0



(0.5
)


4.5



9
%Cash provided by/(used in)
    discontinued operations


0.7



(3.7
)


4.4



119
%Net increase/(decrease) in cash

$
6.7


$
1.0


$
5.7



570
%Days revenue outstanding in
    accounts receivable, including unbilled receivables


64



71        26




---



##### 



Off-Balance Sheet
    Arrangements
    Contractual
    Commitments
    Within 12


1-3


3-5


More than($ in
    millions)

Months


Years


Years


5 Years


TotalTerm notes payable

$
4.5


$
8.0



4.4


$
0.2


$
17.1Capital lease obligations


2.3



1.4











3.7Operating leases


3.6



4.5



0.9



0.1



9.1Total contractual commitments

$
10.4



13.9


$
5.3


$
0.3


$
29.9  27




---



##### 



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),
   28




---



##### 



PART II. 
    OTHER INFORMATION  Item 1.
    Legal
    Proceedings  Form 10-K
    Item 1A.
    Risk
    Factors  Form 10-K.
  Item 4.
    Submission of
    Matters to a Vote of Security Holders      Terms expiring in
    2010

Affirmative
    Votes


Votes
    withheldMaurice B. Tosé


49,529,831



1,848,294James M. Bethmann


42,085,772



9,292,353       Affirmative
    Votes


Negative
    Votes


AbstentionsFifth Amended and Restated 1997
    Stock Incentive Plan


27,703,539



9,544,218



187,135   Item 6.
    Exhibits  ExhibitNumbers

Description31
.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 906
    of the Sarbanes-Oxley Act of 200232
.2

Certification pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to Section 906
    of the Sarbanes-Oxley Act of 2002  29




---



##### 



SIGNATURES      By:
    /s/  Maurice
    B. Tosé       /s/  Maurice
    B.
    ToséMaurice
    B. Tosé

Chairman, President and Chief
    Executive Officer (Principal Executive Officer)

August 9, 2007/s/  Thomas
    M. Brandt,
    Jr.Thomas
    M. Brandt, Jr.

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

August 9, 2007  30