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, 2008ORTRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
    THE SECURITIES EXCHANGE ACT OF 1934   Commission File
    No. 0-30821
  TELECOMMUNICATION SYSTEMS,
    INC.
   MARYLAND(State or Other Jurisdiction ofIncorporation or Organization)275 West Street, Annapolis, MD(Address of principal executive offices)

52-1526369(I.R.S. Employer Identification No.)21401(Zip Code)   (410) 263-7616
   þ o
  12b-2
  Large accelerated filer o

Accelerated filer þ

Non-accelerated filero
    (Do not check if a smaller reporting company)

Smaller reporting company o   Rule 12b-2 o þ
    Shares outstandingas of September 30,Title of Each Class

2008Class A Common Stock, par value$0.01 per share


36,963,106Class B Common Stock, par value$0.01 per share


7,076,334Total Common Stock Outstanding


44,039,440




---



##### 





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


Financial StatementsConsolidated Statements of Operations for the
    three- and nine-months ended September 30, 2008 and 2007
    (Unaudited)


1Consolidated Balance Sheets as of
    September 30, 2008 (Unaudited) and December 31,
    2007


2Consolidated Statement of Stockholders
    Equity for the nine months ended September 30, 2008
    (Unaudited)


3Consolidated Statements of Cash Flows for the
    nine months ended September 30, 2008 and 2007
    (Unaudited)


4Notes to Consolidated Financial Statements
    (Unaudited)


5Item 2.


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


17Item 3.


Quantitative and Qualitative Disclosures About
    Market Risk


31Item 4.


Controls and Procedures


31PART II. OTHER INFORMATIONItem 1.


Legal Proceedings


32Item 1A.


Risk Factors


33Item 6.


Exhibits


34SIGNATURES


35




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##### 



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


Nine Months EndedSeptember 30,


September 30,2008


2007


2008


2007RevenueServices

$
24,902


$
22,049


$
72,002


$
65,552Systems


31,629



15,586



68,853



41,538Total revenue


56,531



37,635



140,855



107,090Direct costs of revenueDirect cost of services revenue


15,486



12,889



43,323



39,487Direct cost of systems revenue, including amortization of
    software development costs of $560, $396, $1,592 and $1,112,
    respectively


23,588



10,608



41,299



28,489Total direct cost of revenue


39,074



23,497



84,622



67,976Services gross profit


9,416



9,160



28,679



26,065Systems gross profit


8,041



4,978



27,554



13,049Total gross profit


17,457



14,138



56,233



39,114Operating costs and expensesResearch and development expense


3,815



3,329



11,838



9,700Sales and marketing expense


3,128



2,729



9,822



9,049General and administrative expense


6,071



4,656



17,386



14,808Depreciation and amortization of property and equipment


1,474



1,497



4,470



4,721Amortization of acquired intangible assets


37



37



111



111Total operating costs and expenses


14,525



12,248



43,627



38,389Gain on sale of patent










8,060



Income from operations


2,932



1,890



20,666



725Interest and financing expenses


(205
)


(328
)


(734
)


(1,432
)Amortization of debt discount and debt issuance expenses


(27
)


(23
)


(173
)


(676
)Write-off of unamortized debt discount and debt issuance expenses














(2,458
)Other income/(expense), net


171



177



(105
)


330Income/(loss) from continuing operations before income
    taxes


2,871



1,716



19,654



(3,511
)Provision for income taxes


(114
)






(314
)


Income/(loss) from continuing operations


2,757



1,716



19,340



(3,511
)Income/(loss) from discontinued operations






54







(215
)Net income/(loss)

$
2,757


$
1,770


$
19,340


$
(3,726
)Income/(loss) per share-basicIncome/(loss) per share from continuing operations

$
0.06


$
0.04


$
0.45


$
(0.08
)Loss per share from discontinued operations






0.00







(0.01
)Net income/(loss) per share-basic

$
0.06


$
0.04


$
0.45


$
(0.09
)Income/(loss) per share-dilutedIncome/(loss) per share from continuing operations

$
0.06


$
0.04


$
0.42


$
(0.08
)Loss per share from discontinued operations






0.00







(0.01
)Net income/(loss) per share-diluted

$
0.06


$
0.04


$
0.42


$
(0.09
)Weighted average shares outstanding-basic


43,312



41,814



42,693



41,210Weighted average shares outstanding-diluted


49,218



44,792



46,223



41,210    1




---



##### 



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


December 31,2008


2007(unaudited)AssetsCurrent assets:Cash and cash equivalents

$
38,676


$
15,955Accounts receivable, net of allowance of $257 in 2008 and $266
    in 2007


26,391



20,424Unbilled receivables


29,698



15,229Inventory


4,190



5,373Other current assets


5,778



5,561Total current assets


104,733



62,542Property and equipment, net of accumulated depreciation and
    amortization of $40,394 in 2008 and $35,969 in 2007


11,635



11,209Software development costs, net of accumulated amortization of
    $6,312 in 2008 and $4,783 in 2007


3,255



4,406Acquired intangible assets, net of accumulated amortization of
    $620 in 2008 and $509 in 2007


598



709Goodwill


1,813



1,813Other assets


1,221



1,445Total assets

$
123,255


$
82,124Liabilities and stockholders equityCurrent liabilities:Accounts payable and accrued expenses

$
25,385


$
12,459Accrued payroll and related liabilities


9,612



4,915Deferred revenue


4,709



4,685Current portion of capital lease obligations and of notes payable


3,798



5,444Total current liabilities


43,504



27,503Capital lease obligations and notes payable, less current portion


8,343



10,657Stockholders equity:Class A Common Stock; $0.01 par value:Authorized shares  225,000,000; issued and
    outstanding shares of 36,963,106 in 2008 and 34,970,394 in 2007


369



349Class B Common Stock; $0.01 par value:Authorized shares  75,000,000; issued and outstanding
    shares of 7,076,334 in 2008 and 7,301,334 in 2007


71



74Additional paid-in capital


235,929



227,987Accumulated other comprehensive income/(loss)


20



(125
)Accumulated deficit


(164,981
)


(184,321
)Total stockholders equity


71,408



43,964Total liabilities and stockholders equity

$
123,255


$
82,124    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, 2008

$
349


$
74


$
227,987


$
(125
)

$
(184,321
)

$
43,964Options exercised for the purchase of 1,648,710 shares of
    Class A Common Stock


17







4,816











4,832Issuance of 108,174 shares of Class A Common Stock
    under Employee Stock Purchase Plan


1







328











329Conversion of 225,000 shares of Class B Common Stock
    to Class A Common Stock


2



(2
)














Stock compensation expense










2,798











2,798Unrealized loss on securities and other














(363
)






(363
)Realization of unrealized loss on securities














515







515Foreign currency translation adjustment














(7
)






(7
)Net income for the nine months ended September 30, 2008


















19,340



19,340Balance at September 30, 2008

$
369


$
71


$
235,929


$
20


$
(164,981
)

$
71,408    3




---



##### 



TeleCommunication
    Systems, Inc.Consolidated Statements of Cash Flows
    (amounts in thousands)
    (unaudited)
  Nine Months EndedSeptember 30,2008


2007Operating activities:Net income/(loss)

$
19,340


$
(3,726
)Less: Loss from discontinued operations






(215
)Income/(loss) from continuing operations


19,340



(3,511
)Adjustments to reconcile net income/(loss) from continuing
    operations to net cash provided by operating activities:Depreciation and amortization of property and equipment


4,470



4,721Non-cash stock compensation expense


2,798



3,121Amortization of software development costs


1,529



1,112Amortization of debt discount






480Amortization of deferred financing fees


173



253Impairment of marketable securities


699



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






2,458Amortization of acquired intangible assets


111



111Other non-cash (income)/expense


54



(45
)Changes in operating assets and liabilities:Accounts receivable, net


(5,967
)


(4,857
)Unbilled receivables


(14,469
)


(1,302
)Inventory


1,183



(110
)Other current assets


140



(1,408
)Other assets


156



(488
)Accounts payable and accrued expenses


12,926



4,262Accrued payroll and related liabilities


4,697



(1,630
)Deferred revenue


24



2,444Net cash provided by operating activities of continuing
    operations


27,864



5,611Net cash used in operating activities of discontinued operations






(3,280
)Total net cash provided by operating activities


27,864



2,331Investing activities:Purchases of property and equipment


(2,152
)


(1,899
)Capitalized software development costs


(381
)


(1,200
)Net cash used in investing activities of continuing operations


(2,533
)


(3,099
)Net cash provided by investing activities of discontinued
    operations






4,000Total net cash (used in)/provided by investing activities


(2,533
)


901Financing activities:Payments on long-term debt and capital lease obligations


(6,704
)


(14,540
)Proceeds from issuance of long-term debt






10,000Proceeds from exercise of warrants






2,208Proceeds from exercise of stock options and sale of stock


4,094



3,268Total net cash (used in)/provided by financing activities


(2,610
)


936Net increase in cash from continuing operations


22,721



3,448Net increase in cash from discontinued operations






720Total net increase in cash


22,721



4,168Cash and cash equivalents at the beginning of the period


15,955



10,358Cash and cash equivalents at the end of the period

$
38,676


$
14,526    4




---



##### 



TeleCommunication
    Systems, Inc.Notes to Consolidated Financial Statements
    September 30, 2008
    (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.
  Investments in Marketable Securities and Note
    Receivable. available-for-sale Accounting for Certain Investments in Debt and Equity
    Securities
  Other Comprehensive Income/(Loss). end-of-period available-for-sale.
  Software Development Costs.
 5




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##### 



TeleCommunication
    Systems, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  Stock-Based Compensation. Share Based
    Payment
  Earnings per share.
  Nine MonthsThree Months Ended


EndedSeptember 30,


September 30,2008


2007


2008


2007Basic weighted average common shares outstanding


43,312



41,814



42,693



41,210Dilutive options outstanding


4,787



2,232



2,654



Dilutive warrants outstanding


1,119



746



876



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


49,218



44,792



46,223



41,210   Income Taxes.
       6




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##### 



TeleCommunication
    Systems, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    Recent Accounting
    Pronouncements.
           7




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    2.
    Stock-Based
    Compensation        Three Months


Nine MonthsEnded September 30,


Ended September 30,2008


2007


2008


2007Continuing operations:Stock options granted at fair value

$
846


$
894


$
2,661


$
2,807Restricted stock


25



79



80



236Employee stock purchase plan


29



27



57



78Total stock compensation expense included in continuing
    operations

$
900


$
1,000


$
2,798


$
3,121Discontinued operations:Stock options granted at fair value

$



$



$



$
132Total stock compensation expense included in discontinued
    operations

$



$



$



$
132  8




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    Three Months Ended September 30,2008


2007Comm.


Gvmt


Total


Comm.


Gvmt


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

$
278


$
119


$
397


$
260


$
160


$
420Direct cost of systems


41



159



200



40



20



60Total stock compensation included in direct costs of revenue

$
319


$
278


$
597


$
300


$
180


$
480   Nine Months Ended September 30,2008


2007Comm.


Gvmt


Total


Comm.


Gvmt


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

$
864


$
370


$
1,234


$
811


$
499


$
1,310Direct cost of systems


128



494



622



125



63



188Total stock compensation included in direct costs of revenue

$
992


$
864


$
1,856


$
936


$
562


$
1,498   Three Months


Nine MonthsEnded


EndedSeptember 30,


September 30,2008


2007


2008


2007Stock compensation included in operating expenses:Research and development expense

$
197


$
200


$
612


$
624Sales and marketing expense


65



145



203



453General and administrative expense


41



175



127



546Total stock compensation included in operating expenses

$
303


$
520


$
942


$
1,623  9




---



##### 



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


Exercise(Share amounts in thousands)

Options


PriceOutstanding, beginning of year


11,144


$
3.69Granted


2,772


$
3.24Exercised


(1,649
)

$
2.93Forfeited


(471
)

$
3.48Outstanding, at September 30, 2008


11,796


$
3.70Exercisable, at September 30, 2008


6,515


$
4.11Vested and expected to vest at September 30, 2008


10,162


$
3.79Estimated weighted-average grant- date fair value of options
    granted during the period

$
1.89Weighted-average remaining contractual life of options
    outstanding at end of period


6.66 years   WeightedAverageNumber of


FairOptions


ValueNon-vested, beginning of year


4,629


$
2.29Forfeited


(410
)

$
2.07Vested


1,710


$
2.20Exercisable, at September 30, 2008


6,515


$
3.57Non-vested, at September 30, 2008


5,281


$
2.13     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$0.29 - $ 2.61


3,063


$
2.37



6.64



2,102


$
2.35$2.61 - $ 5.21


6,655


$
3.34



7.26



2,335


$
3.30$5.21 - $ 7.82


2,048


$
6.74



4.81



2,048


$
6.74$7.82 - $26.05


30


$
11.07



4.26



30


$
11.0711,796











6,515    10




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    Nine Months Ended September 30,2008

2007Expected life (in years)

5.5

5.5Risk-free interest rate(%)

2.65%-3.33%

4.23%-4.92%Volatility(%)

60%-67%

68%-74%Dividend yield(%)

0%

0%   3.  Supplemental
    Disclosure of Cash Flow Information
          4.
    Fair Value
    Measurement           11




---



##### 



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


Fair Value Measurements atas of


9/30/20089/30/2008


Using Fair Value HierarchyTotal


Level 1


Level 2


Level 3AssetsCash and cash equivalents

$
38,676


$
38,676


$



$
Marketable securities available for sale


181



181







$
38,857


$
38,857


$



$
     5.
    Segment
    Information    ®
  ®
   12




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    Three Months Ended September 30,2008


2007Comm.


Gvmt


Total


Comm.


Gvmt


TotalRevenueServices

$
15,720


$
9,182


$
24,902


$
15,014


$
7,035


$
22,049Systems


6,981



24,648



31,629



4,418



11,168



15,586Total revenue


22,701



33,830



56,531



19,432



18,203



37,635Operating costs and expensesDirect cost of services


8,166



7,320



15,486



7,434



5,455



12,889Direct cost of systems


2,449



21,139



23,588



1,141



9,467



10,608Total direct costs


10,615



28,459



39,074



8,575



14,922



23,497Gross profitServices gross profit


7,554



1,862



9,416



7,580



1,580



9,160Systems gross profit


4,532



3,509



8,041



3,277



1,701



4,978Total gross profit

$
12,086


$
5,371


$
17,457


$
10,857


$
3,281


$
14,138   Nine Months Ended September 30,2008


2007Comm.


Gvmt


Total


Comm.


Gvmt


TotalRevenueServices

$
47,809


$
24,193


$
72,002


$
43,320


$
22,232


$
65,552Systems


26,761



42,092



68,853



12,520



29,018



41,538Total revenue


74,570



66,285



140,855



55,840



51,250



107,090Operating costs and expensesDirect cost of services


24,031



19,292



43,323



22,273



17,214



39,487Direct cost of systems


7,338



33,961



41,299



3,791



24,698



28,489Total direct costs


31,369



53,253



84,622



26,064



41,912



67,976Gross profitServices gross profit


23,778



4,901



28,679



21,047



5,018



26,065Systems gross profit


19,423



8,131



27,554



8,729



4,320



13,049Total gross profit

$
43,201


$
13,032


$
56,233


$
29,776


$
9,338


$
39,114   13




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##### 



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


Nine Months EndedSeptember 30,


September 30,2008


2007


2008


2007Total segment gross profit

$
17,457


$
14,138


$
56,233


$
39,114Research and development expense


(3,815
)


(3,329
)


(11,838
)


(9,700
)Sales and marketing expense


(3,128
)


(2,729
)


(9,822
)


(9,049
)General and administrative expense


(6,071
)


(4,656
)


(17,386
)


(14,808
)Depreciation and amortization of property and equipment


(1,474
)


(1,497
)


(4,470
)


(4,721
)Amortization of acquired intangible assets


(37
)


(37
)


(111
)


(111
)Interest expense and amortization of debt discount and debt
    issuance fees


(232
)


(351
)


(907
)


(4,566
)Other income/(expense), net


171



177



(105
)


330Gain/(loss) on sale of patent










8,060



Provision for income taxes


(114
)






(314
)


Income/(loss) from continuing operations


2,757



1,716



19,340



(3,511
)Loss from discontinued operations






54







(215
)Net loss

$
2,757


$
1,770


$
19,340


$
(3,726
)   6.
    Inventory    Sep. 30,


Dec. 31,2008


2007Component parts

$
2,847


$
2,670Finished goods


1,343



2,703Total inventory at period end

$
4,190


$
5,373  14




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##### 



TeleCommunication
    Systems, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  7.
    Acquired
    Intangible Assets and Capitalized Software Development
    Costs    September 30, 2008


December 31, 2007Gross








GrossCarrying


Accumulated





Carrying


AccumulatedAmount


Amortization


Net


Amount


Amortization


NetAcquired intangible assets:Customer Lists

$
606


$
492


$
114


$
606


$
405


$
201Trademarks & Patents


612



128



484



612



104



508Software development costs, including acquired technology


9,567



6,312



3,255



9,189



4,783



4,406Total

$
10,785


$
6,932


$
3,853


$
10,407


$
5,292


$
5,115Estimated future amortization expense:Three months ending December 31, 2008

$
598Year ending December 31, 2009

$
1,829Year ending December 31, 2010

$
770Year ending December 31, 2011

$
211Thereafter

$
445     8.
    Concentrations
    of Credit Risk and Major Customers      % of Total


% of TotalRevenue For


Revenue Forthe Three


the NineMonths Ended


Months EndedSeptember 30,


September 30,Customer

Segment

2008


2007


2008


2007Federal Agencies

Government


49
%


38
%


36
%


37
%Customer A

Commercial


16
%


21
%


24
%


20
%   As of September 30, 2008Accounts


UnbilledCustomer

Segment

Receivable


ReceivablesFederal Agencies

Government


34
%


78
%Customer A

Commercial


16
%


Less than 10
%  15




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   9.
    Lines of
    Credit and Financing Arrangements            10.
    Contingencies   16




---



##### 



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
    
    accounting for our
    percentage-of-completion
    and proportional performance contracts involving multiple
    elements and software, 17




---



##### 




    accounts receivable realizability,
    inventory value,
    evaluating goodwill for impairment,
    the realizability and remaining useful lives of long-lived
    assets, and
    contingent liabilities.      
    revenue recognition for our software and other contracts with
    multiple elements,
    revenue recognition for our contracts accounted for using the
    percentage-of-completion
    and proportional performance methods,
    capitalized software development costs,
    acquired intangible assets, and
    income taxes.  Form 10-K Form 10-K),
  Fair Value
    Measures
    Overview
     18




---



##### 



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 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. Other
    important sources of our liquidity are our lease financings
    secured for the purchase of equipment and potential borrowings
    under our credit lines.
    Balance sheet.  We view cash, working capital,
    and accounts receivable balances and days revenues outstanding
    as important indicators of our financial health. 19




---



##### 



Results of
    Operations
  Revenue and Cost
    of Revenue
    Commercial
    Segment:
  Three Months





Nine MonthsEnded September 30,


2008 vs. 2007


Ended September 30,


2008 vs. 2007($ in millions)

2008


2007


$


%


2008


2007


$


%Services revenue

$
15.7


$
15.0


$
0.7



5
%

$
47.8


$
43.3


$
4.5



10
%Systems revenue


7.0



4.4



2.6



59
%


26.8



12.5



14.3



114
%Commercial segment revenue


22.7



19.4



3.3



17
%


74.6



55.8



18.8



34
%Direct cost of services revenue


8.1



7.4



0.7



9
%


24.0



22.2



1.8



8
%Direct cost of systems revenue


2.5



1.1



1.4



127
%


7.4



3.8



3.6



95
%Commercial segment cost of revenue


10.6



8.5



2.1



25
%


31.4



26.0



5.4



21
%Services gross profit


7.6



7.6







NM



23.8



21.1



2.7



13
%% of revenue


48
%


51
%










50
%


49
%Systems gross profit


4.5



3.3



1.2



36
%


19.4



8.7



10.7



123
%% of revenue


64
%


75
%










72
%


70
%Commercial segment gross
    profit1

$
12.1


$
10.9


$
1.2



11
%

$
43.2


$
29.8


$
13.4



45
%% of revenue


53
%


56
%










58
%


53
%     1 See

    discussion of segment reporting in Note 5 to the
    accompanying unaudited consolidated financial statements  Commercial
    Services Revenue, Cost of Revenue, and Gross Profit:
    E-911, ®
   20




---



##### 



Commercial
    Systems Revenue, Cost of Revenue, and Gross Profit:
    percentage-of-completion
     21




---



##### 



Government
    Segment:
  Three Months





Nine MonthsEnded September 30,


2008 vs. 2007


Ended September 30,


2008 vs. 2007($ in millions)

2008


2007


$


%


2008


2007


$


%Services revenue

$
9.2


$
7.0


$
2.2



31
%

$
24.2


$
22.2


$
2.0



9
%Systems revenue


24.6



11.2



13.4



120
%


42.1



29.0



13.1



45
%Government segment revenue


33.8



18.2



15.6



86
%


66.3



51.2



15.1



29
%Direct cost of services revenue


7.3



5.4



1.9



35
%


19.3



17.2



2.1



12
%Direct cost of systems revenue


21.1



9.5



11.6



122
%


34.0



24.7



9.3



38
%Government segment cost of revenue


28.4



14.9



13.5



91
%


53.3



41.9



11.4



27
%Services gross profit


1.9



1.6



0.3



19
%


4.9



5.0



(0.1
)


(2
)%% of revenue


21
%


23
%










20
%


23
%Systems gross profit


3.5



1.7



1.8



106
%


8.1



4.3



3.8



88
%% of revenue


14
%


15
%










19
%


15
%Government segment gross
    profit1

$
5.4


$
3.3


$
2.1



64
%

$
13.0


$
9.3


$
3.7



40
%% of revenue


16
%


18
%










20
%


18
%     1 See

    discussion of segment reporting in Note 5 to the
    accompanying unaudited consolidated financial statements  percentage-of-completion
 22




---



##### 



Government
    Services Revenue, Cost of Revenue, and Gross Profit:
  percentage-of-completion
        Government
    Systems Revenue, Cost of Revenue, and Gross Profit:
  ® percentage-of-completion
  5-year
   23




---



##### 



Major
    Customers
    Revenue
    Backlog
    September 30,


2008 vs. 2007($ in millions)

2008


2007


$


%Commercial Segment

$
68.5


$
93.9


$
(25.4
)


(27
)%Government Segment


87.0



46.0



41.0



89
%Total funded contract backlog

$
155.5


$
139.9


$
15.6



11
%Commercial Segment

$
68.5


$
111.5


$
(43.0
)


(39
)%Government Segment


381.2



141.5



239.7



169
%Total backlog of orders and commitments, including customer
    options

$
449.7


$
253.0


$
196.7



78
%Expected to be realized within the next 12 months

$
116.8


$
88.4


$
28.4



32
%   and/or
 24




---



##### 



Operating
    Expenses
  Research and
    development expense:
  Three Months





Nine MonthsEnded September 30,


2008 vs. 2007


Ended September 30,


2008 vs. 2007($ in millions)

2008


2007


$


%


2008


2007


$


%Research and development expense

$
3.8


$
3.3


$
0.5



15
%

$
11.8


$
9.7


$
2.1



22
%% of total revenue


7
%


9
%










8
%


9
%       product-by-product
    Sales and
    marketing expense:
  Three Months



Nine MonthsEnded September 30,

2008 vs. 2007

Ended September 30,

2008 vs. 2007($ in millions)

2008

2007

$

%

2008

2007

$

%Sales and marketing expense

$
3.1


$
2.7


$
0.4



15
%

$
9.8


$
9.0


$
0.8



9
%% of total revenue


5
%


7
%










7
%


8
%    25




---



##### 



General and
    administrative expense:
  Three Months



Nine MonthsEnded September 30,

2008 vs. 2007

Ended September 30,

2008 vs. 2007($ in millions)

2008

2007

$

%

2008

2007

$

%General and administrative expense

$
6.1


$
4.7


$
1.4



30
%

$
17.4


$
14.8


$
2.6



18
%% of total revenue


11
%


13
%










12
%


14
%     Depreciation and
    amortization of property and equipment:
  Three Months



Nine MonthsEnded September 30,

2008 vs. 2007

Ended September 30,

2008 vs. 2007($ in millions)

2008

2007

$

%

2008

2007

$

%Depreciation and amortization of property and equipment

$
1.5


$
1.5


$




NM


$
4.5


$
4.7


$
(0.2
)


(4
)%Average gross cost of property and equipment during the period

$
51.4


$
55.7










$
49.7


$
55.0     Amortization of
    acquired intangible assets:
  Three Months



Nine MonthsEnded September 30,

2008 vs. 2007

Ended September 30,

2008 vs. 2007($ in millions)

2008

2007

$

%

2008

2007

$

%Amortization of acquired intangible assets

$
0.1


$
0.1


$




NM


$
0.1


$
0.1


$




NM    26




---



##### 



Interest
    expense:
  ThreeMonths





Nine MonthsEnded September 30,


2008 vs. 2007


Ended September 30,


2008 vs. 2007($ in millions)

2008


2007


$


%


2008


2007


$


%Interest expense incurred on notes payable and line of credit

$
0.1


$
0.2


$
(0.1
)


(50
)%

$
0.5


$
1.2


$
(0.7
)


(58
)%Interest expense incurred on capital lease obligations


0.1



0.1







NM



0.2



0.2







NMAmortization of deferred financing fees






0.1



(0.1
)


(100
)%


0.2



0.3



(0.1
)


(33
)%Amortization of debt discount














NM







0.5



(0.5
)


(100
)%Write-off of unamortized debt discount and debt issuance expenses














NM







2.4



(2.4
)


(100
)%Total interest expense

$
0.2


$
0.4


$
(0.2
)


(50
)%

$
0.9


$
4.6


$
(3.7
)


(80
)%                27




---



##### 



Other
    income/(expense), net:
    Income
    taxes:
    Discontinued
    Operations  Enterprise assets:
  Form 10-Q Accounting for the Impairment or Disposal of
    Long-Lived Assets
  18-month
  Net
    income/(loss):
  Three Months



Nine MonthsEnded September 30,

2008 vs. 2007

Ended September 30,

2008 vs. 2007($ in millions)

2008

2007

$

%

2008

2007

$

%Net income/(loss)

$
2.8


$
1.8


$
1.0



56
%

$
19.3


$
(3.7
)

$
23.0



622
%    28




---



##### 



Liquidity and
    Capital Resources
  Nine MonthsEndedSeptember 30,


2008 vs. 2007($ in millions)

2008


2007


$


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

$
19.3


$
(3.5
)

$
22.8



651
%Non-cash charges


9.8



12.2



(2.4
)


(20
)%Net changes in working capital including changes in other assets


(1.2
)


(3.1
)


1.9



61
%Cash provided by operating activities


27.9



5.6



22.3



398
%Purchases of property and equipment


(2.2
)


(1.9
)


(0.3
)


(16
)%Capitalized software development costs


(0.4
)


(1.2
)


0.8



67
%Proceeds from new borrowings






10.0



(10.0
)


(100
)%Other financing activities


(2.6
)


(9.0
)


6.4



71
%Cash provided by continuing operations


22.7



3.5



19.2



549
%Discontinued operationsOperating activities






(3.3
)


3.3



100
%Investing activities






4.0



(4.0
)


(100
)%Cash provided by discontinued operations






0.7



(0.7
)


100
%Net increase in cash

$
22.7


$
4.2


$
18.5



440
%Days revenue outstanding in accounts receivable, including
    unbilled receivables


89



85   Capital resources:
  Sources and uses of cash:
  Operations:
  Investing activities:
  Financing activities:
 29




---



##### 



Off-Balance Sheet
    Arrangements
   30




---



##### 



Contractual
    Commitments
    Within 12


1-3


3-5


More than($ in millions)

Months


Years


Years


5 Years


TotalTerm notes payable

$
2.6


$
4.6


$
1.7


$



$
8.9Capital lease obligations


2.1



2.3



0.6







5.0Operating leases


3.3



4.6



1.1



0.6



9.6Total contractual commitments

$
8.0


$
11.5


$
3.4


$
0.6


$
23.5   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),
   31




---



##### 



PART II. 
    OTHER INFORMATION  Item 1.
    Legal
    Proceedings  No. 01-CV-9500. Rule 10b-5 Rule 10b-5
   32




---



##### 



Item 1A.
    Risk
    Factors  Form 10-K,
  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
    We are exposed
    to counterparty credit risk and there can be no assurances that
    we will manage this risk effectively, if at all.
   33




---



##### 



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  34




---



##### 



SIGNATURES       By:
    /s/  Maurice
    B. Tosé       /s/ Maurice B. ToséMaurice B. ToséNovember 4, 2008

Chairman, President and Chief Executive Officer
    (Principal Executive Officer)/s/ Thomas M. Brandt, Jr.Thomas M. Brandt, Jr.November 4, 2008

Senior Vice President and Chief Financial Officer
    (Principal Financial Officer)  35