##### 



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, 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
    June 30,Title of Each
    Class

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


31,795,421Class B Common Stock, par
    value
    $0.01 per share


7,788,780Total Common Stock Outstanding


39,584,201




---



##### 



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

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


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


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


3Consolidated
    Statements of Cash Flows for the six-months ended June 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


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


32Item 6.

Exhibits


32SIGNATURES


33




---



##### 



TeleCommunication
    Systems, Inc.
  Consolidated Statements of Operations
  Three Months
    Ended


Six Months
    EndedJune 30,


June 30,2006


2005


2006


2005RevenueServices

$
22,642


$
17,552


$
44,586


$
34,399Systems


9,301



3,852



19,043



11,861Total revenue


31,943



21,404



63,629



46,260Direct costs of
    revenueDirect cost of services
    revenue1


13,579



9,013



26,753



17,552Direct cost of systems revenue,
    including amortization of software development costs of $281,
    $157, $562 and $348,
    respectively1


4,124



2,568



9,074



6,100Total direct cost of revenue


17,703



11,581



35,827



23,652Services gross profit


9,063



8,539



17,833



16,847Systems gross profit


5,177



1,284



9,969



5,761Total gross profit


14,240



9,823



27,802



22,608Operating costs and
    expensesResearch and development
    expense1


3,477



3,162



6,409



7,464Sales and marketing
    expense1


3,140



2,744



6,188



5,599General and administrative
    expense1


4,149



3,759



8,376



7,532Depreciation and amortization of
    property and equipment


1,857



2,019



4,302



4,054Amortization of acquired intangible
    assets


37



37



74



74Total operating costs and expenses


12,660



11,721



25,349



24,723Income/(loss) from
    operations


1,580



(1,898
)


2,453



(2,115
)Interest expense


(890
)


(215
)


(1,449
)


(532
)Other income/(expense), net


69



(203
)


97



(244
)Income/(loss) from continuing
    operations


759



(2,316
)


1,101



(2,891
)Loss from discontinued
    operations1


(2,314
)


(1,722
)


(4,368
)


(3,234
)Net loss

$
(1,555
)

$
(4,038
)

$
(3,267
)

$
(6,125
)Income/(loss) per share-basic and
    dilutedIncome/(loss) per share from
    continuing operations

$
0.02


$
(0.06
)

$
0.03


$
(0.08
)Loss per share from discontinued
    operations


(0.06
)


(0.04
)


(0.11
)


(0.08
)Net loss per share-basic and
    diluted

$
(0.04
)

$
(0.10
)

$
(0.08
)

$
(0.16
)Weighted average shares
    outstanding-basic


39,313



38,725



39,200



38,611Weighted average shares
    outstanding-diluted


40,336



38,725



39,831



38,611     1
    
    Includes non-cash stock compensation expense as detailed in
    Note 2 to Consolidated Financial Statements   1




---



##### 



TeleCommunication
    Systems, Inc.
  Consolidated Balance Sheets
  June 30,


December 31,2006


2005(unaudited)AssetsCurrent assets:Cash and cash equivalents

$
10,314


$
9,320Accounts receivable, net of
    allowance of $360 in 2006 and $233 in 2005


18,835



20,886Unbilled receivables


6,295



6,361Inventory


4,162



3,197Other current assets


2,616



2,970Current assets of discontinued
    operations


26,698



22,891Total current assets


68,920



65,625Property and equipment, net of
    accumulated depreciation and amortization of $36,946 in 2006 and
    $34,134 in 2005


13,477



16,323Software development costs, net of
    accumulated amortization of $2,552 in 2006 and $1,990 in 2005


4,127



3,825Acquired intangible assets, net of
    accumulated amortization of $288 in 2006 and $214 in 2005


930



1,004Goodwill


1,813



1,813Other assets


2,220



1,982Total assets

$
91,487


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

$
8,849


$
10,175Accrued payroll and related
    liabilities


1,696



3,971Deferred revenue


5,136



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


2,017



10,180Current portion of capital lease
    obligations


2,924



3,001Current liabilities of discontinued
    operations


10,712



6,719Total current liabilities


31,334



38,169Notes payable, less current portion
    and net of debt discount of $3,071 at June 30, 2006


6,931



483Capital lease obligations, less
    current portion


1,778



2,858Total liabilities


40,043



41,510Class A Common Stock;
    $0.01 par value:Authorized shares 
    225,000,000; issued and outstanding shares of 31,795,421 in 2006
    and 31,381,575 in 2005


317



314Class B Common Stock;
    $0.01 par value:Authorized shares 
    75,000,000; issued and outstanding shares of 7,788,780 in 2006
    and 8,035,963 in 2005


78



80Additional paid-in capital


215,703



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


(51
)


(40
)Accumulated deficit


(164,603
)


(161,336
)Total stockholders equity


51,444



49,062Total liabilities and
    stockholders equity

$
91,487


$
90,572    2




---



##### 



TeleCommunication
    Systems, Inc.
  Consolidated Statement of Stockholders
    Equity
  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 104,616 shares of Class A Common Stock


1







176











177Issuance of 105,456 shares of
    Class A Common Stock under Employee Stock Purchase Plan


1







181











182Conversion of 247,183 shares
    of Class B Common Stock to Class A Common Stock


2



(2
)














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










1,728











1,728Stock compensation expense of
    discontinued operations










265











265Surrender of 65,434 restricted
    shares of Class A Common Stock as payment for payroll tax
    withholdings


(1
)






(181
)










(182
)Stock compensation for options
    issued to non-employees for service










35











35Foreign currency translation
    adjustment














(11
)






(11
)Net loss for the six months ended
    June 30, 2006


















(3,267
)


(3,267
)Balance at June 30,
    2006

$
317


$
78


$
215,703


$
(51
)

$
(164,603
)

$
51,444    3




---



##### 



TeleCommunication
    Systems, Inc.
  Consolidated Statements of Cash Flows
  Six Months
    EndedJune 30,2006


2005Operating activities:Net loss

$
(3,267
)

$
(6,125
)Less: Loss from discontinued
    operations


(4,368
)


(3,234
)Income/(loss) from continuing
    operations


1,101



(2,891
)Adjustments to reconcile net loss
    from continuing operations to net cash provided by operating
    activities:Depreciation and amortization of
    property and equipment


4,302



4,054Non-cash stock compensation expense


1,728



412Amortization of software
    development costs


562



348Amortization of debt discount


384



Amortization of deferred financing
    fees included in interest expense


260



172Amortization of acquired
    intangible assets


74



74Other non-cash income


(41
)


(42
)Changes in operating assets and
    liabilities:Accounts receivable, net


2,109



6,222Unbilled receivables


66



2,459Inventory


(965
)


1,044Other current assets


446



(813
)Other assets


409



(16
)Accounts payable and accrued
    expenses


(1,612
)


(2,019
)Accrued payroll and related
    liabilities


(2,282
)


(215
)Deferred revenue


956



1,164Net cash provided by operating
    activities of continuing operations


7,497



9,953Net cash used in operating
    activities of discontinued operations


(3,240
)


(37
)Total net cash provided by
    operating activities


4,257



9,916Investing activities:Purchases of property and equipment


(1,076
)


(1,498
)Capitalized software development
    costs


(864
)


(1,099
)Net cash used in investing
    activities of continuing operations


(1,940
)


(2,597
)Net cash used in investing
    activities of discontinued operations


(677
)


(779
)Total net cash used in investing
    activities


(2,617
)


(3,376
)Financing activities:Payments on long-term debt and
    capital lease obligations


(2,871
)


(5,123
)Payments on short-term line of
    credit, net


(8,004
)


(2,000
)Proceeds 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


359



443Total net cash used in financing
    activities


(836
)


(6,761
)Effect of exchange rates on cash
    of discontinued operations


190



(47
)Net increase in cash from
    continuing operations


4,721



595Net decrease in cash from
    discontinued operations


(3,727
)


(863
)Total net increase/(decrease)
    in cash


994



(268
)Cash and cash equivalents at the
    beginning of the period


9,320



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

$
10,314


$
17,983    4




---



##### 



TeleCommunication
    Systems, Inc.
  Notes
    to Consolidated Financial Statements
 June 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.
    Reclassifications.
  Use of Estimates.
   5




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  Accounting Changes and Error
    Corrections
  Software Development Costs.
    Stock-Based Compensation. Share Based
    Payment
    Earnings per share.
  Three Months
    Ended


Six Months
    EndedJune 30,


June 30,2006


2005


2006


2005Basic weighted average common
    shares outstanding


39,313



37,725



39,200



38,611Dilutive common shares outstanding


1,023







631



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


40,336



38,725



39,831



38,611   Recent Accounting Pronouncements.
 6




---



##### 



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


Six MonthsEnded
    June 30,


Ended
    June 30,2006


2005


2006


2005Continuing
    operations:Stock options granted at fair value

$
839


$



$
1,485


$
Restricted stock


60



145



215



290Employee stock purchase plan


17







27



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






62







122Total stock compensation expense
    included in continuing operations

$
916


$
207


$
1,727


$
412Discontinued
    operations:Stock options granted at fair value

$
150


$



$
265


$
Total stock compensation expense
    included in discontinued operations

$
150


$



$
265


$
     Three Months
    Ended June 30,2006


2005Comm.








Comm.Apps


Gvmt


Total


Apps


Gvmt


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

$
233


$
161


$
394


$
4


$
3


$
7Direct cost of systems


31



17



48











Total stock compensation included
    in direct costs of revenue

$
264


$
178


$
442


$
4


$
3


$
7   Six Months Ended
    June 30,2006


2005Comm.








Comm.Apps


Gvmt


Total


Apps


Gvmt


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

$
425


$
294


$
719


$
13


$
3


$
16Direct cost of systems


56



32



88











Total stock compensation included
    in direct costs of revenue

$
481


$
326


$
807


$
13


$
3


$
16   8




---



##### 



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


Six MonthsEnded


EndedJune 30,


June 30,2006


2005


2006


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

$
179


$
11


$
273


$
11Sales and marketing expense


99



8



168



17General and administrative expense


196



181



480



368Total stock compensation included
    in operating expenses

$
474


$
200


$
921


$
396     WeightedAverageNumber of


Exercise(Share amounts in
    thousands)

Options


PriceOutstanding, beginning of year


9,974


$
3.86Granted


2,640


$
2.40Exercised


(105
)

$
1.66Forfeited


(453
)

$
3.60Outstanding, at June 30, 2006


12,056


$
3.57Exercisable, at June 30, 2006


6,896


$
4.29Estimated 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


7.45 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


5,772


$
2.28



8.40



1,676


$
2.01$ 2.61 - $ 5.21


3,789


$
3.36



6.24



2,727


$
3.34$ 5.21 - $ 7.82


2,439


$
6.76



7.12



2,437


$
6.76$ 7.82 - $10.42


25


$
8.33



6.97



25


$
8.33$10.42 - $26.05


31


$
14.07



4.07



31


$
4.07    9




---



##### 



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


Six Months
    EndedJune 30,
    2005


June 30,
    2005Net loss, as reported

$
(4,038
)

$
(6,125
)Add: Stock-based employee
    compensation expense included in reported net loss


207



412Deduct: Total stock-based employee
    compensation expense determined under fair value based method
    for all awards


(942
)


(2,304
)Pro forma net loss

$
(4,773
)

$
(8,017
)Loss per common share:Basic and diluted  as
    reported

$
(0.10
)

$
(0.16
)Basic and diluted  pro
    forma

$
(0.12
)

$
(0.21
)Weighted average shares
    outstanding:Basic and diluted  as
    reported and pro forma


38,725



38,611     Six MonthsEndedJune 30,2006


2005Expected life (in years)


5.5



5.5Risk-free interest rate (%)


4.85
%


3.35
%Volatility (%)


101
%


109
%Dividend yield (%)


0
%


0
%   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
 10




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   ®
    June 30,


December 31,2006


2005Assets:Accounts receivable, net

$
4,986


$
3,263Unbilled receivables


17



260Inventory


907



558Other current assets


2,530



1,225Property and equipment, net of
    accumulated depreciation


2,536



1,863Software development costs, net of
    accumulated amortization


533



533Acquired intangible assets, net of
    accumulated amortization


2,516



2,516Goodwill


12,633



12,633Other assets


40



40Assets of discontinued operations


26,698



22,891Liabilities:Accounts payable and accrued
    expenses


7,602



4,514Accrued payroll and related
    liabilities


789



844Deferred revenue


2,321



1,361Liabilities of discontinued
    operations


10,712



6,719Net assets of discontinued
    operations

$
15,986


$
16,172     GrossCarrying


AccumulatedAmount


Amortization


NetAcquired intangible assets:Customer Contracts

$
4,519


$
3,043


$
1,476Customer Lists


2,165



1,458



707Trademarks


630



297



333Software development costs,
    including acquired technology


844



311



533Total

$
8,158


$
5,109


$
3,049    11




---



##### 



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


Six Months
    EndedJune 30,


June 30,2006


2005


2006


2005Services revenue

$
4,187


$
6,098


$
8,111


$
13,072Systems revenue


2,162



554



2,827



1,803Total revenue


6,349



6,652



10,938



14,875Services gross profit


901



2,194



1,879



4,367Systems gross profit/ (loss)


20



(341
)


(111
)


(503
)Total gross profit


921



1,853



1,768



3,864Research and development, sales,
    marketing, and general and administrative expenses


3,235



2,815



6,136



5,386Depreciation and amortization






760







1,712Loss from discontinued operations

$
(2,314
)

$
(1,722
)

$
(4,368
)

$
(3,234
)     5.
    Financing
    Arrangements        6.
    Segment
    Information     12




---



##### 



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


2005Comm.








Comm.Apps


Gvmt


Total


Apps


Gvmt


TotalRevenueServices

$
15,535


$
7,107


$
22,642


$
12,763


$
4,789


$
17,552Systems


3,764



5,537



9,301



1,789



2,063



3,852Total revenue


19,299



12,644



31,943



14,552



6,852



21,404Operating costs and
    expensesDirect cost of
    services1


8,277



5,302



13,579



6,082



2,931



9,013Direct cost of
    systems1


873



3,251



4,124



1,048



1,520



2,568Total direct costs


9,150



8,553



17,703



7,130



4,451



11,581Gross profitServices gross profit


7,258



1,805



9,063



6,681



1,858



8,539Systems gross profit


2,891



2,286



5,177



741



543



1,284Total gross profit

$
10,149


$
4,091


$
14,240


$
7,422


$
2,401


$
9,823   13




---



##### 



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


2005Comm.








Comm.Apps


Gvmt


Total


Apps


Gvmt


TotalRevenueServices

$
30,684


$
13,902


$
44,586


$
25,133


$
9,266


$
34,399Systems


7,230



11,813



19,043



6,521



5,340



11,861Total revenue


37,914



25,715



63,629



31,654



14,606



46,260Operating costs and
    expensesDirect cost of
    services1


16,474



10,279



26,753



12,000



5,552



17,552Direct cost of
    systems1


1,762



7,312



9,074



2,183



3,917



6,100Total direct costs


18,236



17,591



35,827



14,183



9,469



23,652Gross profitServices gross profit


14,210



3,623



17,833



13,133



3,714



16,847Systems gross profit


5,468



4,501



9,969



4,338



1,423



5,761Total gross profit

$
19,678


$
8,124


$
27,802


$
17,471


$
5,137


$
22,608   Three Months
    Ended


Six Months
    EndedJune 30,


June 30,2006


2005


2006


2005Total segment gross profit

$
14,240


$
9,823


$
27,802


$
22,608Research and development
    expense1


(3,477
)


(3,162
)


(6,409
)


(7,464
)Sales and marketing
    expense1


(3,140
)


(2,744
)


(6,188
)


(5,599
)General and administrative
    expense1


(4,149
)


(3,759
)


(8,376
)


(7,532
)Depreciation and amortization of
    property and equipment


(1,857
)


(2,019
)


(4,302
)


(4,054
)Amortization of acquired
    intangible assets


(37
)


(37
)


(74
)


(74
)Interest expense


(890
)


(215
)


(1,449
)


(532
)Other income/(expense), net


69



(203
)


97



(244
)Income/(loss) from continuing
    operations


759



(2,316
)


1,101



(2,891
)Loss from discontinued
    operations1


(2,314
)


(1,722
)


(4,368
)


(3,234
)Net loss

$
(1,555
)

$
(4,038
)

$
(3,267
)

$
(6,125
)     1
    
    includes non-cash stock compensation expense as detailed in
    Note 2  7.
    Inventory    June 30,


Dec. 31,2006


2005Component parts

$
3,287


$
1,934Finished goods


875



1,263Total inventory at period end

$
4,162


$
3,197  14




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   8.
    Acquired
    Intangible Assets and Capitalized Software Development
    Costs    June 30,
    2006


December 31,
    2005Gross








GrossCarrying


Accumulated





Carrying


AccumulatedAmount


Amortization


Net


Amount


Amortization


NetAcquired intangible assets:Customer Lists

$
606


$
232


$
374


$
606


$
174


$
432Trademarks & Patents


612



56



556



612



40



572Software development costs,
    including acquired technology


6,679



2,552



4,127



5,815



1,990



3,825Total

$
7,897


$
2,840


$
5,057


$
7,033


$
2,204


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

$
926Year ending December 31, 2007

$
1,603Year ending December 31, 2008

$
1,078Year ending December 31, 2009

$
1,006Year ending December 31, 2010

$
444     9.
    Concentrations
    of Credit Risk and Major Customers      % of Total
    Revenue For the


% of Total
    Revenue For theThree Months
    Ended


Six Months
    EndedJune 30,


June 30,Customer

Segment

2006

2005


2006

2005Federal Agencies

Government

29%


18
%

30%


19
%Verizon Wireless, including
    indirect sales

Commercial Applications

22%


18
%

22%


16
%Cingular Wireless

Commercial Applications

Less than 10%


11
%

Less than 10%


10
%   As of
    June 30, 2006Accounts

UnbilledCustomer

Segment

Receivable

ReceivablesFederal Agencies

Government

34%

46%Customer A

Commercial Applications

Less than 10%

16%Customer B

Commercial Applications

14%

Less than 10%Customer C

Commercial Applications

10%

Less than 10%  15




---



##### 



TeleCommunication
    Systems, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   10.
    Line of
    Credit         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 and Estimates
  percentage-of-completion
   17




---



##### 



percentage-of-completion Form 10-K Form 10-K).
  Overview
    slower-than-anticipated Form 10-Q.
  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.   18




---



##### 




    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
  Results of
    Operations
  Recent
    Developments:
    Share Based Payment, Form 10-Q
  Revenue and Cost
    of Revenue
  Discontinued Operations  Enterprise assets
 19




---



##### 



Commercial
    Applications Segment:
  Three Months





Six MonthsEnded
    June 30,


2006 vs.
    2005


Ended
    June 30,


2006 vs.
    2005($ in
    millions)

2006


2005


$


%


2006


2005


$


%Services revenue

$
15.5


$
12.8


$
2.7



21
%

$
30.7


$
25.1


$
5.6



22
%Systems revenue


3.8



1.8



2.0



111
%


7.2



6.5



0.7



11
%Commercial Applications segment
    revenue


19.3



14.6



4.7



32
%


37.9



31.7



6.3



20
%Direct cost of services revenue


8.3



6.1



2.2



36
%


16.5



12.0



4.5



38
%Direct cost of systems revenue


0.9



1.0



(0.1
)


(10
)%


1.8



2.2



(0.4
)


(18
)%Commercial Applications segment
    cost of revenue


9.2



7.1



2.1



30
%


18.3



14.2



4.1



28
%Services gross profit


7.2



6.7



.5



7
%


14.2



13.1



1.1



8
%% of revenue


46
%


52
%










46
%


52
%Systems gross profit


2.9



0.7



2.2



NM



5.5



4.3



1.2



28
%% of revenue


76
%


39
%










76
%


66
%Commercial Applications segment
    gross profit

$
10.1


$
7.4


$
2.7



36
%

$
19.7


$
17.5


$
2.2



13
%% of revenue


52
%


51
%










52
%


55
%     1See discussion of the allocation of non-cash stock compensation
    expense in Note 2 to the accompanying unaudited
    consolidated financial statements.2See
    discussion of segment reporting in Note 6 to the
    accompanying unaudited consolidated financial statements (NM =
    Not meaningful)  Commercial
    Applications Services Revenue, Cost of Revenue, and Gross
    Profit:
    tm
   20




---



##### 



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




---



##### 



Government
    Segment:
  Three Months





Six MonthsEnded
    June 30,


2006 vs.
    2005


Ended
    June 30,


2006 vs.
    2005($ in
    millions)

2006


2005


$


%


2006


2005


$


%Services revenue

$
7.1


$
4.8


$
2.3



48
%

$
13.9


$
9.3


$
4.6



49
%Systems revenue


5.5



2.1



3.4



NM



11.8



5.3



6.5



123
%Government segment revenue


12.6



6.9



5.7



83
%


25.7



14.6



11.1



76
%Direct cost of services revenue


5.3



2.9



2.4



83
%


10.3



5.6



4.7



84
%Direct cost of systems revenue


3.2



1.5



1.7



113
%


7.3



3.9



3.4



87
%Government segment cost of revenue


8.5



4.5



4.0



89
%


17.6



9.5



8.1



85
%Services gross profit


1.8



1.9



(0.1
)


(5
)%


3.6



3.7



(0.1
)


NM% of revenue


25
%


40
%










26
%


40
%Systems gross profit


2.3



0.5



1.8



NM



4.5



1.4



3.1



NM% of revenue


42
%


24
%










38
%


26
%Government segment gross profit

$
4.1


$
2.4


$
1.7



71
%

$
8.1


$
5.1


$
3.0



59
%% of revenue


32
%


35
%










32
%


35
%     1See discussion of the allocation of non-cash stock
    compensation expense in Note 2 to the accompanying
    unaudited consolidated financial statements2See discussion of segment reporting in Note 6 to the
    accompanying unaudited consolidated financial statements  percentage-of-completion
  Government
    Services Revenue, Cost of Revenue, and Gross Profit:
   22




---



##### 



Government
    Systems Revenue, Cost of Revenue, and Gross Profit:
    ®
      Major
    Customers
   23




---



##### 



Revenue
    Backlog
    June 30,($ in
    millions)

2006


2005Commercial Applications segment

$
58.9


$
71.2Government segment


44.9



33.5Total backlog

$
103.8


$
104.7Expected to be realized during the
    current fiscal year

$
37.6


$
33.2Expected to be realized within
    12 months

$
57.4


$
51.3     Operating
    Expenses
  Research and
    development expense:
  Three Months



Six MonthsEnded
    June 30,

2006 vs.
    2005

Ended
    June 30,

2006 vs.
    2005($ in
    millions)

2006

2005

$

%

2006

2005

$

%Research and development expense

$
3.5


$
3.2


$
0.3



0.9
%

$
6.4


$
7.5


$
(1.1
)


(15
)%% of total revenue


11
%


15
%










10
%


16
%         product-by-product
 24




---



##### 



Sales and
    marketing expense:
  Three Months



Six MonthsEnded
    June 30,

2006 vs.
    2005

Ended
    June 30,

2006 vs.
    2005($ in
    millions)

2006

2005

$

%

2006

2005

$

%Sales and marketing expense

$
3.1


$
2.7


$
0.4



15
%

$
6.2


$
5.6


$
0.6



11
%% of total revenue


10
%


13
%










10
%


12
%     General and
    administrative expense:
  Three Months



Six MonthsEnded
    June 30,

2006 vs.
    2005

Ended
    June 30,

2006 vs.
    2005($ in
    millions)

2006

2005

$

%

2006

2005

$

%General and administrative expense

$
4.1


$
3.8


$
0.4



11
%

$
8.4


$
7.5


$
0.9



12
%% of total revenue


13
%


18
%










13
%


16
%     Depreciation and
    amortization of property and equipment:
  Three Months



Six MonthsEnded
    June 30,

2006 vs.
    2005

Ended
    June 30,

2006 vs.
    2005($ in
    millions)

2006

2005

$

%

2006

2005

$

%Depreciation and amortization of
    property and equipment

$
1.9


$
2.0


$
(0.1
)


(5
)%

$
4.3


$
4.1


$
0.2



5
%Average gross cost of property and
    equipment during the period

$
50.8


$
45.1










$
50.4


$
45.8   year-over-year
 25




---



##### 



Interest
    expense:
  Three Months





Six MonthsEnded
    June 30,


2006 vs.
    2005


Ended
    June 30,


2006 vs.
    2005($ in
    millions)

2006


2005


$


%


2006


2005


$


%Interest expense incurred on notes
    payable and line of credit

$
0.1


$
0.1


$




NM


$
0. 2


$
0.2


$




NMInterest expense incurred on
    capital lease obligations


0.1



0.1







NM



0.1



0.1







NMInterest expense incurred on
    convertible subordinated debentures


0.3







0.3



NM



0.4







0.4



NMAmortization of deferred financing
    fees


0.1







0.1



NM



0.4



0.2



0.2



NMAmortization of debt discount


0.3







0.3



NM



0.3







0.3



NMTotal interest expense

$
0.9


$
0.2


$
0.7



NM


$
1.4


$
0.5


$
0.9



NM     Form 10-Q,
       26




---



##### 



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





Six MonthsEnded
    June 30,


2006 vs.
    2005


Ended
    June 30,


2006 vs.
    2005($ in
    millions)

2006


2005


$


%


2006


2005


$


%Services revenue

$
4.2


$
6.1


$
(1.9
)


(31
)%

$
8.1


$
13.1


$
(5.0
)


(38
)%Systems revenue


2.2



0.6



1.6



266
%


2.8



1.8



1.0



56
%Total Enterprise revenue


6.4



6.7



(0.3
)


(4
)%


10.9



14.9



(4.0
)


(27
)%Services gross profit


0.9



2.2



(1.3
)


(59
)%


1.9



4.4



(2.5
)


(57
)%Systems gross profit






(0.3
)


0.3



NM



(0.1
)


(0.5
)


0.4



80
%Total Enterprise gross profit


0.9



1.9



(1.0
)


(53
)%


1.8



3.9



(2.1
)


(54
)%Research and development, sales,
    marketing, and general and administrative expenses


3.2



2.8



0.4



14
%


6.2



5.4



0.8



15
%Depreciation and amortization






0.8



(0.8
)


NM







1.7



(1.7
)


NMLoss from discontinued
    operations

$
(2.3
)

$
(1.7
)

$
0.6



35
%

$
(4.4
)

$
(3.2
)

$
1.2



38
%      27




---



##### 



Net
    loss:
  Three Months



Six MonthsEnded
    June 30,

2006 vs.
    2005

Ended
    June 30,

2006 vs.
    2005($ in
    millions)

2006

2005

$

%

2006

2005

$

%Net (loss)/income

$
(1.6
)

$
(4.0
)

$
2.4



60
%

$
(3.3
)

$
(6.1
)

$
2.8



46
%     Liquidity and
    Capital Resources
  Six MonthsEndedJune 30,


2006 vs.
    2005($ in
    millions)

2006


2005


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

$
1.1


$
(2.9
)

$
4.0Non-cash charges


7.3



5.0



2.3Net changes in working capital


(0.9
)


7.8



(8.7
)Operating activities


7.5



9.9



(2.4
)Purchases of property and equipment


(1.1
)


(1.5
)


0.4Capitalized software development
    costs


(0.9
)


(1.1
)


0.2Proceeds from new borrowings


11.0







11.0Other financing activities


(11.8
)


(6.7
)


(5.1
)Cash provided by continuing
    operations


4.7



0.6



4.1Discontinued
    operationsOperating activities


(3.2
)






(3.2
)Investing activities


(0.5
)


(0.8
)


0.3Cash used in discontinued
    operations


(3.7
)


(0.9
)


(2.8
)Net increase/(decrease) in cash

$
1.0


$
(0.3
)

$
1.3Days revenues outstanding in
    accounts receivable including unbilled receivables


71



74     Form 10-Q,
 28




---



##### 



and/or and/or
   29




---



##### 



Off-Balance Sheet
    Arrangements
    Contractual
    Commitments
    Within 12


1-3


3-5($ in
    millions)

Months


Years


Years


TotalNotes payable

$
2.0


$



$
10.0


$
12.0Capital lease obligations


3.1



1.8







4.9Operating leases


3.5



5.0



1.9



10.4Total contractual commitments

$
8.6


$
6.8


$
11.9


$
27.3  30




---



##### 



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  form 10-K
    Item 1A.
    Risk
    Factors  Form 10-K.
  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  32




---



##### 



SIGNATURES      By:
    /s/  Maurice
    B. Tosé        /s/  Maurice
    B.
    ToséMaurice
    B. Tosé
    August 9, 2006

Chairman, President and Chief
    Executive Officer
    (Principal Executive Officer)/s/  Thomas
    M.
    Brandt, Jr.Thomas
    M. Brandt, Jr.
    August 9, 2006

Senior Vice President and Chief
    Financial Officer
    (Principal Financial Officer)  33