UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2010

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from ____ to____

Commission file number: 333-138009

Hughes Network Systems, LLC

(Exact Name of Registrant as Specified in Its Charter)

Delaware	11-3735091
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

11717 Exploration Lane, Germantown, Maryland 20876

(Address of Principal Executive Offices and Zip Code)

(301) 428-5500

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. o Yes x No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filerx (Do not check if a smaller reporting company)	Smaller reporting company ¨

Indicate by check mark whether the company is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

The number of the registrant's membership interests outstanding as of April 30, 2010 was as follows:

Class A Membership Interests: 95,000

Class B Membership Interests: 3,330

Table of Contents

		Page
PART I—FINANCIAL INFORMATION		1
Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4T.	Controls and Procedures	40
PART II—OTHER INFORMATION		42
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3.	Defaults Upon Senior Securities	42
Item 4.	(Removed and Reserved)	42
Item 5.	Other Information	42
Item 6.	Exhibits	43
SIGNATURES		44

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PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

HUGHES NETWORK SYSTEMS, LLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

	March 31,			December 31,
	2010			2009
ASSETS
Current assets:
Cash and cash equivalents	$	118,336		$	183,733
Marketable securities		43,672			31,126
Receivables, net		159,093			162,806
Inventories		61,690			60,244
Prepaid expenses and other		21,543			20,976
Total current assets		404,334			458,885
Property, net		638,399			601,964
Capitalized software costs, net		48,858			49,776
Intangible assets, net		12,786			13,488
Goodwill		2,661			2,661
Other assets		68,177			68,524
Total assets	$	1,175,215		$	1,195,298
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	98,175		$	117,513
Short-term debt		6,506			6,750
Accrued liabilities and other		140,093			133,926
Total current liabilities		244,774			258,189
Long-term debt		714,298			714,957
Other long-term liabilities		17,177			16,191
Total liabilities		976,249			989,337
Commitments and contingencies
Equity:
Hughes Network Systems, LLC ("HNS") equity:
Class A membership interests		178,157			177,933
Class B membership interests		-			-
Retained earnings		30,532			36,094
Accumulated other comprehensive loss		(15,951	)		(13,987	)
Total HNS' equity		192,738			200,040
Noncontrolling interest		6,228			5,921
Total equity		198,966			205,961
Total liabilities and equity	$	1,175,215		$	1,195,298

See accompanying Notes to the Condensed Consolidated Financial Statements.

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HUGHES NETWORK SYSTEMS, LLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

(Unaudited)

	Three Months Ended
	March 31,
	2010			2009
Revenues:
Services revenues	$	186,890		$	161,904
Hardware sales		55,253			77,850
Total revenues		242,143			239,754
Operating costs and expenses:
Cost of services		115,650			106,546
Cost of hardware products sold		60,886			74,205
Selling, general and administrative		48,680			43,797
Research and development		4,915			5,351
Amortization of intangible assets		702			1,385
Total operating costs and expenses		230,833			231,284
Operating income		11,310			8,470
Other income (expense):
Interest expense		(16,105	)		(13,829	)
Interest income		553			227
Loss before income tax (expense) benefit		(4,242	)		(5,132	)
Income tax (expense) benefit		(1,217	)		668
Net loss		(5,459	)		(4,464	)
Net income attributable to the noncontrolling interest		(103	)		(390	)
Net loss attributable to HNS	$	(5,562	)	$	(4,854	)

See accompanying Notes to the Condensed Consolidated Financial Statements.

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HUGHES NETWORK SYSTEMS, LLC

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(In thousands)

(Unaudited)

	HNS' Equity
	Class A and B Membership		Retained			Accumulated Other Comprehensive			Noncontrolling
	Interests		Earnings			Loss			Interest		Total
Balance at January 1, 2009	$	177,425	$	80,999		$	(28,583	)	$	5,629	$	235,470
Share-based compensation		220		-			-			-		220
Comprehensive income (loss):
Net income (loss)				(4,854	)					390		(4,464	)
Foreign currency translation adjustments							(1,407	)
Unrealized gain on hedging instruments							5,337
Reclassification of realized loss on hedging instruments							(854	)
Balance at March 31, 2009	$	177,645	$	76,145		$	(25,507	)	$	6,019	$	231,226

Balance at January 1, 2010	$	177,933	$	36,094		$	(13,987	)	$	5,921	$	205,961
Share-based compensation		224		-			-			-		224
Comprehensive income (loss):
Net income (loss)				(5,562	)					103		(5,459	)
Foreign currency translation adjustments							(1,011	)		204		(807	)
Unrealized loss on hedging instruments							(2,323	)				(2,323	)
Reclassification of realized loss on hedging instruments							1,368					1,368
Unrealized gain on available-for-sale securities							2					2
Balance at March 31, 2010	$	178,157	$	30,532		$	(15,951	)	$	6,228	$	198,966

See accompanying Notes to the Condensed Consolidated Financial Statements.

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HUGHES NETWORK SYSTEMS, LLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three Months Ended
	March 31,
	2010			2009
Cash flows from operating activities:
Net loss	$	(5,459	)	$	(4,464	)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization		29,969			21,860
Amortization of debt issuance costs		616			378
Share-based compensation expense		224			220
Other		37			(9	)
Change in other operating assets and liabilities, net of acquisition:
Receivables, net		3,077			23,683
Inventories		(2,078	)		(1,089	)
Prepaid expenses and other		828			747
Accounts payable		(19,909	)		(4,873	)
Accrued liabilities and other		7,660			(3,025	)
Net cash provided by operating activities		14,965			33,428
Cash flows from investing activities:
Change in restricted cash		88			94
Purchases of marketable securities		(22,615	)		-
Proceeds from sales of marketable securities		10,000			-
Expenditures for property		(63,668	)		(26,625	)
Expenditures for capitalized software		(3,166	)		(4,391	)
Proceeds from sale of property		-			56
Net cash used in investing activities		(79,361	)		(30,866	)
Cash flows from financing activities:
Short-term revolver borrowings		1,999			-
Repayments of revolver borrowings		(2,430	)		-
Net decrease in notes and loans payable		-			(509	)
Long-term debt borrowings		1,220			933
Repayments of long-term debt		(1,721	)		(2,069	)
Debt issuance costs		(1,742	)		-
Net cash used in financing activities		(2,674	)		(1,645	)
Effect of exchange rate changes on cash and cash equivalents		1,673			1,393
Net increase (decrease) in cash and cash equivalents		(65,397	)		2,310
Cash and cash equivalents at beginning of the period		183,733			100,262
Cash and cash equivalents at end of the period	$	118,336		$	102,572
Supplemental cash flow information:
Cash paid for interest	$	2,407		$	2,653
Cash paid for income taxes	$	2,341		$	705
Supplemental non-cash disclosures related to:
Capitalized software and property acquired, not paid	$	25,303

See accompanying Notes to the Condensed Consolidated Financial Statements.

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HUGHES NETWORK SYSTEMS, LLC

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1:

Organization, Basis of Presentation and Summary of Significant Accounting Policies

Hughes Network Systems, LLC (“HNS” and, together with its consolidated subsidiaries, the “Company” or “we,” “us,” and “our”) was formed as a Delaware limited liability company on November 12, 2004. The Limited Liability Company Agreement of Hughes Network Systems, LLC, as amended (the “LLC Agreement”) provides for two classes of membership interests. The Class A membership interests, which have voting rights, are purchased by investors in the Company. The Class B membership interests, which do not have voting rights, are available for grant to employees, officers, directors, and consultants of the Company in exchange for the performance of services. Hughes Communications, Inc. (“HCI” or “Parent”) is the sole owner of our Class A membership interests and serves as our managing member, as defined in the LLC Agreement. As of March 31, 2010, there were 95,000 Class A membership interests outstanding and 3,330 Class B membership interests outstanding.

We are a telecommunications company that provides equipment and services to the broadband communications marketplace. We have extensive technical expertise in satellite, wireline and wireless communications which we utilize in a number of product and service offerings. In particular, we offer a spectrum of broadband equipment and services to the managed services market, which is comprised of enterprises with a requirement to connect a large number of geographically dispersed locations with reliable, scalable, and cost-effective applications, such as credit card verification, inventory tracking and control, and broadcast video. We provide broadband network services and systems to the international and domestic enterprise markets and satellite broadband Internet access to North American consumers, which we refer to as the Consumer market. In addition, we provide networking systems solutions to customers for mobile satellite, telematics and wireless backhaul systems. These services are generally provided on a contract or project basis and may involve the use of proprietary products engineered by us.

We have five reportable segments, which we operate and manage as strategic business units and organize by products and services. We measure and evaluate our reportable segments based on the operating earnings of the respective segments. Our business segments include: (i) the North America Broadband segment; (ii) the International Broadband segment; (iii) the Telecom Systems segment; (iv) the HTS Satellite segment; and (v) the Corporate segment. The North America Broadband segment consists of the Consumer group, which delivers broadband internet service to consumer customers, and the Enterprise group, which provides satellite, wireline and wireless communication networks and services to enterprises. The International Broadband segment consists of our international service companies and provides managed network services and equipment to enterprise customers and broadband service providers worldwide. The Telecom Systems segment consists of the Mobile Satellite Systems group, the Telematics group, and the Terrestrial Microwave group. The Mobile Satellite Systems group provides turnkey satellite ground segment systems to mobile system operators. The Telematics group previously provided development engineering and manufacturing services to Hughes Telematics, Inc. (“HTI”). However, as a result of the unfavorable impact of the economy on the automobile industry, HTI terminated substantially all of the development engineering and manufacturing services with us in August 2009. We expect our future revenue from the Telematics group to be insignificant. The Terrestrial Microwave group provides point-to-multipoint microwave radio network systems that are used for both cellular backhaul and broadband wireless access. The HTS Satellite segment, which is a new segment starting in 2010, consists of activities related to the development, construction and launch of high throughput satellites, including our Jupiter satellite, which is currently under construction and/or the provision of satellite capacity. The Corporate segment includes our corporate offices and assets not specifically related to another business segment.

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with: (i) generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information; (ii) the instructions to Form 10-Q; and (iii) the guidance of Rule 10-01 of Regulation S-X under the Securities and Exchange Act of 1934, as amended, for financial statements required to be filed with the Securities and Exchange Commission (“SEC”). They include the assets, liabilities, results of operations and cash flows of the Company, including its domestic and foreign subsidiaries that are more than 50% owned or for which the Company is deemed to be the primary beneficiary as defined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “ASC”) 810 “Consolidation.” Entities in which the Company holds at least 20% ownership or in which there are other indicators of significant influence are generally accounted for by the equity method, whereby the Company records its proportionate share of the entities’ results of operations. Entities in which the Company holds less than 20% ownership and does not have the ability to exercise

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HUGHES NETWORK SYSTEMS, LLC

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

significant influence are generally carried at cost. As permitted under Rule 10-01 of Regulation S-X, certain notes and other financial information normally required by GAAP have been condensed or omitted. Management believes the accompanying condensed consolidated financial statements reflect all normal and recurring adjustments necessary for a fair presentation of the Company’s financial position, results of operations, and cash flows as of and for the periods presented herein. Our results of operations for the three months ended March 31, 2010 may not be indicative of our future results. These condensed consolidated financial statements are unaudited and should be read in conjunction with our audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2009.

All intercompany balances and transactions with subsidiaries and other consolidated entities have been eliminated.

Use of Estimates in the Preparation of the Condensed Consolidated Financial Statements

The preparation of our condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be affected by changes in those estimates.

New Accounting Pronouncements

Recently Adopted Accounting Guidance

In January 2010, the FASB issued Accounting Standard Update (“ASU”) 2010-06 to improve disclosures about fair value measurements. ASU 2010-6 clarifies certain existing disclosures and requires new disclosure regarding significant transfers in and out of Level 1 and Level 2 of fair value measurements and the reasons for the transfer. In addition, ASU 2010-06 clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The amendments in ASU 2010-06 were effective for fiscal years beginning after December 15, 2009, and for interim periods within those fiscal periods. The adoption of ASU 2010-06 did not have a material impact on our fair value measurements.

In June 2009 and December 2009, the FASB amended ASC 810 changing certain consolidation guidance and requiring improved financial reporting by enterprises involved with variable interest entities (“VIE”). The amendments provide guidance in determining when a reporting entity should include the assets, liabilities, noncontrolling interest and results of activities of a VIE in its consolidated financial statements. The amendments to ASC 810 were effective for the first annual reporting period beginning after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. The adoption of amendments to consolidation rules did not have any impact on our disclosures relating to our VIE activity and our financial statements.

Accounting Guidance Not Yet Effective

In October 2009, the FASB issued ASU 2009-14 to amend ASC 605 “Revenue Recognition.” The amendments in this update change the accounting model for revenue arrangements that include both tangible products and software elements. The amendments in ASU 2009-14 will be effective for us beginning January 1, 2011, with early adoption permitted. We are currently evaluating the impact these amendments will have on our financial statements when they become effective.

In October 2009, the FASB issued ASU 2009-13 amending ASC 605 related to revenue arrangements with multiple deliverables. Among other things, ASU 2009-13 provides guidance for entities in determining the selling price of a deliverable and clarifies that the allocation of revenue is based on entity-specific assumptions rather than assumptions of a marketplace participant. We are currently evaluating the impact ASU 2009-13 will have on our financial statements when it becomes effective on January 1, 2011. Early adoption is permitted.

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HUGHES NETWORK SYSTEMS, LLC

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 2:

Marketable Securities

The amortized cost basis and estimated fair value of available-for-sale marketable securities are summarized as follows (in thousands):

	Cost		Gross Unrealized		Estimated
	Basis		Gain		Fair Value
March 31, 2010:
Municipal commercial paper	$	12,615	$	-	$	12,615
U.S. government bonds and treasury bills		15,045		11		15,056
Other debt securities		15,999		2		16,001
Total available-for-sale securities	$	43,659	$	13	$	43,672
December 31, 2009:
U.S. government bonds and treasury bills	$	15,105	$	4	$	15,109
Other debt securities		16,012		5		16,017
Total available-for-sale securities	$	31,117	$	9	$	31,126

Our investments in municipal commercial papers have A-1+ and P-1 ratings from S&P and Moody’s, respectively, and our investments in U.S. government bonds and treasury bills have AAA and Aaa ratings from S&P and Moody’s, respectively. The investments in Other debt securities have A-1+ and P-1/Aa3 ratings from S&P and Moody’s, respectively.

Note 3:

Receivables, Net

Receivables, net consisted of the following (in thousands):

	March 31,			December 31,
	2010			2009
Trade receivables	$	152,323		$	154,037
Contracts in process		15,929			16,952
Other receivables		3,428			3,902
Total receivables		171,680			174,891
Allowance for doubtful accounts		(12,587	)		(12,085	)
Total receivables, net	$	159,093		$	162,806

Trade receivables included $8.9 million and $8.7 million of amounts due from related parties as of March 31, 2010 and December 31, 2009, respectively. Advances and progress billings offset against contracts in process amounted to $3.6 million and $0.3 million as of March 31, 2010 and December 31, 2009, respectively.

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HUGHES NETWORK SYSTEMS, LLC

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 4:

Inventories

Inventories consisted of the following (in thousands):

	March 31,		December 31,
	2010		2009
Production materials and supplies	$	8,547	$	7,896
Work in process		19,064		15,615
Finished goods		34,079		36,733
Total inventories	$	61,690	$	60,244

Inventories are carried at the lower of cost or market, principally using standard costs adjusted to reflect actual cost, based on variance analyses performed throughout the year. Inventories are adjusted to net realizable value using management’s best estimates of future use. In making its assessment of future use or recovery, management considers the aging and composition of inventory balances, the effects of technological and/or design changes, forecasted future product demand based on firm or near-firm customer orders and alternative means of disposition of excess or obsolete items.

Note 5:

Property, Net

Property, net consisted of the following (dollars in thousands):

		Estimated Useful Lives	March 31,			December 31,
		(years)	2010			2009
Land and improvements		10	$	5,891		$	5,885
Buildings and leasehold improvements		2 - 30		33,532			32,867
Satellite related assets		15		380,394			380,394
Machinery and equipment		1 - 7		277,186			250,345
VSAT operating lease hardware		2 - 5		19,035			18,945
Furniture and fixtures		7		1,579			1,557
Construction in progress	—Jupiter			98,302			66,555
	—Other			14,857			12,888
Total property				830,776			769,436
Accumulated depreciation				(192,377	)		(167,472	)
Total property, net			$	638,399		$	601,964

Satellite related assets primarily consist of SPACEWAYTM 3 (“SPACEWAY 3”), a next generation broadband satellite system with a unique architecture for broadband data communications. In April 2008, we placed SPACEWAY 3 into service and began to depreciate its related costs on a straight-line basis over the estimated useful life of 15 years. Satellite related assets include the costs associated with the construction and launch of the satellite, insurance premiums for the satellite launch and the in-orbit testing period, interest incurred during the construction of the satellite, and other costs directly related to the satellite.

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HUGHES NETWORK SYSTEMS, LLC

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In June 2009, we entered into an agreement with Space Systems/Loral, Inc. (“SS/L”), under which SS/L will manufacture a next-generation, high throughput geostationary satellite (“Jupiter”). Jupiter will employ a multi-spot beam, bent pipe Ka-band architecture and will provide additional capacity for the HughesNet service in North America. In July 2009, we began the construction of the satellite and capitalized costs associated with the construction of the satellite, including interest incurred and other direct costs related to the satellite. We anticipate launching Jupiter in the first half of 2012.

For the three months ended March 31, 2010, we capitalized $2.0 million of interest related to the construction of Jupiter.

Note 6:

Intangible Assets, Net

Intangible assets, net consisted of the following (dollars in thousands):

	Estimated Useful Lives (years)	Cost Basis		Accumulated Amortization			Net Basis
March 31, 2010:
Backlog and customer relationships	4 - 8	$	21,612	$	(16,296	)	$	5,316
Patented technology and trademarks	2 - 10		15,745		(8,275	)		7,470
Total intangible assets, net		$	37,357	$	(24,571	)	$	12,786
December 31, 2009:
Backlog and customer relationships	4 - 8	$	21,612	$	(16,015	)	$	5,597
Patented technology and trademarks	2 - 10		15,745		(7,854	)		7,891
Total intangible assets, net		$	37,357	$	(23,869	)	$	13,488

We amortize the recorded values of our intangible assets over their estimated useful lives. As of March 31, 2010, our intangible assets included $11.8 million of fully depreciated intangible assets. For the three months ended March 31, 2010 and 2009, we recorded $0.7 million and $1.4 million of amortization expense, respectively. Estimated future amortization expense at March 31, 2010 is as follows (in thousands):

	Amount
Remaining nine months ending December 31, 2010	$	2,048
Year ending December 31,
2011		2,730
2012		2,730
2013		2,730
2014		1,237
2015		1,237
Thereafter		74
Total estimated future amortization expense	$	12,786

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HUGHES NETWORK SYSTEMS, LLC

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 7:

Other Assets

Other assets consisted of the following (in thousands):

	March 31,		December 31,
	2010		2009
Subscriber acquisition costs	$	28,513	$	29,884
Debt issuance costs		13,956		12,899
Other		25,708		25,741
Total other assets	$	68,177	$	68,524

Note 8:

Debt

Short-term and current portion of long-term debt consisted of the following (dollars in thousands):

	Interest Rates at		March 31,		December 31,
	March 31, 2010		2010		2009
VSAT hardware financing		8.00% - 15.00%	$	3,188	$	3,158
Revolving bank borrowings		8.75%		1,103		1,547
Capital lease and other		6.00% - 39.60%		2,215		2,045
Total short-term and the current portion of long-term debt			$	6,506	$	6,750

As of March 31, 2010, we had an outstanding revolving bank borrowing of $1.1 million, which had a variable interest rate of 8.75%. The borrowing was obtained by our Indian subsidiary under its revolving line of credit with a local bank. There is no requirement for compensating balances for these borrowings. The total amount available for borrowing by our foreign subsidiaries under various revolving lines of credit was $4.7 million as of March 31, 2010.

Long-term debt consisted of the following (dollars in thousands):

	Interest Rates at		March 31,		December 31,
	March 31, 2010		2010		2009
Senior Notes(1)		9.50%	$	588,424	$	587,874
Term Loan Facility		7.62%		115,000		115,000
VSAT hardware financing		8.00% - 15.00%		5,152		5,861
Capital lease and other		6.00% - 39.60%		5,722		6,222
Total long-term debt			$	714,298	$	714,957
(1) Includes 2006 Senior Notes and 2009 Senior Notes.

On March 16, 2010, we entered into a credit agreement with JP Morgan Chase Bank, N.A. and Barclays Capital to amend and restate our senior secured $50 million revolving credit facility (the “Revolving Credit Facility”). Pursuant to the terms of the agreement, among other changes, the maturity date of the Revolving Credit Facility was extended to March 16, 2014, subject to an early maturity date of 91 days prior to March 16, 2014 in the event our 2009 and 2006 Senior Notes and our Term Loan Facility (as defined below) are not (i) repaid in full or (ii) refinanced with new debt (or amended) with maturities of no earlier than 91 days after March 16, 2014. The terms of the Revolving Credit Facility was amended to be: (i) in respect of the interest rate, at our option, the ABR (as defined in the Revolving Credit Facility) plus 2.00% or the Adjusted LIBOR (as defined in the Revolving Credit Facility) plus 3.00% and (ii) in respect of the participation fee for outstanding letters of credit, 3.00% per annum, in each case subject to downward adjustment based on our leverage ratio. For the three months ended March 31, 2010 and 2009, there were no borrowings under the Revolving Credit Facility. As of March 31, 2010, the Revolving Credit Facility had total outstanding letters of credit of $2.1 million and an available borrowing capacity of $47.9 million.

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HUGHES NETWORK SYSTEMS, LLC

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In May 2009, we, along with our subsidiary, HNS Finance Corp., as Co-Issuer, completed a private debt offering of $150.0 million of 9.50% senior notes maturing on April 15, 2014 (the “2009 Senior Notes”). Interest on the 2009 Senior Notes is accrued from April 15, 2009 and is paid semi-annually in arrears on April 15 and October 15 of each year, beginning on October 15, 2009. As of March 31, 2010 and December 31, 2009, we recorded $6.5 million and $3.0 million, respectively, of accrued interest payable related to the 2009 Senior Notes.

In February 2007, we borrowed $115 million from a syndicate of banks (the “Term Loan Facility”), which matures on April 15, 2014. The interest on the Term Loan Facility is paid quarterly at Adjusted LIBOR (as defined in the Term Loan Facility) plus 2.50% per annum. To mitigate the variable interest rate risk associated with the Term Loan Facility, we entered into a swap agreement to swap the Adjusted LIBOR for a fixed interest rate of 5.12% per annum (the “Swap Agreement”). As a result, the Term Loan Facility has a fixed interest rate of 7.62% per annum. As of March 31, 2010 and December 31, 2009, interest accrued based on the Swap Agreement and the Term Loan Facility was $0.8 million.

In April 2006, we issued $450 million of 9.50% senior notes maturing on April 15, 2014 (the “2006 Senior Notes”). Interest on the 2006 Senior Notes is paid semi-annually in arrears on April 15 and October 15. As of March 31, 2010 and December 31, 2009, we recorded $19.6 million and $8.9 million, respectively, of accrued interest payable related to the 2006 Senior Notes.

Although the terms and covenants with respect to the 2009 Senior Notes are substantially identical to the 2006 Senior Notes, the 2009 Senior Notes were issued under a separate indenture and do not vote together with the 2006 Senior Notes. Each of the indentures governing the 2006 Senior Notes and the 2009 Senior Notes (collectively, the “Senior Notes”), the agreement governing the amended Revolving Credit Facility and the agreement governing the Term Loan Facility require us to comply with certain affirmative and negative covenants: (i) in the case of the indentures, for so long as any Senior Notes are outstanding; (ii) in the case of the amended Revolving Credit Facility, so long as the amended Revolving Credit Facility is in effect; and (iii) in the case of the Term Loan Facility, for so long as the Term Loan Facility remains outstanding. Negative covenants contained in these agreements include limitations on our ability and/or certain of our subsidiaries’ ability to incur additional indebtedness; issue redeemable stock and subsidiary preferred stock; incur liens; pay dividends or distributions or redeem or repurchase capital stock; prepay, redeem or repurchase debt; make loans and investments; enter into agreements that restrict distributions from our subsidiaries; sell assets and capital stock of our subsidiaries; enter into certain transactions with affiliates; consolidate or merge with or into, or sell substantially all of our assets to, another person; and enter into new lines of business. In addition to these negative covenants, the amended Revolving Credit Facility, the indentures governing the Senior Notes and/or the agreement governing the Term Loan Facility contain affirmative covenants that require us to: (i) preserve our businesses and properties; (ii) maintain insurance over our assets; (iii) pay and discharge all material taxes when due; and (iv) furnish the lenders’ administrative agent our financial statements for each fiscal quarter and fiscal year, certificates from a financial officer certifying that no Event of Default or Default has occurred during the fiscal period being reported, litigation and other notices, compliance with laws, maintenance of records and other such customary covenants. Management believes that we were in compliance with all of our debt covenants as of March 31, 2010.

In July 2006, we entered into a capital lease with 95 West Co., Inc. (“95 West Co.”) and its parent, Miraxis License Holdings, LLC (“MLH”), which are our related parties as discussed in Note 14—Transactions with Related Parties. Pursuant to the capital lease agreement, 95 West Co. and MLH agreed to provide a series of coordination agreements allowing us to operate SPACEWAY 3 at the 95° west longitude orbital slot where 95 West Co. and MLH have higher priority rights. As of March 31, 2010, the remaining debt balance under the capital lease was $5.3 million, which was included in “Capital lease and other” in the short-term and long-term debt tables above. The remaining payments under the capital lease are subject to conditions in the agreement including our ability to operate SPACEWAY 3, and are as follows: $0.75 million for the year ending December 31, 2010 and $1.0 million for each of the years ending December 31, 2011 through 2016.

Note 9:

Financial Instruments

Interest Rate Swap

The interest on the Term Loan Facility was at Adjusted LIBOR plus 2.50% per annum. To mitigate the variable interest rate risk associated with the Term Loan Facility, we entered into the Swap Agreement to swap the Adjusted LIBOR for a fixed interest rate of 5.12% per annum. As a result, the Term Loan Facility has a fixed interest rate of 7.62% per annum.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

We account for the Swap Agreement as a cash flow hedge in accordance with ASC 815-30 “Derivatives and Hedging —Cash Flow Hedges.” Accordingly, we recorded a net unrealized loss of $1.0 million and a net unrealized gain of $4.5 million for the three months ended March 31, 2010 and 2009, respectively, in accumulated other comprehensive loss associated with the fair market valuation of the interest rate swap. The net interest payments based on the Swap Agreement and the Term Loan Facility are paid quarterly and estimated to be approximately $8.8 million for each of the years ending December 31, 2010 through 2013 and $3.3 million for the year ending December 31, 2014. For each of the three months ended March 31, 2010 and 2009, we recorded $2.2 million interest expense on the Term Loan Facility.

Note 10:

Fair Value

Under ASC 820 “Fair Value Measurements and Disclosures,” fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date, and the principal market is defined as the market in which the reporting entity would sell the asset or transfer the liability with the greatest volume and level of activity for the asset or liability. If there is no principal market, the most advantageous market is used. This is the market in which the reporting entity would sell the asset or transfer the liability with the price that maximizes the amount that would be received for the asset or minimizes the amount that would be paid to transfer the liability. ASC 820 clarifies that fair value should be based on assumptions market participants would make in pricing the asset or liability. Where available, fair value is based on observable quoted market prices or derived from observable market data. Where observable prices or inputs are not available, valuation models are used (i.e. Black-Scholes, a barrier option model or a binomial model). ASC 820 established the following three levels used to classify the inputs used in measuring fair value measurements:

Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.

Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on the assumptions market participants would use in pricing the asset or liability based on the best available information.

In determining fair value, we use various valuation approaches, including market, income and/or cost approaches. Other valuation techniques involve significant management judgment. As of March 31, 2010, the carrying values of cash and cash equivalents, receivables, net, accounts payable, and debt, except for the Senior Notes as described below, approximated their respective fair values.

Our Senior Notes were categorized as Level 1 of the fair value hierarchy as we utilized recent market transactions for identical notes.

Our Term Loan Facility originally had a variable interest rate based on observable interest rates plus 2.50% per annum. To mitigate the variable interest rate risk, we entered into the Swap Agreement to swap the Adjusted LIBOR for a fixed interest rate of 5.12% per annum. As a result, the Term Loan Facility has a fixed interest rate of 7.62% per annum. We adjust the value of the interest rate swap on a quarterly basis. The fair value of the interest rate swap was categorized as Level 2 of the fair value hierarchy.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Assets and liabilities measured at fair value on a recurring basis are summarized below (dollars in thousands):

				March 31, 2010
	Level		Included In	Carrying Value		Fair Value
Marketable securities		1	Marketable securities	$	43,672	$	43,672
2006 Senior Notes		1	Long-term debt	$	450,000	$	462,375
2009 Senior Notes		1	Long-term debt	$	150,000	$	154,163
Interest rate swap on the Term Loan Facility		2	Other long-term liabilities	$	11,477	$	11,477

Note 11:

Income Taxes

We are a limited liability company and have elected to be treated as a partnership for income tax purposes. As such, our U.S. federal and state income taxes (in the states which tax limited liability companies as partnerships) are the direct responsibility of our members. Our Parent holds 100% of our Class A membership interests; and therefore, our activity is reported on our Parent’s income tax returns. Under the terms of the Contribution and Membership Interest Purchase Agreement dated December 3, 2004, as amended, among the Company, SkyTerra Communications, Inc., the DIRECTV Group, Inc. (“DIRECTV”) and DTV Network Systems, Inc. (“DTV Networks”), DIRECTV retained the domestic tax benefits of the Company occurring prior to April 23, 2005 and has responsibility for all of the pre-closing domestic and foreign income tax liabilities of DTV Networks. We have recorded a liability in the balance sheet for the estimated amount we may be required to pay to DIRECTV resulting from prepaid taxes exceeding tax liabilities as of April 22, 2005.

For the three months ended March 31, 2010 and 2009, we recorded a net income tax expense of $1.2 million and a net income tax benefit of $0.7 million, respectively. Our income tax expense represents taxes associated with our foreign subsidiaries and state taxes in the states that recognize limited liability companies as taxable corporations.

Certain of our subsidiaries are expected to utilize a portion of their net operating loss carry-forwards during 2010. These subsidiaries have not met the more-likely-than-not criteria of ASC 740 “Income Taxes” and therefore maintain a full valuation allowance on their deferred tax assets as of March 31, 2010. Any benefit realized from the reversal of valuation allowance will be recorded as a reduction to income tax expense.

For the three months ended March 31, 2010, we did not identify any significant uncertain tax positions. We do not believe that the unrecognized tax benefits will significantly increase or decrease within the next twelve months. Following is a description of the tax years that remain subject to examination by major tax jurisdictions:

United States - Federal		2007 and forward
United States - Various States		2005 and forward
United Kingdom		2005 and forward
Germany		2004 and forward
Italy		2005 and forward
India		1995 and forward
Mexico		2000 and forward
Brazil		2003 and forward

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 12:

Employee Share-Based Payments

HCI’s 2006 Equity and Incentive Plan

In January 2006, HCI’s Board of Directors approved the HCI 2006 Equity and Incentive Plan (the “Plan”). The Plan provides for the grant of equity-based awards, including restricted common stock, restricted stock units, stock options, stock appreciation rights and other equity-based awards, as well as cash bonuses and long-term cash awards to directors, officers, employees, advisors and consultants of HCI and its subsidiaries who are selected by HCI’s Compensation Committee for participation in the Plan. We recorded compensation expense related to the restricted stock awards, issued to our employees, and restricted stock units, issued only to our international employees, after adjustment for forfeitures, of $0.6 million for each of the three months ended March 31, 2010 and 2009. As of March 31, 2010, we had $2.2 million of unrecognized compensation expense related to the restricted stock awards and restricted stock units, which will be recognized over a weighted average life of 1.14 years.

Summaries of non-vested restricted stock awards, excluding awards issued to HCI’s directors, and restricted stock units are as follows:

Restricted Stock Awards

	Shares			Weighted-Average Grant-Date Fair Value
Non-vested at December 31, 2009		72,360		$	47.58
Forfeited		(500	)	$	45.02
Vested		(4,175	)	$	49.41
Non-vested at March 31, 2010		67,685		$	47.48

Restricted Stock Units

As of December 31, 2009 and March 31, 2010, we had 8,675 non-vested restricted stock units with a weighted-average grant-date fair value of $28.73.

Stock Option Program

On April 24, 2008, HCI’s Compensation Committee made stock option awards under the Plan (the “Stock Option Program”), which consisted of the issuance of non-qualified stock options to employees of HCI and its subsidiaries. The grant and exercise price of the stock options is the closing price of HCI’s common stock on the date of the grant. Any options forfeited or cancelled before exercise will be deposited back into the Option Pool and will become available for award under the Stock Option Program. Each grant has a 10 year life and vests 50% on the second anniversary of the grant date and 25% on each of the third and fourth anniversaries of the grant date. The fair value of each option award was estimated on the date of grant using a Black-Scholes option valuation model.

On March 19, 2009, HCI offered eligible participants in the Stock Option Program the opportunity to exchange (the “Exchange Offer”) all or a portion of their eligible outstanding stock options for new stock options, on a one-for-one basis, through an exchange offer, which expired on April 16, 2009. Each new option (the “New Options”) has an exercise price of $14.47, which was the closing price of our common stock on April 15, 2009, and a new vesting schedule to reflect the new grant date of April 16, 2009.

As a result of the Exchange Offer, which was completed on April 16, 2009, 546,900 outstanding stock options (representing 100% participation) were exchanged, and the estimated fair value of the New Options of $2.3 million was computed using a Black-Scholes option valuation model based on the new grant date. The compensation expense related to the New Options is recognized on a straight-line basis over the four-year vesting period beginning on the date of grant.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A summary of option activity under the Stock Option Program is presented below:

	Option Shares			Weighted-Average Exercise Price		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value(1)
Outstanding at December 31, 2009		648,050		$	16.77	9.37	$	6,326
Forfeited or expired		(4,650	)	$	14.47
Outstanding at March 31, 2010		643,400		$	16.78	9.12	$	7,263
Vested and expected to vest at March 31, 2010		579,060		$	16.78	9.12	$	6,537
Exercisable at March 31, 2010		-		$	-
(1) In thousands.

The compensation expense related to stock option awards is recognized on a straight-line basis over the four-year vesting period beginning on the date of grant. We recorded $1.0 million and $0.8 million of compensation expense for the three months ended March 31, 2010 and 2009, respectively. As of March 31, 2010, we had $9.1 million of unrecognized compensation expense for non-vested stock options, which will be recognized over a weighted average period of 3.1 years.

Bonus Unit Plan

In July 2005, we adopted an incentive bonus unit plan (the “Bonus Unit Plan”), pursuant to which bonus units were granted to certain employees of the Company. The bonus units provide for time vesting over five years and are subject to a participant’s continued employment with the Company. Pursuant to the Bonus Unit Plan, if participants in the Bonus Unit Plan are employed by the Company at the time of the predetermined exchange dates, they are entitled to exchange their vested bonus units for shares of HCI’s common stock. The number of HCI’s common stock shares to be issued upon each exchange is calculated based upon the fair market value of the vested bonus unit divided by the average closing trading price of HCI’s common stock for the 20 business days immediately preceding the date of the exchange. We recognized compensation expense of $0.2 million for each of the three months ended March 31, 2010 and 2009 related to the Bonus Unit Plan.

The following table summarizes changes in bonus units under the Bonus Unit Plan:

	Three Months Ended
	March 31,
	2010			2009
Non-vested, beginning balance		2,453,250			2,500,000
Forfeited		(13,750	)		-
Non-vested balance at March 31,		2,439,500			2,500,000

Class B Membership Interests

Class B membership interests in the Company were issued to certain members of our senior management, two of our former senior management and a member of our Board of Managers and HCI’s Board of Directors. The Class B membership interests are subject to certain vesting requirements, with 50% of the Class B membership interests subject to time vesting over five years and the other 50% vesting based upon certain performance criteria. The Class B membership interests subject to the performance criteria vested on April 23, 2010. At the holders’ election, vested Class B membership interests may be exchanged for our common stock. The number of shares of our common stock to be issued upon such exchange is based upon the fair market value of such vested Class B membership interest tendered for exchange divided by the average closing trading price of our common stock for the 20 business days immediately preceding the date of such exchange. On September 25, 2009, HCI registered 75,000 shares of its common stock with the SEC on Form S-8 to be issued, from time to time, upon the exchange of the Class B membership interests.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Pursuant to ASC 718 “Compensation—Stock Compensation,” the Company determined that the Class B membership interests had nominal value at the date of grant, and, accordingly, minimal compensation expense was recorded for each of the three months ended March 31, 2010 and 2009. There were no Class B membership interests issued or forfeited during the three months ended March 31, 2010. As of March 31, 2010, there were 3,330 outstanding Class B membership interests.

Note 13:

Long-Term Cash Incentive Retention Program

In 2005, the Company established a one-time employee retention program (“Retention Program”), which was designed to retain certain employees chosen by HNS’ senior management. As a result of HNS successfully attaining 100% of its earnings goal for 2008, as defined in the Retention Program, the Company paid an aggregate of $14.7 million to eligible participants under the Retention Program in 2009.

Note 14:

Transactions with Related Parties

In the ordinary course of our operations, we enter into transactions with related parties to purchase and/or sell telecommunications services, equipment, and inventory. Related parties include all entities that are controlled by Apollo Management, L.P. and its affiliates (collectively “Apollo”), our Parent’s controlling stockholder.

Hughes Telematics, Inc.

In July 2006, we granted a limited license to HTI allowing HTI to use the HUGHES trademark. The license is limited in that HTI may use the HUGHES trademark only in connection with its business of automotive telematics and only in combination with the TELEMATICS name. As partial consideration for the license, the agreement provides that we will be HTI’s preferred engineering services provider. The license is royalty-free, except that HTI has agreed to pay a royalty to us in the event HTI no longer has a commercial or affiliated relationship with us.

In October 2007, we entered into an agreement with HTI and a customer of HTI, whereby we agreed to assume the rights and performance obligations of HTI in the event that HTI fails to perform its obligations due to a fundamental cause such as bankruptcy or the cessation of its telematics business. In connection with that agreement, the Company and HTI have entered into a letter agreement pursuant to which HTI has agreed to take certain actions to enable us to assume HTI’s obligations in the event that such action is required. However, as a result of the Merger, as defined and described below, our obligations to HTI and its customer expired when HTI became a public company in March 2009 with an initial market capitalization value greater than $300.0 million.

In January 2008, we entered into an agreement with HTI for the development of an automotive telematics system for HTI, comprising the telematics system hub and the Telematics Control Unit (“TCU”), which will serve as the user appliance in the telematics system. The agreement also provided that, subject to certain specified performance conditions, we will serve as the exclusive manufacturer and supplier of TCU’s for HTI.

In March 2009, HCI exchanged $13.0 million of HTI receivables for HTI convertible preferred stock (“HTI Preferred Stock”) as part of a $50.0 million private placement of HTI Preferred Stock. In connection with the merger of HTI with Polaris Acquisition Corp. (the “Merger”), which occurred on March 31, 2009, HTI became a publicly traded company and HCI’s HTI Preferred Stock was converted into HTI common stock (“HTI Shares”). There are certain restrictions and/or earn-out provisions applicable to the HTI Shares pursuant to the Merger agreement. If the full earn-out is achieved, HCI’s investment could represent approximately 3.8% of HTI’s outstanding common stock.

In August 2009, HTI terminated substantially all of the development engineering and manufacturing services with us as a result of the bankruptcy filing of one of HTI’s customers. On December 18, 2009, the Company entered into a promissory note with HTI (“Promissory Note”) for $8.3 million of account receivables that HTI owed to the Company. The Promissory Note has a maturity date of December 31, 2010 and an interest rate of 12% per annum.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

HTI is controlled by an affiliate of Apollo. Jeffrey A. Leddy, a member of our Board of Managers and HCI’s Board of Directors, is the CEO and a director of HTI and owns less than 1% of HTI’s equity as of March 31, 2010. In addition, Andrew Africk and Aaron Stone, members of our Board of Managers and HCI’s Board of Directors, are directors of HTI and partners of Apollo.

Hughes Systique Corporation (“Hughes Systique”)

We have contracted with Hughes Systique, an entity consolidated with our Parent, for software development services. The founders of Hughes Systique include Pradman Kaul, our and HCI’s Chief Executive Officer (“CEO”) and President, and certain former employees of the Company, including Pradeep Kaul, who is the CEO and President of Hughes Systique, our former Executive Vice President and the brother of our CEO and President. HCI acquired an equity investment in Hughes Systique Series A Preferred shares of $3.0 million and $1.5 million in October 2005 and January 2008, respectively. As of March 31, 2010, on an undiluted basis, HCI owned approximately 45.23% of Hughes Systique’s outstanding shares, and our CEO and President and his brother, in the aggregate, owned approximately 25.61% of Hughes Systique’s outstanding shares. In addition, our CEO and President and Jeffrey A. Leddy, a member of our Board of Managers and HCI’s Board of Directors, serve on the board of directors of Hughes Systique.

Hughes Communications, Inc.

We have a management and advisory services agreement with HCI, our Parent, pursuant to which HCI agrees to provide us, through its officers and employees, general support, advisory, and consulting services in relation to our business. Pursuant to the agreement, we reimburse HCI for its out of pocket costs and expenses incurred in connection with the services, including an amount equal to 98% of the compensation of certain HCI executives plus a 2% service fee.

Agreement with 95 West Co., Inc.

In July 2006, we entered into an agreement with 95 West Co. and its parent, MLH, pursuant to which 95 West Co. and MLH agreed to provide a series of coordination agreements which allow us to operate SPACEWAY 3 at an orbital position where such parties have higher-priority rights. Jeffrey A. Leddy, a member of our Board of Managers and HCI’s Board of Directors, is the managing director of 95 West Co. and MLH and also owns a small interest in each. Andrew Africk, another member of our Board of Managers and HCI’s Board of Directors, is also a director of MLH. As part of the agreement, we agreed to pay $9.3 million, in annual installments of $0.3 million in 2006, $0.75 million in each year between 2007 and 2010 and $1.0 million in each year between 2011 and 2016 for the use of the orbital position, subject to conditions in the agreement including our ability to operate SPACEWAY 3. As of March 31, 2010, the remaining debt balance under the capital lease was $5.3 million, which was included in “Capital lease and other” in the short-term and long-term debt tables included in Note 8—Debt.

Smart & Final, Inc.

As of March 31, 2010, Apollo owned, directly or indirectly, 95% of Smart & Final, Inc. (“Smart & Final”). We provide broadband products and services to Smart & Final.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Other

Certain members of our Board of Managers and officers serve on the boards of directors of some of our affiliates. In some cases, such members and officers have received stock-based compensation from such affiliates for their service. In those cases, the amount of stock-based compensation received by the directors and officers is comparable to stock-based compensation awarded to other non-executive members of the affiliates’ boards of directors.

Related Party Transactions

Sales and purchase transactions with related parties are as follows (in thousands):

	Three Months Ended
	March 31,
	2010		2009
Sales:
HTI	$	301	$	7,068
Smart & Final		123		152
Total sales	$	424	$	7,220
Purchases:
HCI	$	2,483	$	2,195
Hughes Systique		2,455		2,244
Total purchases	$	4,938	$	4,439

Assets and liabilities resulting from transactions with related parties are as follows (in thousands):

	March 31,		December 31,
	2010		2009
Due from related parties:
HTI	$	8,862	$	8,652
Smart & Final		51		52
Total due from related parties	$	8,913	$	8,704
Due to related parties:
HCI	$	4,478	$	2,610
Hughes Systique		1,669		1,643
Total due to related parties	$	6,147	$	4,253

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 15:

Segment Data

Set forth below is selected financial information for our operating segments (in thousands). There were no intersegment transactions.

	North America Broadband		International Broadband			Telecom Systems		HTS Satellite(1)			Corporate		Consolidated
As of or For the Three Months Ended March 31, 2010
Revenues	$	173,995	$	43,456		$	24,692	$	-		$	-	$	242,143
Operating income (loss)	$	9,616	$	(1,156	)	$	3,708	$	(858	)	$	-	$	11,310
Depreciation and amortization	$	25,519	$	3,426		$	1,024	$	-		$	-	$	29,969
Assets	$	636,622	$	168,771		$	45,877	$	99,515		$	224,430	$	1,175,215
Capital expenditures	$	26,138	$	4,187		$	153	$	32,767		$	3,589	$	66,834
As of or For the Three Months Ended March 31, 2009
Revenues	$	165,608	$	44,884		$	29,262	$	-		$	-	$	239,754
Operating income	$	1,750	$	1,231		$	5,489	$	-		$	-	$	8,470
Depreciation and amortization	$	18,185	$	2,708		$	967	$	-		$	-	$	21,860
Assets	$	641,150	$	174,992		$	59,684	$	-		$	186,520	$	1,062,346
Capital expenditures	$	24,844	$	3,324		$	457	$	-		$	2,391	$	31,016
(1) There were no activities for the three months ended March 31, 2009.

Note 16:

Comprehensive Loss

Comprehensive loss is as follows (in thousands):

	Three Months Ended
	March 31,
	2010			2009
Net loss	$	(5,459	)	$	(4,464	)
Other comprehensive income (loss):
Foreign currency translation adjustments		(807	)		(1,407	)
Unrealized gain (loss) on hedging instruments		(2,323	)		5,337
Reclassification of realized (gain) loss on hedging instruments		1,368			(854	)
Unrealized gain on available-for-sale securities		2			-
Total other comprehensive income (loss)		(1,760	)		3,076
Comprehensive loss		(7,219	)		(1,388	)
Comprehensive income attributable to the noncontrolling interest		(307	)		(390	)
Comprehensive loss attributable to HNS	$	(7,526	)	$	(1,778	)

Note 17:

Commitments and Contingencies

Litigation

We are periodically involved in litigation in the ordinary course of our business involving claims regarding intellectual property infringement, product liability, property damage, personal injury, contracts, employment and worker’s compensation. We do not believe that there are any such pending or threatened legal proceedings, including ordinary litigation incidental to the conduct of our business and the ownership of our properties that, if adversely determined, would have a material adverse effect on our business, financial condition, results of operations or liquidity.

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In October 2008, Hughes Telecommunicaçoes do Brasil Ltda. (“HTB”), a wholly-owned subsidiary of ours, received a tax assessment of approximately $6.4 million from the State of São Paulo Treasury Department. The tax assessment alleges that HTB failed to pay certain import taxes to the State of São Paulo. We do not believe the assessment is valid and plan to dispute the State of São Paulo’s claims and to defend vigorously against these allegations. Therefore, we have not recorded a liability. It is the opinion of management that such litigation is not expected to have a material adverse effect on our financial position, results of operations or cash flows.

In March 2009, an arbitration panel ruled in the Company’s favor in its arbitration against Sea Launch Limited Partnership and Sea Launch Company, LLC (collectively, “Sea Launch”) entitling the Company to a full refund of $44.4 million (the “Deposit”) in payments made to Sea Launch in connection with launch services for SPACEWAY 3, in addition to interest of 10% per annum on the $44.4 million from July 10, 2007 until payment on the Deposit is received in full. As a result of Sea Launch filing a voluntary petition to reorganize under Chapter 11 of the U.S. Bankruptcy Code, our efforts to pursue collection of the arbitral award have been stayed under the bankruptcy laws. We are pursuing the collection of our arbitral award as part of Sea Launch’s bankruptcy process and in accordance with its timetable. Based upon information made available in the bankruptcy proceedings and other factors, the Company concluded that the value of the previously-recorded Deposit was impaired and recorded an impairment loss of $44.4 million in June 2009.

On May 18, 2009, the Company and HCI received notice of a complaint filed in the U.S. District Court for the Northern District of California by two California subscribers to the HughesNet service. The plaintiffs complain about the speed of the HughesNet service, the Fair Access Policy, early termination fees and certain terms and conditions of the HughesNet subscriber agreement. The plaintiffs seek to pursue their claims as a class action on behalf of other California subscribers. On June 4, 2009, the Company and HCI received notice of a similar complaint filed by another HughesNet subscriber in the Superior Court of San Diego County, California. The plaintiff in this case also seeks to pursue his claims as a class action on behalf of other California subscribers. Both cases have been consolidated into a single case in the U.S. District Court for the Northern District of California. Based on our investigation, we believe that the allegations in both complaints are not meritorious and we intend to vigorously defend these matters.

On December 18, 2009, the Company and HCI received notice of a complaint filed in the Cook County, Illinois, Circuit Court by a former subscriber to the HughesNet service. The complaint seeks a declaration allowing the former subscriber to file a class arbitration challenging early termination fees under the subscriber agreement. Based on our investigation, we believe that the allegations in this complaint are not meritorious and we intend to vigorously defend this matter.

Commitments

In June 2009, we entered into an agreement with SS/L, under which we are obligated to pay an aggregate of approximately $252.0 million for the construction of our Jupiter satellite and have agreed to make installment payments to SS/L upon the completion of each milestone set forth in the agreement. As of March 31, 2010, the remaining obligation for the construction of Jupiter was $184.1 million. We anticipate launching Jupiter in the first half of 2012. In connection with the construction of Jupiter, we have entered into a contract with Barrett Xplore Inc. (“Barrett”), whereby Barrett has agreed to lease user beams and purchase gateways and terminals for the Jupiter satellite that are designed to operate in Canada.

We are contingently liable under standby letters of credit and bonds in the aggregate amount of $16.4 million that were undrawn as of March 31, 2010. Of this amount, $2.1 million was issued under the Revolving Credit Facility; $1.6 million was secured by restricted cash; $1.0 million related to insurance bonds; and $11.7 million was issued under credit arrangements available to our Indian and Brazilian subsidiaries. Certain letters of credit issued by our Indian subsidiaries are secured by their assets. As of March 31, 2010, these obligations were scheduled to expire as follows: $5.3 million in 2010; $8.5 million in 2011; $0.3 million in 2012; and $2.3 million in 2013 and thereafter.

Note 18:

Subsequent Event

On April 30, 2010, we entered into an agreement with Arianespace for the launch of our Jupiter satellite in the first half of 2012. Pursuant to the agreement, the Ariane 5 heavy launcher will be utilized to launch Jupiter to a geosynchronous transfer orbit from Europe’s Spaceport in Kourou, French Guiana.

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HUGHES NETWORK SYSTEMS, LLC

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 19:

Supplemental Guarantor and Non-Guarantor Financial Information

Certain of the Company’s wholly-owned subsidiaries (HNS Real Estate LLC, Hughes Network Systems International Service Company, HNS India VSAT, Inc., HNS Shanghai, Inc. and Helius (together, the “Guarantor Subsidiaries”)) have fully and unconditionally guaranteed, on a joint and several basis, payment of the Senior Notes. In lieu of providing separate unaudited financial statements of the Co-Issuer and the Guarantor Subsidiaries, condensed financial statements prepared in accordance with Rule 3-10 of Regulation S-X are presented below. The column marked “Parent” represents our results of operations, with the subsidiaries accounted for using the equity method. The column marked “Guarantor Subsidiaries” includes the results of the guarantor subsidiaries along with the results of the Co-Issuer, a finance subsidiary which is 100% owned by the Company and which had no assets, operations, revenues or cash flows for the periods presented. The column marked “Non-Guarantor Subsidiaries” includes the results of non-guarantor subsidiaries of the Company. Eliminations necessary to arrive at the information for the Company on a consolidated basis for the periods presented are included in the column so labeled. Separate financial statements and other disclosures concerning the Co-Issuer and the Guarantor Subsidiaries are not presented because management has determined that they are not material to investors.

The following represents the supplemental condensed financial statements of the Company, the Guarantor Subsidiaries and the Non-guarantor Subsidiaries. These condensed financial statements should be read in conjunction with our condensed consolidated financial statements and notes thereto.

Condensed Consolidated Balance Sheet as of March 31, 2010
(In thousands)
(Unaudited)

			Guarantor		Non-Guarantor
	Parent		Subsidiaries		Subsidiaries		Eliminations			Total
Assets
Cash and cash equivalents	$	110,448	$	221	$	7,667	$	-		$	118,336
Marketable securities		43,672		-		-		-			43,672
Receivables, net		117,495		77		51,998		(10,477	)		159,093
Inventories		49,309		-		12,381		-			61,690
Prepaid expenses and other		7,856		36		13,651		-			21,543
Total current assets		328,780		334		85,697		(10,477	)		404,334
Property, net		577,570		32,857		27,972		-			638,399
Investment in subsidiaries		113,879		-		-		(113,879	)		-
Other assets		101,817		1,810		28,855		-			132,482
Total assets	$	1,122,046	$	35,001	$	142,524	$	(124,356	)	$	1,175,215
Liabilities and equity
Accounts payable	$	81,473	$	163	$	27,016	$	(10,477	)	$	98,175
Short-term debt		1,992		-		4,514		-			6,506
Accrued liabilities and other		118,238		-		21,855		-			140,093
Total current liabilities		201,703		163		53,385		(10,477	)		244,774
Long-term debt		710,428		-		3,870		-			714,298
Other long-term liabilities		17,177		-		-		-			17,177
Total HNS' equity		192,738		28,610		85,269		(113,879	)		192,738
Noncontrolling interest		-		6,228		-		-			6,228
Total liabilities and equity	$	1,122,046	$	35,001	$	142,524	$	(124,356	)	$	1,175,215

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HUGHES NETWORK SYSTEMS, LLC

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Condensed Consolidated Balance Sheet as of December 31, 2009
(In thousands)
(Unaudited)

			Guarantor		Non-Guarantor
	Parent		Subsidiaries		Subsidiaries		Eliminations			Total
Assets
Cash and cash equivalents	$	173,991	$	1,091	$	8,651	$	-		$	183,733
Marketable securities		31,126		-		-		-			31,126
Receivables, net		115,948		628		60,862		(14,632	)		162,806
Inventories		47,437		138		12,669		-			60,244
Prepaid expenses and other		7,421		234		13,321		-			20,976
Total current assets		375,923		2,091		95,503		(14,632	)		458,885
Property, net		542,642		32,792		26,530		-			601,964
Investment in subsidiaries		115,136		-		-		(115,136	)		-
Other assets		102,045		3,221		29,183		-			134,449
Total assets	$	1,135,746	$	38,104	$	151,216	$	(129,768	)	$	1,195,298
Liabilities and equity
Accounts payable	$	97,114	$	2,272	$	32,759	$	(14,632	)	$	117,513
Short-term debt		2,054		-		4,696		-			6,750
Accrued liabilities and other		110,088		714		23,124		-			133,926
Total current liabilities		209,256		2,986		60,579		(14,632	)		258,189
Long-term debt		710,259		-		4,698		-			714,957
Other long-term liabilities		16,191		-		-		-			16,191
Total HNS' equity		200,040		29,197		85,939		(115,136	)		200,040
Noncontrolling interest		-		5,921		-		-			5,921
Total liabilities and equity	$	1,135,746	$	38,104	$	151,216	$	(129,768	)	$	1,195,298

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HUGHES NETWORK SYSTEMS, LLC

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Condensed Consolidated Statement of Operations for the Three Months Ended March 31, 2010
(In thousands)
(Unaudited)

				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Total
Revenues	$	212,471		$	988		$	32,635		$	(3,951	)	$	242,143
Operating costs and expenses:
Costs of revenues		155,328			306			24,492			(3,590	)		176,536
Selling, general and administrative		41,086			1,372			6,583			(361	)		48,680
Research and development		4,460			455			-			-			4,915
Amortization of intangible assets		534			168			-			-			702
Total operating costs and expenses		201,408			2,301			31,075			(3,951	)		230,833
Operating income (loss)		11,063			(1,313	)		1,560			-			11,310
Other income (expense):
Interest expense		(15,793	)		-			(320	)		8			(16,105	)
Interest and other income (loss), net		(359	)		870			50			(8	)		553
Equity in losses of subsidiaries		(246	)		-			-			246			-
Income (loss) before income tax expense		(5,335	)		(443	)		1,290			246			(4,242	)
Income tax expense		(227	)		(3	)		(987	)		-			(1,217	)
Net income (loss)		(5,562	)		(446	)		303			246			(5,459	)
Net (income) loss attributable to the noncontrolling interest		-			(141	)		38			-			(103	)
Net income (loss) attributable to HNS	$	(5,562	)	$	(587	)	$	341		$	246		$	(5,562	)

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HUGHES NETWORK SYSTEMS, LLC

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Condensed Consolidated Statement of Operations for the Three Months Ended March 31, 2009
(In thousands)
(Unaudited)

				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Total
Revenues	$	209,815		$	1,832		$	33,802		$	(5,695	)	$	239,754
Operating costs and expenses:
Costs of revenues		159,383			665			25,524			(4,821	)		180,751
Selling, general and administrative		36,779			1,353			6,539			(874	)		43,797
Research and development		4,656			695			-			-			5,351
Amortization of intangible assets		1,103			282			-			-			1,385
Total operating costs and expenses		201,921			2,995			32,063			(5,695	)		231,284
Operating income (loss)		7,894			(1,163	)		1,739			-			8,470
Other income (expense):
Interest expense		(13,653	)		-			(176	)		-			(13,829	)
Interest and other income, net		147			-			80			-			227
Equity in earnings of subsidiaries		932			-			-			(932	)		-
Income (loss) before income tax (expense) benefit		(4,680	)		(1,163	)		1,643			(932	)		(5,132	)
Income tax (expense) benefit		(174	)		-			842			-			668
Net income (loss)		(4,854	)		(1,163	)		2,485			(932	)		(4,464	)
Net (income) loss attributable to the noncontrolling interest		-			(529	)		139			-			(390	)
Net income (loss) attributable to HNS	$	(4,854	)	$	(1,692	)	$	2,624		$	(932	)	$	(4,854	)

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HUGHES NETWORK SYSTEMS, LLC

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Condensed Consolidated Statement of Cash Flows for the Three Months Ended March 31, 2010
(In thousands)
(Unaudited)

				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Total
Cash flows from operating activities:
Net income (loss)	$	(5,562	)	$	(446	)	$	303		$	246		$	(5,459	)
Adjustments to reconcile net income (loss) to net cash flows from operating activities		18,845			218			1,607			(246	)		20,424
Net cash provided by (used in) operating activities		13,283			(228	)		1,910			-			14,965
Cash flows from investing activities:
Change in restricted cash		(1	)		-			89			-			88
Purchases of marketable securities		(22,615	)		-			-			-			(22,615	)
Proceeds from sales of marketable securities		10,000			-			-			-			10,000
Expenditures for property		(59,409	)		(642	)		(3,617	)		-			(63,668	)
Expenditures for capitalized software		(3,166	)		-			-			-			(3,166	)
Net cash used in investing activities		(75,191	)		(642	)		(3,528	)		-			(79,361	)
Cash flows from financing activities:
Short-term revolver borrowings		-			-			1,999			-			1,999
Repayments of revolver borrowings		-			-			(2,430	)		-			(2,430	)
Long-term debt borrowings		550			-			670			-			1,220
Repayments of long-term debt		(443	)		-			(1,278	)		-			(1,721	)
Debt issuance costs		(1,742	)		-			-			-			(1,742	)
Net cash used in financing activities		(1,635	)		-			(1,039	)		-			(2,674	)
Effect of exchange rate changes on cash and cash equivalents		-			-			1,673			-			1,673
Net decrease in cash and cash equivalents		(63,543	)		(870	)		(984	)		-			(65,397	)
Cash and cash equivalents at beginning of the period		173,991			1,091			8,651			-			183,733
Cash and cash equivalents at end of the period	$	110,448		$	221		$	7,667		$	-		$	118,336

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HUGHES NETWORK SYSTEMS, LLC

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Condensed Consolidated Statement of Cash Flows for the Three Months Ended March 31, 2009
(In thousands)
(Unaudited)

				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Total
Cash flows from operating activities:
Net income (loss)	$	(4,854	)	$	(1,163	)	$	2,485		$	(932	)	$	(4,464	)
Adjustments to reconcile net income (loss) to net cash flows from operating activities		45,235			550			(8,825	)		932			37,892
Net cash provided by (used in) operating activities		40,381			(613	)		(6,340	)		-			33,428
Cash flows from investing activities:
Change in restricted cash		(1	)		-			95			-			94
Expenditures for property		(24,052	)		(220	)		(2,353	)		-			(26,625	)
Expenditures for capitalized software		(4,391	)		-			-			-			(4,391	)
Proceeds from sale of property		-			6			50			-			56
Net cash used in investing activities		(28,444	)		(214	)		(2,208	)		-			(30,866	)
Cash flows from financing activities:
Net decrease in notes and loans payable		-			-			(509	)		-			(509	)
Long-term debt borrowings		87			-			846			-			933
Repayments of long-term debt		(1,480	)		-			(589	)		-			(2,069	)
Net cash used in financing activities		(1,393	)		-			(252	)		-			(1,645	)
Effect of exchange rate changes on cash and cash equivalents		-			-			1,393			-			1,393
Net increase (decrease) in cash and cash equivalents		10,544			(827	)		(7,407	)		-			2,310
Cash and cash equivalents at beginning of the period		75,956			2,013			22,293			-			100,262
Cash and cash equivalents at end of the period	$	86,500		$	1,186		$	14,886		$	-		$	102,572

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Item 2.

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

The following discussion and analysis of the Company’s financial condition and results of operations are based upon financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America and should each be read together with our condensed consolidated financial statements and the notes to those condensed consolidated financial statements included elsewhere in this report. This report contains forward-looking statements that involve risks and uncertainties, including statements regarding our capital needs, business strategy, expectations and intentions within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent our expectations or beliefs concerning future events. We urge you to consider statements that use the terms “believe,” “do not believe,” “anticipate,” “expect,” “plan,” “may,” “estimate,” “strive,” “intend,” “will,” “should,” and variations of these words or similar expressions are intended to identify forward-looking statements. These statements reflect our current views with respect to future events and because our business is subject to numerous risks, and uncertainties, our actual results could differ materially from those anticipated in the forward-looking statements, including those set forth below under this “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” “Special Note Regarding Forward-Looking Statements” and contained elsewhere in this report. All forward-looking statements speak only as of the date of this report. Actual results will most likely differ from those reflected in these forward-looking statements and the differences could be substantial. We disclaim any obligation to update these forward-looking statements or disclose any difference, except as may be required by securities laws, between our actual results and those reflected in these statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements in this report are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved.

Overview

Hughes Network Systems, LLC, a Delaware limited liability company, (“HNS” and, together with its consolidated subsidiaries, the “Company” or “we,” “us,” and “our”) is a telecommunications company. The Company is a wholly-owned subsidiary of Hughes Communications, Inc. (“HCI” or “Parent”). We provide equipment and services to the broadband communications marketplace. We have extensive technical expertise in satellite, wireline and wireless communications which we utilize in a number of product and service offerings. In particular, we offer a spectrum of broadband equipment and services to the managed services market, which is comprised of enterprises with a requirement to connect a large number of geographically dispersed locations with reliable, scalable, and cost-effective applications, such as credit card verification, inventory tracking and control, and broadcast video. We provide broadband network services and systems to the international and domestic enterprise markets and satellite broadband Internet access to North American consumers, which we refer to as the Consumer market. In addition, we provide networking systems to customers for mobile satellite, telematics and wireless backhaul systems. These services are generally provided on a contract or project basis and may involve the use of proprietary products engineered by us.

Strategic Initiatives and Their Impact on Our Results of Operations

For the three months ended March 31, 2010 and 2009, net loss attributable to HNS was $5.6 million and $4.9 million, respectively. The increase in our net loss for the three months ended March 31, 2010 was attributed to three main factors. First, our selling, general and administrative expenses increased by $4.9 million, mainly associated with our North America operations as we increased our effort in promoting our consumer business. Second, we recognized $3.6 million of interest expense on our $150 million senior notes maturing on April 15, 2014 (the “2009 Senior Notes”), which were issued in May 2009. Third, our tax expense increased by $1.9 million resulting from state income taxes and income earned from our foreign subsidiaries. The increase in the net loss was partially offset by higher profit margin of $6.6 million for the three months ended March 31, 2010.

Technology—We incorporate advances in technology to reduce costs and to increase the functionality and reliability of our products and services. Through the usage of advanced spectrally efficient modulation and coding methodologies, such as DVB-S2, and proprietary software web acceleration and compression techniques, we continue to improve the efficiency of our networks. In addition, we invest in technologies to enhance our system and network management capabilities, specifically our managed services for enterprises. We also continue to invest in next generation technologies that can be applied to our future products and services.

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Acquisitions, Strategic Alliances and Divestitures—We continue to focus on expanding the identified markets for our products, services and network solutions in our North America Broadband, International Broadband and Telecom Systems segments. Consistent with our strategy to grow and improve our financial position, we also review our competitive position on an ongoing basis and, from time to time, consider various acquisitions, strategic alliances and divestitures which we believe would be beneficial to our business. We, from time to time, consider various alternatives related to the ownership structure of a new satellite, capacity features and other factors that would promote long term growth while meeting the needs of our customers.

In June 2009, we entered into an agreement with Space Systems/Loral (“SS/L”), Inc. to manufacture a next-generation, high throughput geostationary satellite (“Jupiter”). Jupiter will employ a multi-spot beam, bent pipe Ka-band architecture and will provide additional capacity for the HughesNet service in North America. We are obligated to pay an aggregate of approximately $252.0 million for the construction of Jupiter and have agreed to make installment payments to SS/L upon the completion of each milestone set forth in the agreement. We anticipate launching Jupiter in the first half of 2012. In connection with the construction of Jupiter, we have entered into a contract with Barrett Xplore Inc. (“Barrett”), whereby Barrett has agreed to lease user beams and purchase gateways and terminals for the Jupiter satellite that are designed to operate in Canada.

Key Business Metrics

Business Segments—We divide our operations into five distinct segments—(i) the North America Broadband segment; (ii) the International Broadband segment; (iii) the Telecom Systems segment; (iv) the HTS Satellite segment; and (v) the Corporate segment. Within the North America Broadband segment, sales are attributed to the Consumer group, which delivers broadband internet service to consumer customers, and the Enterprise group, which provides satellite, wireline and wireless communication networks and services to enterprises. The International Broadband segment consists of our international service companies and provides managed network services and equipment to enterprise customers and broadband service providers worldwide. The Telecom Systems segment consists of the Mobile Satellite Systems group, the Telematics group, and the Terrestrial Microwave group. The Mobile Satellite Systems group provides turnkey satellite ground segment systems to mobile system operators. The Telematics group previously provided development engineering and manufacturing services to Hughes Telematics, Inc. (“HTI”). However, as a result of the unfavorable impact of the economy on the automobile industry, HTI terminated substantially all of the development engineering and manufacturing services with us in August 2009. We expect our future revenue from the Telematics group to be insignificant. The Terrestrial Microwave group provides point-to-multipoint microwave radio network systems that are used for both cellular backhaul and broadband wireless access. The HTS Satellite segment, which is a new segment starting in 2010, consists of activities related to the development, construction and launch of high throughput satellites, including our Jupiter satellite, which is currently under construction and/or the provision of satellite capacity. The Corporate segment includes our corporate offices and assets not specifically related to another business segment. Due to the complementary nature and common architecture of our services and products across our business segments, we are able to leverage our expertise and resources within our various operating units to yield significant cost efficiencies.

Revenues—We generate revenues from the sale and financing of hardware and the provision of services. In our North America and International Broadband segments, we generate revenues from services and hardware. In our Telecom Systems segment, we generate revenues primarily from the development and sale of hardware. Some of our enterprise customers purchase equipment separately and operate their own networks. These customers include large enterprises, incumbent local exchange carriers, governmental agencies and resellers. Contracts for our services vary in length depending on the customers’ requirements.

Services—Our services revenue is varied in nature and includes total turnkey communications services, terminal relocation, maintenance and changes, transponder capacity and multicast or broadcast services. Our services are offered on a contractual basis, which vary in length based on the particular end market. Typically, our large enterprise customers enter into a three- to five-year contract, and our consumer customers enter into a 24-month contract. We bill and recognize service revenues on a monthly per site basis. For enterprise customers who receive services from our network operations, our services include the following:

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Service Type	Description
Broadband connectivity	•	Provide basic transport, intranet connectivity services and internet service provider services
Broadband connectivity	•	Applications include high-speed internet access, IP VPN, multicast file delivery and streaming, point-of-sale credit transactions, enterprise back-office communications, and satellite backup for frame relay service and other terrestrial networks
Managed network services	•	Provide one-stop turnkey suite of bundled services that include wireline and wireless satellite networks
Managed network services	•	Includes network design program management, installation management, network and application engineering services, proactive network management, network operations, field maintenance and customer care
ISP services and hosted applications	•	Provide internet connectivity and hosted customer-owned and managed applications on our network facilities
	•	Provide the customer application services developed by us or in conjunction with our service partners
	•	Includes internet access, e-mail services, web hosting and online payments
Digital media services	•	Digital content management and delivery including video, online learning and digital signage applications
Customized business solutions	•	Provide customized, industry-specific enterprise solutions that can be applied to multiple businesses in a given industry

Our services to enterprise customers are negotiated on a contract-by-contract basis with price varying based on numerous factors, including number of sites, complexity of system and scope of services provided. We have the ability to integrate these service offerings to provide comprehensive solutions for our customers. We also provide managed services to our customers who operate their own dedicated network facilities and charge them a management fee for the operation and support of their networks.

Hardware—We offer our enterprise customers the option to purchase their equipment up front or to finance the sale through a third-party leasing company as part of their service agreement under which payments are made over a fixed term. Our consumer customers have the option to purchase the equipment up front or, beginning in September 2008, to rent the equipment with a 24-month service contract. Hardware revenues of the North American Enterprise group and International Broadband segment are derived from: (i) network operating centers; (ii) radio frequency terminals (earth stations); (iii) VSAT components including indoor units, outdoor units, and antennas; (iv) voice, video and data appliances; (v) routers and DSL modems; and (vi) system integration services to integrate all of the above into a system.

We also provide specialized equipment to our Mobile Satellite Systems and Terrestrial Microwave customers. Through large multi-year contracts, we develop and supply turnkey networking and terminal systems for various operators who offer mobile satellite-based services. We also supply microwave-based networking equipment to mobile operators for back-hauling their data from cellular telephone sites to their switching centers. In addition, local exchange carriers use our equipment for broadband access traffic from corporations bypassing local phone companies. The size and scope of these projects vary from year to year by customer and do not follow a pattern that can be reasonably predicted.

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Market trends impacting our revenues—The following table presents our revenues by end market for the three months ended March 31, 2010 and 2009 (dollars in thousands):

	Three Months Ended
	March 31,				Variance
	2010		2009		Amount			%
Revenues:
Services revenues	$	186,890	$	161,904	$	24,986			15.4%
Hardware sales		55,253		77,850		(22,597	)		(29.0)%
Total revenues	$	242,143	$	239,754	$	2,389			1.0%
Revenues by end market:
North America Broadband segment:
Consumer	$	113,354	$	98,729	$	14,625			14.8%
Enterprise		60,641		66,879		(6,238	)		(9.3)%
Total North America Broadband segment		173,995		165,608		8,387			5.1%
International Broadband segment		43,456		44,884		(1,428	)		(3.2)%
Telecom Systems segment:
Mobile Satellite Systems		19,405		18,466		939			5.1%
Telematics		301		7,069		(6,768	)		(95.7)%
Terrestrial Microwave		4,986		3,727		1,259			33.8%
Total Telecom Systems segment		24,692		29,262		(4,570	)		(15.6)%
Total revenues	$	242,143	$	239,754	$	2,389			1.0%

The following table presents our churn rate, average revenue per unit (“ARPU”), average monthly gross subscriber additions, and subscribers as of or for the three months ended March 31, 2010 and 2009:

	As of or For the
	Three Months Ended March 31,				Variance
	2010		2009		Amount		%
Churn rate		1.98%		2.29%		(0.31)%		(13.5)%
ARPU	$	72	$	68	$	4		5.9%
Average monthly gross subscriber additions		19,200		17,700		1,500		8.5%
Subscribers		530,800		455,100		75,700		16.6%

North America Broadband Segment

Revenue from our Consumer group for the three months ended March 31, 2010 increased by 14.8% to $113.4 million compared to the same period in 2009. The growth in our Consumer group has been driven primarily by three factors: (i) the substantial growth in the number of subscribers arising from increased consumer awareness of our products and services in geographic areas that have historically been underserved by DSL and cable; (ii) value-added services and mix of plans resulting in an increase in average monthly revenue per subscriber; and (iii) improvements in customer retention as noted by the reduction in the churn rate.

As of March 31, 2010 and 2009, we achieved a total subscription base of 530,800 and 455,100, respectively, which included 30,100 and 18,900, respectively, subscribers in our small/medium enterprise and wholesale businesses. ARPU is used to measure average monthly consumer subscription service revenues on a per subscriber basis. For the three months ended March 31, 2010, ARPU was $72 compared to $68 for the same period in 2009.

Revenue from our North American Enterprise group for the three months ended March 31, 2010 decreased by 9.3% to $60.6 million compared to the same period in 2009. The decrease was primarily due to lower hardware sales resulting from the adverse overall market and economy, as well as changes in the product mix where the emphasis on managed services has led to lower upfront hardware revenue. Enterprise service revenue is generally characterized by long term contracts, and our enterprise backlog continues to increase as a result of new orders for enterprise services.

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International Broadband Segment

Revenue from our International Broadband segment for the three months ended March 31, 2010 decreased slightly to $43.5 million compared to the same period in 2009, primarily due to delays in customer buying decisions impacting new hardware orders. This decrease was offset by the continued growth of our expanding array of solutions and global services to enterprises and government organizations in Brazil and the Africa/Middle East region, and $4.2 million resulting from the favorable impact of currency exchange due to the depreciation of U.S. dollars.

Telecom Systems Segment

Revenue from our Telecom Systems segment for the three months ended March 31, 2010 decreased by 15.6% to $24.7 million compared to the same period in 2009. The decrease in revenue was primarily due to the reduction in revenue from our Telematics group.

Cost of Services— Our cost of services primarily consists of transponder capacity leases, hub infrastructure, customer care, wireline and wireless capacity, depreciation expense related to network infrastructure and capitalized hardware and software, and the salaries and related employment costs for those employees who manage our network operations and other project areas. These costs are dependent on the number of customers served and have increased relative to our growth. We continue to execute a number of cost containment and efficiency initiatives that were implemented in previous years. In addition, the migration to a single upgraded platform for ongoing consumer customers from our North America Broadband segment has enabled us to leverage our satellite bandwidth and network operation facilities to achieve further cost efficiencies. The costs associated with transponder capacity leases for the Consumer group are expected to decline as more customers are added to the SPACEWAY network.

Cost of Hardware Products Sold—We outsource a significant portion of the manufacturing of our hardware for our North America and International Broadband and Telecom Systems segments to third-party contract manufacturers. Our cost of hardware products sold relates primarily to direct materials and subsystems (e.g., antennas), salaries and related employment costs for those employees who are directly associated with the procurement and manufacture of our products and other items of indirect overhead incurred in the procurement and production process. Cost of hardware products sold also includes certain engineering and hardware costs related to the design of a particular product for specific customer programs. In addition, certain software development costs are capitalized in accordance with Accounting Standards Codification 985-20 “Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed,” and amortized to cost of hardware products sold over their estimated useful lives, not to exceed five years. As we have developed new product offerings, we have reduced product costs due to higher levels of component integration, design improvements and volume increases.

Subscriber acquisition costs (“SAC”) are associated with our Consumer group and are comprised of three elements: (i) the subsidy for the cost of hardware and related installation; (ii) certain sales and marketing expense; and (iii) dealer and customer service representative commissions on new installations/activations. The subsidy for cost of hardware and related cost of installation is deferred and amortized over the initial contract period or the useful life of the hardware as a component of cost of hardware products sold for hardware related sales or cost of services for activities related to the consumer rental program. The portion of SAC related to sales and marketing is expensed as incurred. Dealer and customer service representative commissions are deferred and amortized over the initial contract period as a component of sales and marketing expense.

Selling, General and Administrative (“SG&A”)—Selling expenses primarily consist of the salaries, commissions, related benefit costs of our direct sales force and marketing staff, advertising, channel compensations on new activations which are deferred and amortized over the initial consumer contract period, travel, allocation of facilities, and other directly related overhead costs for our domestic and international businesses. General and administrative expenses include bad debt expense and salaries and related employee benefits for employees associated with common supporting functions, such as accounting and finance, risk management, legal, information technology, administration, human resources, and senior management. Selling, general, and administrative costs also include facilities costs, third-party service providers’ costs (such as outside tax and legal counsel, and insurance providers), bank fees related to credit card processing charges and depreciation of fixed assets.

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Research and Development (“R&D”)—R&D expenses primarily consist of the salaries of certain members of our engineering staff plus an applied overhead charge. R&D expenses also include engineering support for existing platforms and development efforts to build new products and software applications, subcontractors, material purchases and other direct costs in support of product development.

Results of Operations

Revenues

	Three Months Ended
	March 31,				Variance
(Dollars in thousands)	2010		2009		Amount			%
Services revenues	$	186,890	$	161,904	$	24,986			15.4%
Hardware sales		55,253		77,850		(22,597	)		(29.0)%
Total revenues	$	242,143	$	239,754	$	2,389			1.0%
% of revenue to total revenues:
Services revenues		77.2%		67.5%
Hardware sales		22.8%		32.5%

Services Revenues

The increase in services revenues was attributable to our North America Broadband segment. Revenues from our Consumer group increased by $18.8 million to $106.0 million for the three months ended March 31, 2010 compared to $87.2 million for the same period in 2009 resulting primarily from the increase in our consumer subscriber base. The increase in the Consumer group was partly due to a larger percentage of our customers utilizing the consumer rental program, for which we recognized $7.1 million and $1.9 million of services revenues for the three months ended March 31, 2010 and 2009, respectively.

In addition, revenue from our North America Enterprise group increased by $6.4 million to $47.6 million for the three months ended March 31, 2010 compared to $41.2 million for the same period in 2009. The increase reflected the growth in our managed services business, new contracts awarded in prior periods that provided incremental service revenue in the first quarter of 2010 and the growth in our small/medium and wholesale subscriber base.

Furthermore, services revenue from our International Broadband segment increased by $5.8 million to $31.9 million for the three months ended March 31, 2010 from $26.1 million for the same period in 2009, primarily due to the continued growth of our expanding array of solutions and global services to enterprises and government organizations in Brazil and the Africa/Middle East region. Also, contributing to the increase was $3.8 million as a result of the favorable impact of currency exchange due to the depreciation of U.S. dollars.

Partially offsetting the increase was a decrease in revenue from our Telecom Systems segment of $6.0 million to $1.4 million for the three months ended March 31, 2010 compared to $7.4 million for the same period in 2009, mainly as a result of a significant reduction in revenues from the Telematics group.

Hardware Sales

Hardware sales decreased mainly due to a revenue decrease of $16.8 million from our North America Broadband segment to $20.4 million for the three months ended March 31, 2010 compared to $37.2 million for the same period in 2009.

Despite the growth in the subscriber base, hardware sales in the Consumer group decreased by $4.1 million to $7.4 million for the three months ended March 31, 2010 compared to $11.5 million for the same period in 2009. The decrease was due to an increase in (i) the utilization of the consumer rebate program which reduced hardware revenues and (ii) customers utilizing the consumer rental program, which revenues are accounted for as services revenues, instead of the previously offered deferred purchase plan, which revenues were accounted for as hardware sales.

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Hardware revenue from our North America Enterprise group also decreased by $12.7 million to $13.0 million for the three months ended March 31, 2010 compared to $25.7 million for the same period in 2009. The decrease was due to a lower volume of shipments as customers delayed their buying decisions as well as the changes in the product mix where the emphasis on managed services has led to lower upfront hardware revenue and an increase in recurring service revenue.

In addition, hardware sales from our International Broadband segment decreased by 7.2 million to $11.6 million for the three months ended March 31, 2010 compared to $18.8 million for the same period in 2009. The decrease was primarily due to the completion of the rollout of terminal shipments on a multi-year contract for a large lottery operator in the United Kingdom and a decrease in shipment volume to our enterprise customers as delays in customer buying decisions impacting new hardware orders. These decreases were slightly offset by a $0.4 million favorable impact of currency exchange due to the depreciation of U.S. dollars.

Hardware sales from our Telecom Systems segment increased by $1.4 million to $23.3 million for the three months ended March 31, 2010 compared to $21.9 million for the same period in 2009, partly due to the change in the mix of customer programs in the Mobile Satellite group.

Cost of Revenues

	Three Months Ended
	March 31,				Variance
(Dollars in thousands)	2010		2009		Amount			%
Cost of services	$	115,650	$	106,546	$	9,104			8.5%
Cost of hardware products sold		60,886		74,205		(13,319	)		(17.9)%
Total cost of revenues	$	176,536	$	180,751	$	(4,215	)		(2.3)%

Cost of Services

The increase in cost of services reflects the growth in our consumer subscriber base and our managed services businesses in the North America Broadband segment. Support costs for the growth included customer service, wireline and wireless costs, field services, network operations and depreciation expense, which increased by $11.8 million for the three months ended March 31, 2010 compared to the same period in 2009. The increases were partially offset by lower transponder capacity lease expense. We expect transponder capacity lease expense for the Consumer group to continue to decrease as more customers are placed on the SPACEWAY network.

In addition, cost of services from our International Broadband segment increased by $4.8 million, primarily due to an increase in the number of enterprise and global service sites in service across Brazil and the Africa/Middle East region. The increase in cost of services was partially offset by a decrease of $4.7 million in cost of services from the Telematics group.

Cost of Hardware Products Sold

Cost of hardware products sold decreased in conjunction with the reduction in hardware sales. The decrease was mainly attributable to a decrease in cost of hardware products sold from our North America Broadband segment of $10.5 million to $35.1 million for the three months ended March 31, 2010 compared to $45.6 million for the same period in 2009. Partially offsetting the decrease in the North America Broadband segment was an increase in (i) the upfront recognition of hardware costs, which were previously amortized, as a resulted of a change in the consumer distribution process and (ii) repair center costs, which was primarily driven by the expansion of the hardware refurbishment effort related to the reuse of equipment returned due to churn, warranty and other factors.

In addition, cost of hardware products sold from our International Broadband segment decreased by $4.6 million to $8.2 million for the three months ended March 31, 2010 compared to $12.8 million for the same period in 2009, primarily due to a decrease in hardware sales.

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The decrease in cost of hardware products sold was partially offset by the increase of $1.8 million in costs from our Telecom Systems segment resulting mostly from the change in the mix of customer programs in the Mobile Satellite group.

Selling, General and Administrative Expense

	Three Months Ended
	March 31,				Variance
(Dollars in thousands)	2010		2009		Amount		%
Selling, general and administrative expense	$	48,680	$	43,797	$	4,883		11.1%
% of revenue		20.1%		18.3%

SG&A expense increased mainly due to higher: (i) marketing costs of $3.5 million, primarily in our North America operations as we increased targeted spending for our consumer business and (ii) bad debt expense and bank fees for the three months ended March 31, 2010 compared to the same period in 2009. From time to time, we modify our marketing strategy to attract new customers, which may impact our SG&A expense.

Research and Development

	Three Months Ended
	March 31,				Variance
(Dollars in thousands)	2010		2009		Amount		%
Research and development	$	4,915	$	5,351	$	(436)		(8.1)%
% of revenue		2.0%		2.2%

R&D decreased due to a reduction in development activities in our North America Broadband segment. This reduction was partially offset by a $0.8 million increase in development activities related to the construction of our Jupiter satellite.

Amortization of Intangible Assets

	Three Months Ended
	March 31,				Variance
(Dollars in thousands)	2010		2009		Amount			%
Amortization of intangible assets	$	702	$	1,385	$	(683	)		(49.3)%
% of revenue		0.3%		0.6%

Amortization of intangible assets decreased primarily due to the impact of certain fully depreciated intangible assets.

Operating Income

	Three Months Ended
	March 31,				Variance
(Dollars in thousands)	2010		2009		Amount		%
Operating income	$	11,310	$	8,470	$	2,840		33.5%
% of revenue		4.7%		3.5%

The increase in operating income was attributable to higher profit margin of $6.6 million as a result of higher revenues and lower cost of revenues for the months ended March 31, 2010 compared to the same period in 2009. The increase was partially offset by higher selling, general and administrative expenses of $4.9 million, mainly associated with our North America operations, as we increased our effort in promoting our consumer business.

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Interest Expense

	Three Months Ended
	March 31,				Variance
(Dollars in thousands)	2010		2009		Amount		%
Interest expense	$	16,105	$	13,829	$	2,276		16.5%

Interest expense primarily relates to interest on the 2006 Senior Notes, the 2009 Senior Notes and the Term Loan Facility less capitalized interest associated with the construction of our satellites. The increase in interest expense was primarily due to the recognition of interest, accretion of the original issue discount and amortization of the debt issuance cost of the 2009 Senior Notes, which was partially offset by $2.0 million of capitalized interest associated with the construction of the Jupiter satellite for the three months ended March 31, 2010.

Interest Income

	Three Months Ended
	March 31,				Variance
(Dollars in thousands)	2010		2009		Amount		%
Interest income	$	553	$	227	$	326		143.6%

The increase in interest income was primarily due to interest earned on certain notes and deferred trade receivables.

Income Tax (Expense) Benefit

	Three Months Ended
	March 31,					Variance
(Dollars in thousands)	2010			2009		Amount			%
Income tax (expense) benefit	$	(1,217	)	$	668	$	(1,885	)		(282.2)%

Changes in income tax (expense) benefit are generally attributable to state income taxes and income earned from our foreign subsidiaries. Our income tax expense was partially offset by $0.2 million for the three months ended March 31, 2010 compared to an offset of $1.2 million for the same period in 2009 of income tax benefit generated by our Indian subsidiary as a result of it being engaged in telecommunications infrastructure development. Indian tax law provides for a deduction of 100% of profits and gains derived from qualifying infrastructure businesses for ten consecutive assessment years. This benefit is available to us through the tax assessment year of 2015/2016.

Liquidity and Capital Resources

	Three Months Ended
	March 31,						Variance
(Dollars in thousands)	2010			2009			Amount			%
Net cash provided by (used in):
Operating activities	$	14,965		$	33,428		$	(18,463	)		(55.2)%
Investing activities	$	(79,361	)	$	(30,866	)	$	48,495			157.1%
Financing activities	$	(2,674	)	$	(1,645	)	$	1,029			62.6%

Net Cash Flows from Operating Activities

The decrease in net cash provided by operating activities for the three months ended March 31, 2010 was primarily due to changes in our operating assets and liabilities of $25.9 million, which was partially offset by the increase in our net

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income of $7.1 million prior to noncash depreciation and amortization expense of $30 million for the three months ended March 31, 2010.

Net Cash Flows from Investing Activities

The increase in net cash used in investing activities was mainly due to an increase in capital expenditures of $35.8 million set forth in the table below and (ii) a net increase in marketable securities of $12.6 million.

Capital expenditures for the three months ended March 31, 2010 and 2009 are shown as follows (in thousands):

	Three Months Ended
	March 31,
	2010		2009		Variance
Capital expenditures:
Jupiter program	$	31,638	$	-	$	31,638
Capital expenditures—VSAT		27,768		23,510		4,258
Capital expenditures—other		3,589		2,490		1,099
Capitalized software		3,166		4,391		(1,225	)
SPACEWAY program		673		548		125
VSAT operating lease hardware		-		77		(77	)
Total capital expenditures	$	66,834	$	31,016	$	35,818

Net Cash Flows from Financing Activities

The increase in net cash used in financing activities for the three months ended March 31, 2010 was due to the additional debt issuance costs of $1.7 million associated with the refinancing of our revolving credit facility in March 2010, which was partially offset by a decrease in the repayments of long-term debt.

Future Liquidity Requirements

As of March 31, 2010, our Cash and cash equivalents and Marketable securities were $162.0 million and our total debt was $720.8 million. We are leveraged as a result of our indebtedness.

On March 16, 2010, we entered into a credit agreement with JP Morgan Chase Bank, N.A. and Barclays Capital to amend and restate our senior secured $50 million revolving credit facility (the “Revolving Credit Facility”). Pursuant to the terms of the agreement, among other changes, the maturity date of the Revolving Credit Facility was extended to March 16, 2014, subject to an early maturity date of 91 days prior to March 16, 2014 in the event our 2009 and 2006 Senior Notes and our Term Loan Facility (as defined below) are not (i) repaid in full or (ii) refinanced with new debt (or amended) with maturities of no earlier than 91 days after March 16, 2014. The terms of the Revolving Credit Facility was amended to be: (i) in respect of the interest rate, at our option, the ABR (as defined in the Revolving Credit Facility) plus 2.00% or the Adjusted LIBOR (as defined in the Revolving Credit Facility) plus 3.00% and (ii) in respect of the participation fee for outstanding letters of credit, 3.00% per annum, in each case subject to downward adjustment based on our leverage ratio. As of March 31, 2010, the total outstanding letters of credit and the available borrowing capacity under the Revolving Credit Facility was $2.1 million and $47.9 million, respectively. As of March 31, 2010, the Revolving Credit Facility was rated Baa3 and BB- by Moody’s and S&P, respectively.

In May 2009, we, along with our subsidiary, HNS Finance Corp., as co-issuer, completed a private debt offering of $150.0 million of 9.50% senior notes maturing on April 15, 2014 (the “2009 Senior Notes”). The 2009 Senior Notes are guaranteed on a senior unsecured basis by each of our current and future domestic subsidiaries that guarantee any of our indebtedness or indebtedness of our other subsidiary guarantors. Interest on the 2009 Senior Notes is accrued from April 15, 2009 and is paid semi-annually in arrears on April 15 and October 15 of each year, beginning on October 15, 2009. We received net proceeds of approximately $133.6 million from the offering. We have used and intend to continue to use these

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net proceeds for general corporate purposes, which could include working capital needs, corporate development opportunities (which may include acquisitions), capital expenditures and opportunistic satellite fleet expansion. As of March 31, 2010, the 2009 Senior Notes were rated B1 and B by Moody’s and Standard & Poor (“S&P”), respectively. As of March 31, 2010, we had recorded $6.5 million of accrued interest payable related to the 2009 Senior Notes.

In February 2007, we borrowed $115 million from a syndicate of banks pursuant to a senior unsecured credit agreement (the “Term Loan Facility”), which matures on April 15, 2014. The Term Loan Facility is guaranteed, on a senior unsecured basis, by all of our existing and future subsidiaries that guarantee our existing 2006 Senior Notes and the Revolving Credit Facility. The interest on the Term Loan Facility is paid quarterly at Adjusted LIBOR (as defined in the Term Loan Facility) plus 2.50%. To mitigate the variable interest rate risk associated with the Term Loan Facility, we entered into an agreement to swap the Adjusted LIBOR for a fixed rate of 5.12% per annum (the “Swap Agreement”). As a result, the Term Loan Facility has a fixed interest rate of 7.62% per annum and is subject to certain mandatory and optional prepayment provisions and contains negative covenants and events of default, in each case, substantially similar to those provisions contained in the indentures governing the Senior Notes. The net interest payments on the Term Loan Facility are estimated to be approximately $8.8 million for each of the years ending December 31, 2010 through 2013 and $3.3 million for the year ending December 31, 2014. As of March 31, 2010, the Term Loan was rated B1 and B by Moody’s and S&P, respectively.

In April 2006, we issued $450 million of 9.50% senior notes maturing on April 15, 2014 (the “2006 Senior Notes”), which are guaranteed on a senior unsecured basis by us and each of our current and future domestic subsidiaries that guarantee any of our indebtedness or indebtedness of our other subsidiary guarantors. Interest on the 2006 Senior Notes is paid semi-annually in arrears on April 15 and October 15. As of March 31, 2010, we had recorded $19.6 million of accrued interest payable related to the 2006 Senior Notes. As of March 31, 2010, the 2006 Senior Notes were rated B1 and B by Moody’s and S&P, respectively.

Although the terms and covenants with respect to the 2009 Senior Notes are substantially identical to the 2006 Senior Notes, the 2009 Senior Notes were issued under a separate indenture and do not vote together with the 2006 Senior Notes. Each of the indentures governing the 2006 Senior Notes and 2009 Senior Notes (collectively, the “Senior Notes”), the agreement governing the amended Revolving Credit Facility and the agreement governing the Term Loan Facility require us to comply with certain affirmative and negative covenants: (i) in the case of the indentures, for so long as any Senior Notes are outstanding; (ii) in the case of the amended Revolving Credit Facility, for so long as the amended Revolving Credit Facility is in effect; and (iii) in the case of the Term Loan Facility, for so long as the Term Loan Facility remains outstanding. Negative covenants contained in these agreements include limitations on our ability and/or certain of our subsidiaries’ ability to incur additional indebtedness; issue redeemable stock and subsidiary preferred stock; incur liens; pay dividends or distributions or redeem or repurchase capital stock; prepay, redeem or repurchase debt; make loans and investments; enter into agreements that restrict distributions from our subsidiaries; sell assets and capital stock of our subsidiaries; enter into certain transactions with affiliates; consolidate or merge with or into, or sell substantially all of our assets to, another person; and enter into new lines of business. In addition to these negative covenants, the amended Revolving Credit Facility, the indentures governing the Senior Notes and/or the agreement governing the Term Loan Facility contain affirmative covenants that require us to: (i) preserve our businesses and properties; (ii) maintain insurance over our assets; (iii) pay and discharge all material taxes when due; and (iv) furnish the lenders’ administrative agent our financial statements for each fiscal quarter and fiscal year, certificates from a financial officer certifying that no Event of Default or Default has occurred during the fiscal period being reported, litigation and other notices, compliance with laws, maintenance of records and other such customary covenants. Management believes that the Company was in compliance with all of its debt covenants as of March 31, 2010.

Our subsidiaries primarily meet their working capital requirements through their respective operations or the utilization of local credit facilities. Occasionally, the subsidiaries utilize temporary advances to/from us to meet temporary cash requirements. Certain of our foreign subsidiaries maintain various revolving lines of credit and term loans funded by their respective local banks in local currency. As of March 31, 2010, the aggregate balance outstanding under these loans was $3.7 million. Our subsidiaries may be restricted from paying dividends to us under the terms of these loans.

The Company and its subsidiaries are separate and distinct legal entities and, except for our existing and future subsidiaries that are or will be guarantors of the Senior Notes, the Term Loan Facility and the Revolving Credit Facility, they will have no obligation, contingent or otherwise, to pay amounts due under the Senior Notes, Term Loan Facility and the Revolving Credit Facility, or to make any funds available to pay those amounts, whether by dividend, distribution, loan or other payment.

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In July 2006, we entered into an agreement with 95 West Co., Inc. (“95 West Co.”) and its parent, Miraxis License Holdings, LLC (“MLH”), pursuant to which 95 West Co. and MLH agreed to provide a series of coordination agreements allowing the Company to operate SPACEWAY 3 at the 95° West Longitude orbital slot where 95 West Co. and MLH have higher priority rights. Our remaining obligations with 95 West Co. as of March 31, 2010 are subject to conditions in the agreement including our ability to operate SPACEWAY 3, and are as follows: $0.75 million for the year ending December 31, 2010 and $1.0 million for each of the years ending December 31, 2011 through 2016.

In June 2009, we entered into an agreement with SS/L, under which we are obligated to pay an aggregate of approximately $252.0 million for the construction of our Jupiter satellite and have agreed to make installment payments to SS/L upon the completion of each milestone set forth in the agreement. As of March 31, 2010, the remaining obligation for the construction of Jupiter was $184.1 million. We anticipate launching Jupiter in the first half of 2012. In connection with the construction of Jupiter, we have entered into a contract with Barrett, whereby Barrett has agreed to lease user beams and purchase gateways and terminals for the Jupiter satellite that are designed to operate in Canada.

Based on our current and anticipated levels of operations and conditions in our markets and industry, we believe that our cash on hand, cash flow from operations and availability under our Revolving Credit Facility will enable us to meet our requirements for working capital, capital expenditures, debt service, research and development, remaining ground infrastructure expenditures for SPACEWAY 3, new acquisitions, initial milestone payments for development of our Jupiter satellite and, to a lesser extent, other on-going capital and operating expenditures. However, our ability to fund these needs and to comply with the financial covenants under our debt agreements depends on our future operating performance and cash flow, which is subject to prevailing economic conditions, the level of spending by our customers and other factors, many of which are beyond our control. Any future acquisitions, joint ventures, acquisition of a satellite, or other similar transactions will likely require additional capital and there can be no assurance that any such capital will be available to us on acceptable terms, if at all.

Contractual Obligations

On March 16, 2010, we entered into an amended and restated credit agreement with JP Morgan Chase Bank, N.A. and Barclays Capital to amend and restate our senior secured $50 million revolving credit facility (the “Revolving Credit Facility”). See the Future Liquidity Requirements section for the discussion of the Revolving Credit Facility. There have been no other material changes to our contractual obligations since December 31, 2009, as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009.

Commitments and Contingencies

For a discussion of commitments and contingencies, see Note 17—Commitments and Contingencies to our unaudited condensed consolidated financial statements included in Part I-Item 1 of this report.

Off-Balance Sheet Arrangements

We are required to issue standby letters of credit and bonds primarily to support certain sales of our equipment to international government customers. These letters of credit are either bid bonds to support contract bids, or to support advance payments made by customers upon contract execution and prior to equipment being shipped, or guarantees of performance issued in support of its warranty obligations. Bid bonds typically expire upon the issue of the award by the customer. Advance payment bonds expire upon receipt by the customer of equipment, and performance bonds typically expire when the warranty expires, generally one year after the installation of the equipment.

As of March 31, 2010, we had $16.4 million of contractual obligations to customers and other statutory/governmental agencies, which were secured by letters of credit issued through us and our subsidiaries’ credit facilities. Of this amount, $2.1 million was issued under the Revolving Credit Facility; $1.6 million was secured by restricted cash; $1.0 million related to insurance bonds; and $11.7 million was issued under credit arrangements available to our Indian and Brazilian subsidiaries. Certain letters of credit issued by our Indian subsidiaries are secured by their assets.

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Seasonality

Like many communications infrastructure equipment vendors, a significant amount of our hardware sales occur in the second half of the year due to our customers’ annual procurement and budget cycles. Large enterprises and operators usually allocate their capital expenditure budgets at the beginning of their fiscal year (which often coincides with the calendar year). The typical sales cycle for large complex system procurements is 6 to 12 months, which often results in the customer expenditure occurring towards the end of the year. Customers often seek to expend the budgeted funds prior to the end of the year and the next budget cycle. As a result, interim results are not indicative of the results to be expected for the full year.

Inflation

Historically, inflation has not had a material effect on our results of operations.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. We evaluate these estimates and assumptions on an ongoing basis. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions and conditions. For a description of our critical accounting policies, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as included in our Annual Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission on March 3, 2010 (File number 333-138009).

New Accounting Pronouncements

For a discussion of new accounting pronouncements, see Note 1—Organization, Basis of Presentation and Summary of Significant Accounting Policies to the Company’s unaudited condensed consolidated financial statements included in Part I-Item 1 of this report.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

The following discussion and the estimated amounts generated from the sensitivity analyses referred to below include forward-looking statements of market risk which assume for analytical purposes that certain adverse market conditions may occur. Actual future market conditions may differ materially from such assumptions because the amounts noted below are the result of analyses used for the purpose of assessing possible risks and the mitigation thereof. Accordingly, you should not consider the forward-looking statements as projections by us of future events or losses.

General

Our cash flows and earnings are subject to fluctuations resulting from changes in foreign currency exchange rates, interest rates and changes in the market value of our equity investments. We manage our exposure to those market risks through internally established policies and procedures and, when deemed appropriate, through the use of derivative financial instruments. We enter into derivative instruments only to the extent considered necessary to meet our risk management objectives and do not enter into derivative contracts for speculative purposes.

Foreign Currency Risk

We generally conduct our business in United States dollars. However, as our international business is conducted in a variety of foreign currencies, it is exposed to fluctuations in foreign currency exchange rates. Our objective in managing our exposure to foreign currency changes is to reduce earnings and cash flow volatility associated with foreign exchange rate fluctuations. Accordingly, we may enter into foreign exchange contracts to mitigate risks associated with foreign currency denominated assets, liabilities, commitments and anticipated foreign currency transactions. As of March 31, 2010, we had an estimated $12.5 million of foreign currency denominated receivables and payables outstanding, and $2.0 million of hedge

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contracts in place to partially mitigate foreign currency risk. The differences between the face amount of the foreign exchange contracts and their estimated fair values were not material as of March 31, 2010.

The impact of a hypothetical 10% adverse change in exchange rates on the fair value of foreign currency denominated net assets and liabilities of our foreign subsidiaries would be an estimated loss of $7.3 million as of March 31, 2010.

Marketable Securities Risk

We have a significant amount of cash that is invested in marketable securities which is subject to market risk due to interest rate fluctuations. We have established an investment policy which governs our investment strategy and stipulates that we diversify investments among United States Treasury securities and other high credit quality debt instruments that we believe to be low risk. We are averse to principal loss and seek to preserve our invested funds by limiting default risk and market risk.

Interest Rate Risk

Our Senior Notes and outstanding borrowings related to very small aperture terminal hardware financing arrangements are not subject to interest rate fluctuations because the interest rate is fixed for the term of the instrument. We are subject to variable interest rates on certain other debt including the Revolving Credit Facility and the Term Loan Facility. To the extent we draw against the credit facility, increases in interest rates would have an adverse impact on our results of operations.

To mitigate the variable interest rate risk associated with the Term Loan Facility, we entered into the Swap Agreement to swap the variable LIBOR based interest on the Term Loan Facility for a fixed interest rate of 5.12% per annum. The net interest payments based on the Swap Agreement and the Term Loan Facility are paid quarterly and estimated to be approximately $8.8 million for each of the years ending December 31, 2010 through 2013 and $3.3 million for the year ending December 31, 2014. The security for our interest obligation under the Swap Agreement is the same as the security for the Revolving Credit Facility described in Note 8—Debt to our unaudited condensed consolidated financial statements included in Part I-Item 1 in this report.

Market Concentration and Credit Risk

We provide services and extend credit to a number of equipment customers, service providers, and a large number of consumers, both in the United States and around the world. We monitor our exposure to credit losses and maintain, as necessary, allowances for anticipated losses. Financial instruments which potentially subject us to a concentration of credit risk consist of cash, cash equivalents and marketable investments. Although we maintain cash balances at financial institutions that exceed federally insured limits, these balances are placed with high credit quality financial institutions.

Commodity Price Risk

All of our products contain components whose base raw materials have undergone dramatic cost fluctuations in the last 24 months. Fluctuations in pricing of raw materials have the ability to affect our product costs. Although we have been successful in offsetting or mitigating our exposure to these fluctuations, such changes could have an adverse impact on our product costs. We are unable to predict the possible impact of changes in commodity prices.

Item 4T.

Controls and Procedures

Disclosure Controls and Procedures

As required by Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, the Company has evaluated, with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, the effectiveness of its disclosure controls and procedures (as defined in such rules) as of the end of the period covered by this report. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.

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Our management, including the Company’s Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s disclosure controls and procedures will prevent all errors and all frauds. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.

Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting that occurred during the first quarter of 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company continues to review its disclosure controls and procedures, including its internal controls over financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that the Company’s systems evolve with its business.

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PART II—OTHER INFORMATION

Item 1.

Legal Proceedings

No other material legal proceedings have commenced or been terminated during the period covered by this report.

Item 1A.

Risk Factors

For a discussion of the risk factors affecting the Company, see “Risk Factors” in Part I, Item 1A of the Annual Report on Form 10-K filed with respect to the Company’s fiscal year ended December 31, 2009. There have been no material changes in the risk factors previously disclosed in such Annual Report on Form 10-K.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

( Removed and Reserved)

None.

Exhibit
Number		Description
10.1*		Amendment Agreement dated March 16, 2010 among Hughes Network Systems, LLC, the lenders party thereto, JP Morgan Chase Bank, as administrative agent, Barclays Capital, as syndication agent, to the Credit Agreement dated as of April 22, 2005, as amended and restated as of June 27, 2005, and as further amended and restated as of April 13, 2006, among Hughes Network Systems, LLC, the lenders from time to time party thereto, Bear, Sterns Corporate Lending Inc., as the administrative agent, Morgan Stanley Senior Funding, Inc., as syndication agent, and Bear, Stearns & Co. Inc. and Morgan Stanley Senior Funding, Inc., as joint lead arrangers and joint book managers.
10.2*		Credit Agreement dated as of April 22, 2005, as amended and restated as of June 27, 2005, as further amended and restated as of April 13, 2006, as further amended and restated as of March 16, 2010, among Hughes Network Systems, LLC, JP Morgan Chase Bank, N.A., as administrative agent, Barclays Capital, as syndication agent, J.P. Morgan Securities Inc., as sole lead book runner, and J.P. Morgan Securities Inc. and Barclays Capital, as joint lead arrangers.
31.1*		Certification of Chief Executive Officer of Hughes Network Systems, LLC pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Chief Financial Officer of Hughes Network Systems, LLC pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32*		Certification of Chief Executive Officer and Chief Financial Officer of Hughes Network Systems, LLC pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*	Filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: May 5, 2010	HUGHES NETWORK SYSTEMS, LLC
	(Registrant)

		/s/ Pradman P. Kaul
	Name:	Pradman P. Kaul
	Title:	Chief Executive Officer and President
		(Principal Executive Officer)


		/s/ Grant A. Barber
	Name:	Grant A. Barber
	Title:	Executive Vice President and Chief Financial Officer
		(Principal Financial Officer)

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Hughes Network Systems, LLC 10-Q