UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2005.

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

For the transition period from                      to                     .

ViaSat, Inc.

Delaware		33-0174996
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

     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. Yes þ No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

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

     The number of shares outstanding of the registrant’s Common Stock, $.0001 par value, as of November 3, 2005 was 27,118,537.

 

 

VIASAT, INC.

INDEX

		Page
PART I Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at September 30, 2005 and April 1, 2005			3
Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2005 and October 1, 2004			4
Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2005 and October 1, 2004			5
Condensed Consolidated Statement of Stockholders’ Equity for the six months ended September 30, 2005			6
Notes to Condensed Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3. Quantitative and Qualitative Disclosures About Market Risk			40
Item 4. Controls and Procedures			41
PART II Other Information
Item 1. Legal Proceedings			42
Item 4. Submission of Matters to a Vote of Security Holders			42
Item 6. Exhibits			42
Signatures			43
EXHIBIT 31.1
EXHIBIT 32.1

PART I Financial Information

Item 1. Financial Statements

VIASAT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands)

		September 30,				April 1,
		2005				2005
Assets
Current assets:
Cash and cash equivalents		$	28,119			$	14,579
Short-term investments			163				162
Accounts receivable, net			157,723				141,298
Inventories			36,032				36,612
Deferred income taxes			6,986				7,027
Prepaid expenses and other current assets			5,163				10,114
Total current assets			234,186				209,792
Goodwill			19,492				19,492
Other intangible assets, net			17,966				20,990
Property and equipment, net			36,557				33,278
Other assets			18,671				18,273
Total assets		$	326,872			$	301,825
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	42,430			$	38,523
Accrued liabilities			38,701				32,410
Total current liabilities			81,131				70,933
Other liabilities			5,740				3,911
Total liabilities			86,871				74,844
Commitments and contingencies (Note 8)
Minority interest in consolidated subsidiary			632				698
Stockholders’ equity:
Common stock			3				3
Paid in capital			166,049				163,819
Retained earnings			73,417				62,288
Accumulated other comprehensive (loss) income			(100	)			173
Total stockholders’ equity			239,369				226,283
Total liabilities and stockholders’ equity		$	326,872			$	301,825

See accompanying notes to condensed consolidated financial statements.

VIASAT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share amounts)

		Three months ended								Six months ended
		September 30, 2005				October 1, 2004				September 30, 2005				October 1, 2004
Revenues		$	104,112			$	82,643			$	204,089			$	166,813
Cost of revenues			78,154				62,808				153,875				125,584
Gross profit			25,958				19,835				50,214				41,229
Operating expenses:
Selling, general and administrative			13,327				10,832				26,173				23,045
Independent research and development			3,557				1,575				6,861				3,419
Amortization of intangible assets			1,512				1,660				3,024				3,618
Income from operations			7,562				5,768				14,156				11,147
Other income (expense):
Interest income			2				3				4				22
Interest expense			(28	)			(29	)			(179	)			(59	)
Income before income taxes			7,536				5,742				13,981				11,110
Provision for income taxes			1,629				1,927				2,895				3,713
Minority interest in net (loss) earnings of subsidiary, net of tax			(46	)			70				(43	)			89
Net income		$	5,953			$	3,745			$	11,129			$	7,308
Basic net income per share		$	.22			$	.14			$	.41			$	.27
Diluted net income per share		$	.21			$	.13			$	.39			$	.26
Shares used in basic net income per share computation			26,997				26,759				26,944				26,673
Shares used in diluted net income per share computation			28,634				28,049				28,371				28,114

See accompanying notes to condensed consolidated financial statements.

VIASAT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)

		Six months ended
		September 30, 2005				October 1, 2004
Cash flows from operating activities:
Net income		$	11,129			$	7,308
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			5,322				5,117
Amortization of intangible assets and software			4,685				5,396
Provision for bad debt			18				—
Deferred income taxes			(1,405	)			(153	)
Minority interest in consolidated subsidiary			(66	)			95
Tax benefit from exercise of stock options			—				816
Increase (decrease) in cash resulting from changes in operating assets and liabilities:
Accounts receivable, net			(15,952	)			(15,234	)
Inventories			577				(397	)
Other assets			4,337				(3,965	)
Accounts payable			3,907				4,770
Accrued liabilities			6,222				(6,890	)
Other liabilities			332				500
Net cash provided by (used in) operating activities			19,106				(2,637	)
Cash flows from investing activities:
Purchase of short-term investments			(1	)			(1	)
Purchases of property and equipment			(7,773	)			(6,908	)
Net cash (used in) investing activities			(7,774	)			(6,909	)
Cash flows from financing activities:
Proceeds from line of credit			3,000				—
Payments on line of credit			(3,000	)			—
Proceeds from issuance of common stock, net of issuance costs			2,230				2,319
Net cash provided by financing activities			2,230				2,319
Effect of exchange rate changes on cash			(22	)			(69	)
Net increase (decrease) in cash and cash equivalents			13,540				(7,296	)
Cash and cash equivalents at beginning of period			14,579				18,510
Cash and cash equivalents at end of period		$	28,119			$	11,214

See accompanying notes to condensed consolidated financial statements.

VIASAT, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(In thousands, except share data)

																		Accumulated
		Common Stock																Other
		Number of								Paid in				Retained				Comprehensive								Comprehensive
		Shares				Amount				Capital				Earnings				Income (Loss)				Total				Income
Balance at April 1, 2005			26,861,900			$	3			$	163,819			$	62,288			$	173			$	226,283
Exercise of stock options			130,991				—				1,289				—				—				1,289
Issuance of stock under Employee Stock Purchase Plan			54,415				—				941				—				—				941
Net income			—				—				—				11,129				—				11,129				$11,129
Hedging Transactions			—				—				—				—				(240	)			(240	)			(240	)
Foreign currency translation			—				—				—				—				(33	)			(33	)			(33	)
Comprehensive income			—				—				—				—				—				—				$10,856
Balance at September 30, 2005			27,047,306			$	3			$	166,049			$	73,417			$	(100	)		$	239,369

See accompanying notes to condensed consolidated financial statements.

VIASAT, INC.

Note 1 — Basis of Presentation

     The accompanying condensed consolidated balance sheet at September 30, 2005, the condensed consolidated statements of operations for the three and six months ended September 30, 2005 and October 1, 2004, the condensed consolidated statements of cash flows for the six months ended September 30, 2005 and October 1, 2004, and the condensed consolidated statement of stockholders’ equity for the six months ended September 30, 2005 have been prepared by the management of ViaSat, Inc., and have not been audited. These financial statements have been prepared on the same basis as the audited consolidated financial statements for the year ended April 1, 2005 and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the financial position, results of operations and cash flows for all periods presented. These financial statements should be read in conjunction with the financial statements and notes thereto for the year ended April 1, 2005 included in our 2005 Annual Report on Form 10-K. Interim operating results are not necessarily indicative of operating results for the full year.

     Our consolidated financial statements include the assets, liabilities and results of operations of TrellisWare Technologies, Inc., a majority owned subsidiary of ViaSat. All significant intercompany amounts have been eliminated.

     Our fiscal year is the 52 or 53 weeks ending on the Friday closest to March 31 of the specified year. For example, references to fiscal year 2006 refer to the fiscal year ending on March 31, 2006. Our quarters for fiscal year 2006 end on July 1, 2005, September 30, 2005, December 30, 2005 and March 31, 2006.

     Certain prior period amounts have been reclassified to conform to the current period presentation.

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Estimates have been prepared on the basis of the most current and best available information and actual results could differ from those estimates. Significant estimates made by management include revenue recognition, capitalized software, allowance for doubtful accounts, warranty accrual, valuation of goodwill and other intangible assets, and valuation allowance on deferred tax assets.

Derivatives

     We enter into foreign currency forward and option contracts to hedge certain forecasted foreign currency transactions. Gains and losses arising from foreign currency forward and option contracts not designated as hedging instruments are recorded in interest income (expense) as gains (losses) on derivative instruments. Gains and losses arising from the effective portion of foreign currency forward and option contracts that are designated as cash-flow hedging instruments are recorded in accumulated other comprehensive income (loss) as gains (losses) on derivative instruments until the underlying transaction affects our earnings at which time they are then recorded in the same income statement line as the underlying transaction.

Deferred Rent

     Rent expense on noncancellable leases containing known future scheduled rent increases are recorded on a straight-line basis over the term of the respective leases beginning when we receive possession of the leased property for construction purposes. The difference between rent expense and rent paid is accounted for as deferred

VIASAT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

rent. Landlord improvement allowances and other such lease incentives are recorded as deferred lease credits and are amortized on a straight-line basis over life of lease as a reduction to rent expense.

Stock-based Compensation

     At September 30, 2005, we had stock-based compensation plans from which incentive stock options may be granted to our key employees and non-qualified stock options may be granted to key employees, directors, officers, independent contractors, and consultants. Approximately 79% of grants outstanding at September 30, 2005 were incentive stock options. We measure compensation expense for options issued to employees, directors and officers under those plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees, and Related Interpretations.” Generally, no stock-based employee compensation cost is reflected in net income, as all options granted under those plans have an exercise price equal to the market value of the underlying common stock on the date of grant.

     Under Financial Accounting Standards Board (“FASB”) Statement No. 123 (“SFAS 123”) the estimated fair value of options is amortized to expense over the vesting period. We elect to use the disclosure only provisions of SFAS 123. Had compensation expense for employees, directors and officers stock options been determined based on the fair value of the options on the date of grant, net income and net income per share would have resulted in the pro forma information presented below for the three and six months ended September 30, 2005 and October 1, 2004:

		Three months ended								Six months ended
		September 30,				October 1,				September 30,				October 1,
		2005				2004				2005				2004
		(In thousands, except per share data)								(In thousands, except per share data)
Net income as reported		$	5,953			$	3,745			$	11,129			$	7,308
Stock based compensation included in net income, net of tax			—				—				—				—
Stock based employee compensation expense under fair value based method, net of tax			(2,343	)			(1,966	)			(4,691	)			(3,868	)
Pro forma net income		$	3,610			$	1,779			$	6,438			$	3,440
Basic earnings per share
As reported		$	0.22			$	0.14			$	0.41			$	0.27
Pro forma		$	0.13			$	0.07			$	0.24			$	0.13
Diluted earnings per share
As reported		$	0.21			$	0.13			$	0.39			$	0.26
Pro forma		$	0.13			$	0.07			$	0.23			$	0.13

     These pro forma amounts may not be representative of future costs since the estimated fair value of stock options is amortized to expense over the vesting period and additional options may be granted in future years.

Recent Accounting Pronouncements

     In December 2004, the Financial Accounting Standards Board (“FASB”) revised Statement No. 123 (SFAS 123R), “Share-Based Payment,” which requires companies to expense the estimated fair value of employee stock options and similar awards. On April 14, 2005, the Securities and Exchange Commission adopted a new rule amending the compliance dates for SFAS 123R. In accordance with the new rule, the accounting provisions of SFAS 123R will be effective for the Company in fiscal 2007. We will adopt the provisions of SFAS 123R and plan to use the modified prospective transition method.

     Under the modified prospective transition method, SFAS 123R, which provides certain changes to the method for valuing stock-based compensation among other changes, will apply to new awards and to awards that are outstanding on the effective date and are subsequently modified or cancelled. Compensation expense for outstanding awards for which the requisite service had not been rendered as of the effective date will be recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under SFAS 123 (See Stock-based Compensation in this note). As permitted by SFAS 123, the Company currently accounts for stock-based compensation using APB 25’s intrinsic value method and, as such, generally recognizes no

VIASAT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

compensation cost for employee stock options. Accordingly, the adoption of SFAS 123R will likely have a material impact on the Company’s results of operations. However, the ultimate impact of adoption of SFAS 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future.

     In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”. SFAS No. 154 is a replacement of Accounting Principles Board Opinion (“APB”) No. 20 and FASB Statement No. 3. SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application as the required method for reporting a change in accounting principle. SFAS No. 154 provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The reporting of a correction of an error by restating previously issued financial statements is also addressed by SFAS No. 154. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning December 15, 2005. We will be adopting this pronouncement beginning in our fiscal year 2007.

Note 2 — Revenue Recognition

     A substantial portion of the Company’s revenues are derived from long-term contracts requiring development and delivery of products over time and often contain fixed-price purchase options for additional products. Sales related to long-term contracts are accounted for under the percentage-of-completion method of accounting under the American Institute of Certified Public Accountants’ (“AICPA”) Statement of Position (“SOP”) 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Sales and earnings under these contracts are recorded either based on the ratio of actual costs incurred to total estimated costs expected to be incurred related to the contract or under the cost-to-cost method or as products are shipped under the units-of-delivery method. Anticipated losses on contracts are recognized in full in the period in which losses become probable and estimable. Changes in estimates of profit or loss on contracts are included in earnings on a cumulative basis in the period the estimate is changed. During the three and six months ended September 30, 2005, we recorded charges of approximately $1.4 million and $3.3 million, respectively, related to loss contracts. There were no significant charges for loss contracts for the three and six months ended October 1, 2004.

     The Company also has contracts and purchase orders where revenue is recorded on delivery of products in accordance with SAB 104, “Staff Accounting Bulletin No. 104: Revenue Recognition.” In this situation, contracts and customer purchase orders are used to determine the existence of an arrangement. Shipping documents and customer acceptance, when applicable, are used to verify delivery. The Company assesses whether the sales price is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment, and assesses collectibility based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer’s payment history.

     When a sale involves multiple elements, such as sales of products that include services, the entire fee from the arrangement is allocated to each respective element based on its relative fair value in accordance with Emerging Issues Task Force (“EITF”) 00-21, Accounting for Multiple Element Revenue Arrangements and recognized when the applicable revenue recognition criteria for each element are met. The amount of product and service revenue recognized is impacted by our judgments as to whether an arrangement includes multiple elements and, if so, whether vendor-specific objective evidence of fair value exists for those elements. Changes to the elements in an arrangement and our ability to establish vendor-specific objective evidence for those elements could affect the timing of the revenue recognition.

     Collections in excess of revenues represent cash collected from customers in advance of revenue recognition and are recorded as an accrued liability.

     Contract costs on U.S. government contracts, including indirect costs, are subject to audit and negotiations with U.S. government representatives. These audits have been completed and agreed upon through fiscal year 2001. Contract revenues and accounts receivable are stated at amounts which are expected to be realized upon final settlement.

Note 3 — Earnings Per Share

     Potential common stock of 1,637,186 and 1,290,476 shares for the three months ended September 30, 2005 and October 1, 2004, respectively, and 1,427,581 and 1,441,559 shares for the six months ended September 30, 2005 and October 1, 2004, respectively, were included in the calculation of diluted earnings per share. Antidilutive shares excluded from the calculation were 292,355 and 1,714,995 shares for the three months ended September 30, 2005 and October 1, 2004, respectively, and 1,779,828 and 1,553,759 shares for the six months ended September 30, 2005 and October 1, 2004, respectively. Potential common stock is primarily comprised of options granted under our stock option plans.

VIASAT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 4 — Composition of Certain Balance Sheet Captions (In thousands)

		September 30, 2005				April 1, 2005
Cash and cash equivalents:
Cash		$	15,088			$	14,579
Investments classified as cash equivalents			13,031				—
		$	28,119			$	14,579
Accounts receivable, net:
Billed		$	68,316			$	49,737
Unbilled			89,552				91,724
Allowance for doubtful accounts			(145	)			(163	)
		$	157,723			$	141,298
Inventories:
Raw materials		$	17,842			$	16,706
Work in process			6,725				9,347
Finished goods			11,465				10,559
		$	36,032			$	36,612
Prepaid expenses and other current assets:
Income taxes receivable		$	522			$	2,639
Prepaid expenses			4,286				6,187
Other			355				1,288
		$	5,163			$	10,114
Other intangible assets, net:
Technology		$	26,770			$	26,770
Contracts and relationships			9,736				9,736
Non-compete agreement			7,950				7,950
Other intangibles			6,875				6,875
			51,331				51,331
Less accumulated amortization			(33,365	)			(30,341	)
		$	17,966			$	20,990
Property and equipment, net:
Machinery and equipment		$	47,476			$	43,966
Computer equipment and software			31,365				29,866
Furniture and fixtures			3,633				3,523
Construction in progress			7,358				3,876
			89,832				81,231
Less accumulated depreciation			(53,275	)			(47,953	)
		$	36,557			$	33,278
Other assets:
Capitalized software costs, net		$	8,690			$	10,341
Deferred income taxes			7,779				6,333
Other			2,202				1,599
		$	18,671			$	18,273
Accrued liabilities:
Current portion of warranty reserve		$	4,051			$	3,268
Accrued vacation			5,388				5,120
Accrued bonus/401 (k) matching contributions			4,164				6,239
Collections in excess of revenues			17,489				13,767
Other			7,609				4,016
		$	38,701			$	32,410
Other liabilities:
Accrued warranty		$	4,060			$	3,911
Deferred rent			1,680				—
		$	5,740			$	3,911

VIASAT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 5 — Accounting for Goodwill and Intangible Assets

     We account for our goodwill under SFAS No. 142. The SFAS No. 142 goodwill impairment model is a two-step process. First, it requires a comparison of the book value of net assets to the fair value of the business units that have goodwill assigned to them. The only reporting units which have goodwill assigned to them are the businesses which were acquired and have been included in our commercial segment. We estimate the fair values of the business units using discounted cash flows. The cash flow forecasts are adjusted by an appropriate discount rate. If the fair value is determined to be less than book value, a second step is performed to compute the amount of the impairment. In this process, a fair value for goodwill is estimated, based in part on the fair value of the operations used in the first step, and is compared to its carrying value. The shortfall of the fair value below carrying value represents the amount of goodwill impairment.

     We make assessments of impairment on an annual basis in the fourth quarter of our fiscal year or more frequently if specific events occur. In assessing the value of goodwill, we make assumptions regarding estimated future cash flows and other factors to determine the fair value of the reporting units. If these estimates or their related assumptions change in the future, we may be required to record impairment charges that would negatively impact operating results.

     The intangible assets are amortized using the straight-line method over their estimated useful lives of two to ten years. The technology intangible asset has several components with estimated useful lives of six to nine years, contracts and relationships intangible asset has several components with estimated useful lives of three to nine years, non-compete agreements have useful lives of three to five years and other amortizable assets have several components with estimated useful lives of two to ten years.

     The current and expected amortization expense for each of the following periods is as follows (in thousands):

		Amortization
For the six months ended September 30, 2005		$	3,024
Expected for the remainder of fiscal year 2006			3,024
Expected for fiscal year 2007			5,378
Expected for fiscal year 2008			4,508
Expected for fiscal year 2009			3,760
Expected for fiscal year 2010			536
Expected for fiscal year 2011			395
Expected for fiscal year 2012			365
		$	17,966

Note 6 — Notes Payable and Line of Credit

     On January 31, 2005, we entered into a three-year, $60 million revolving credit facility (the “Facility”) in the form of a Second Amended and Restated Revolving Loan Agreement with Union Bank of California, Comerica Bank and Silicon Valley Bank.

     Borrowings under the Facility are permitted up to a maximum amount of $60 million, including up to $15 million of letters of credit. Borrowings under the Facility bear interest, at the Company’s option, at either the lender’s prime rate or at LIBOR (London Interbank Offered Rate) plus, in each case, an applicable margin based on the ratio of the Company’s total funded debt to EBITDA (income from operations plus depreciation and amortization). The Facility is collateralized by substantially all of the Company’s personal property assets. At September 30, 2005, the Company had approximately $5.2 million outstanding under standby letters of credit leaving borrowing availability under our line of credit of $54.8 million.

     The Facility contains financial covenants that set a minimum EBITDA limit for the twelve-month period ending on the last day of any fiscal quarter at $30 million, a minimum tangible net worth as of the last day of any fiscal quarter at $135 million and a minimum quick ratio (sum of cash and cash equivalents, accounts receivable and marketable securities, divided by current liabilities) as of the last day of any fiscal quarter at 1.50 to 1.00. We were in compliance with our loan covenants at September 30, 2005.

VIASAT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 7 — Product Warranty

     We provide limited warranties on most of our products for periods of up to five years. We record a liability for our warranty obligations when products are shipped based upon an estimate of expected warranty costs. Amounts expected to be incurred within twelve months are classified as a current liability. For mature products, the warranty costs estimates are based on historical experience with the particular product. For newer products that do not have a history of warranty costs, we base our estimates on our experience with the technology involved and the types of failure that may occur. It is possible that our underlying assumptions will not reflect the actual experience and in that case, future adjustments will be made to the recorded warranty obligation. The following table reflects the change in our warranty accrual during the six months ended September 30, 2005 and October 1, 2004 (in thousands).

		For the six months ended
		September 30, 2005				October 1, 2004
Balance, beginning of period		$	7,179			$	4,451
Change in liability for warranties issued in period			2,738				2,574
Settlements made during the period			(1,806	)			(1,277	)
Balance, end of period		$	8,111			$	5,748

Note 8 — Commitments and Contingencies

     We are currently a party to various government and commercial contracts which require us to meet performance covenants and project milestones. Under the terms of these contracts, failure by us to meet such performance covenants and milestones permit the other party to terminate the contract and, under certain circumstances, recover liquidated damages or other penalties. We are currently not in compliance (or in the past were not in compliance) with the performance or milestone requirements of certain of these contracts. Historically, our customers have not elected to terminate such contracts and we do not believe that our existing customers will do so. In the past, we have incurred liquidated damages under our customer contracts. There can be no assurance that our customers will not elect to terminate such contracts or seek additional liquidated damages or penalties from us in the future.

     On September 15, 2005, we entered into an agreement to purchase approximately 10 acres of land adjacent to a leased property for approximately $3.0 million. We anticipate closing this transaction in January 2006.

     On May 21, 2003, we filed a complaint against Xetron Corporation alleging Xetron failed to deliver conforming radio frequency amplifiers (RFAs) for integration into our MIDS terminals. Xetron filed a counter-claim against us alleging we failed to make proper payments. On April 11, 2005, we reached an agreement with Xetron to settle all claims whereby we received $4.8 million as a result of the settlement. Accordingly, in the first quarter of fiscal year 2006, the Company recognized a net reduction of cost of revenues of $2.7 million after recovery of approximately $2.1 million in related subcontractor prepayments.

     We are also party to various claims and legal actions arising in the normal course of business. Although the ultimate outcome of such matters is not presently determinable, we believe that the resolution of all such matters, net of amounts accrued, will not have a material adverse effect on our financial position or liquidity; however, there can be no assurance that the ultimate resolution of these matters will not have a material impact on our results of operations in any period.

Note 9 — Derivatives

     During the three months ended September 30, 2005, the Company settled one foreign exchange contract recognizing a loss of $800 recorded as cost of revenues based on the underlying transaction. For the six months ended September 30, 2005, the Company settled two foreign exchange contracts recognizing a loss of $236,200 recorded also as cost of revenues based on the underlying transaction. The Company also entered into a new foreign currency exchange contract intended to reduce the foreign currency risk for amounts payable to vendors in Euros which has a maturity of less than six months. The fair value of the outstanding foreign currency contract was $293,500 and is recorded as a liability as of September 30, 2005. We had $6.0 million of notional value of foreign currency forward contracts outstanding at September 30, 2005. We did not record any gains or losses on foreign currency forward contracts for the three and six months ended October 1, 2004.

VIASAT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 10 — Income Taxes

     The effective income tax rate for the three months ended September 30, 2005 was 21.6%. The effective income tax rate for the six months ended September 30, 2005 was 20.7%, which is consistent with the estimated annual effective tax rate for the fiscal year ending March 31, 2006. The estimated tax rate is different from the expected statutory rate due primarily to research and development tax credits and the tax benefit for export sales.

     Our estimated effective tax rate of 20.7% for fiscal 2006 reflects the expiration of the federal tax credit for research and development expenses at December 31, 2005. If the federal tax credit for research and development expenses is reinstated, we will have a lower effective tax rate. In the event the federal tax credit for research and development expenses is reinstated, the amount of the reduction in our tax rate will depend on the effective date and terms of the reinstatement as well as the amount of eligible research and development expenses in our fourth quarter of fiscal year 2006.

Note 11 — Segment Information

     Our commercial and government segments are primarily distinguished by the type of customer and the related contractual requirements. The more regulated government environment is subject to unique contractual requirements and distinctive economic characteristics which differ from the commercial segment. Therefore, we are organized primarily on the basis of products with commercial and government (defense) communication applications. Based on the Company’s commercial business strategy to provide end-to-end capability with satellite communication equipment solutions, the Company implemented certain management changes during the year ended April 1, 2005 which led to the delineation of the commercial segment into two product lines: Satellite Networks and Antenna Systems. These product lines are distinguished from one another based upon their underlying technologies. Prior segment results have been reclassified to conform to our current organizational structure. Reporting segments are determined consistent with the way that management organizes and evaluates financial information internally for making operating decisions and assessing performance. The following table summarizes revenues and operating profits by reporting segment for the three and six months ended September 30, 2005 and October 1, 2004. Certain corporate general and administrative costs, amortization of intangible assets and charges of acquired in-process research and development are not allocated to either segment and accordingly, are shown as reconciling items from segment operating profit and consolidated operating profit. Certain assets are not tracked by reporting segment. Depreciation expense is allocated to reporting segments as an overhead charge based on direct labor dollars within the reporting segments.

		Three months ended								Six months ended
(in thousands)		September 30, 2005				October 1, 2004				September 30, 2005				October 1, 2004
Revenues
Government		$	49,461			$	41,051			$	102,975			$	79,105
Commercial
Satellite Networks			44,790				32,953				81,776				70,471
Antenna Systems			12,106				9,960				22,659				19,889
			56,896				42,913				104,435				90,360
Elimination of intersegment revenues			(2,245	)			(1,321	)			(3,321	)			(2,652	)
Total revenues			104,112				82,643				204,089				166,813
Operating profits (losses)
Government			9,383				8,269				19,680				13,931
Commercial
Satellite Networks			(240	)			(1,068	)			(3,343	)			539
Antenna Systems			1,476				913				2,450				1,676
			1,236				(155	)			(893	)			2,215
Elimination of intersegment operating profits			(1,632	)			(232	)			(1,838	)			(303	)
Segment operating profit before corporate and amortization			8,987				7,882				16,949				15,843
Corporate			87				(454	)			231				(1,078	)
Amortization of intangible assets (1)			(1,512	)			(1,660	)			(3,024	)			(3,618	)
Income from operations		$	7,562			$	5,768			$	14,156			$	11,147

VIASAT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(in thousands)		September 30, 2005				April 1, 2005
Segment assets (2)
Government		$	82,289			$	81,645
Commercial
Satellite Networks			88,122				79,835
Antenna Systems			23,125				17,778
			111,247				97,613
Corporate assets			133,336				122,567
Total		$	326,872			$	301,825

(2)

Assets identifiable to segments include: accounts receivable, unbilled accounts receivable and inventory. At September 30, 2005 and April 1, 2005, all the Company’s goodwill related to the Company’s commercial segment.

     Revenue information by geographic area for the three and six month periods ended September 30, 2005 and October 1, 2004 is as follows:

		Three months ended								Six months ended
(in thousands)		September 30, 2005				October 1, 2004				September 30, 2005				October 1, 2004
United States		$	83,868			$	67,779			$	166,549			$	134,149
Asia Pacific			6,668				4,103				14,636				13,113
Europe/Africa			7,015				8,265				10,941				13,677
North America other than United States			4,550				2,170				7,366				4,681
Latin America			2,011				326				4,597				1,193
		$	104,112			$	82,643			$	204,089			$	166,813

     We distinguish revenues from external customers by geographic areas based on customer location.

     The net book value of long-lived assets located outside the United States was $93,000 at September 30, 2005 and $48,000 at April 1, 2005.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following information should be read in conjunction with the condensed consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report and the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in ViaSat’s Annual Report on Form 10-K for the year ended April 1, 2005, filed with the Securities and Exchange Commission.

     Except for the historical information contained herein, the following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ substantially from those referred to herein due to a number of factors, including but not limited to risks described in the section entitled “Factors That May Affect Future Performance” and elsewhere in this Quarterly Report.

General

     We are a leading provider of advanced digital satellite communications and other wireless networking and signal processing equipment and services to the government and commercial markets. Based on our history and extensive experience in complex defense communications systems, we believe we have developed the capability to design and implement innovative communications solutions which enhance bandwidth utilization by applying our sophisticated networking and digital signal processing techniques. Our goal is to leverage our advanced technology and capabilities to capture a considerable share of the global satellite communications equipment and services segment of the broadband communications market for both government and commercial customers. ViaSat was incorporated in 1986 and completed its initial public offering in 1996.

     Our internal growth to date has historically been driven largely by our success in meeting the need for advanced communications products for the U.S. government and commercial customers. By developing cost-effective communications products incorporating our advanced technologies, we have continued to grow the markets for our products and services.

     Our company is organized principally in two segments: government and commercial. Our government business encompasses specialized products and systems solutions principally serving government and aerospace and defense customers and includes:

	•		Tactical data links, including multifunction information distribution system (MIDS) products,
	•		Information security and assurance products and services, which enable military and government users to communicate secure information over secure and non-secure networks,
	•		UHF DAMA satellite communications products consisting of modems, terminals and network control systems,
	•		Government satellite communication products and services, which provide innovative solutions to government customers to increase available bandwidth using existing satellite capacity, and
	•		Simulation and test equipment, which allows the testing of sophisticated airborne radio equipment without expensive flight exercises.

     Serving government customers with cost-effective products and solutions continues to be a critical and core element of our overall business strategy.

     We have been increasing our focus in recent years on offering satellite based communications products and systems solutions to address commercial market needs. In pursuing this strategy, we have acquired three strategic satellite communication equipment providers: (1) the Satellite Networks Business of Scientific-Atlanta in fiscal year 2001; (2) Comsat Laboratories products business from Lockheed Martin in fiscal year 2002; and (3) US Monolithics, LLC in fiscal year 2002. Our commercial business accounted for approximately 55% and 52% of our revenues in the three months ended September 30, 2005 and October 1, 2004, respectively, 51% and 54% of our

revenues in the six months ended September 30, 2005 and October 1, 2004, respectively, and 51% of our revenues in fiscal year 2005 and 55% of our revenues in fiscal year 2004. To date, our principal commercial offerings include Very Small Aperture Terminals (VSATs), broadband internet equipment over satellite, network control systems, network integration services, network operation services, gateway infrastructure, antenna systems and other satellite ground stations. In addition, based on our advanced satellite technology and systems integration experience, we have won several important projects in the three key broadband markets: enterprise, consumer and in-flight mobile applications.

     Our commercial business offers an end-to-end capability to provide customers with a broad range of satellite communication and other wireless communications equipment solutions including:

	•		Consumer broadband products and solutions to customers using DOCSIS-based or DVB-RCS-based technology,
	•		Mobile broadband products and systems for in-flight, maritime and ground mobile broadband applications,
	•		Enterprise VSAT networks products and services,
	•		Antenna systems for commercial and defense applications and customers,
	•		Satellite networking systems design and technology development, and
	•		MMIC design and development, with an emphasis in systems engineering of packaged components, specializing in high-frequency communication technology design and development.

     With expertise in commercial satellite network engineering, gateway construction, and remote terminal manufacturing for all types of interactive communications services, we believe we have the unique ability to take overall responsibility for designing, building, initially operating, and then handing over a fully operational, customized satellite network serving a variety of markets and applications.

     There are a number of large new business opportunities we are continuing to pursue in fiscal year 2006. In the government segment, the opportunities include domestic and international MIDS orders, new joint tactical radio system contracts, additional funding for current information assurance projects, new information assurance contracts using our HAIPIS technology, and orders for our new KG-250 product. In our commercial segment, the opportunities include new production orders for consumer and mobile broadband systems, further penetration in the North American consumer and enterprise VSAT market and new antenna systems programs. The timing of these orders is not entirely predictable, so our new business awards and revenue outlook may vary somewhat from quarter-to-quarter or even year-to-year.

     To date, our ability to grow and maintain our revenues has depended on our ability to identify and target high technology satellite communication and other communication markets where the customer places a high priority on the solution, and obtaining additional sizable contract awards. Due to the nature of this process, it is difficult to predict the probability and timing of obtaining these awards.

     For the current quarter, our income from operations, excluding the income statement line “Amortization of intangible assets,” is approximately nine percent of revenues. To the extent we are not generating sufficient gross profit from revenues, we strive to adjust other operating expenses to increase this percentage. Due to the need to increase our new contracts awards, to expand our product portfolio, the high level of customer funded research and development and our operating performance, we have only slowly improved this percentage over the last few fiscal years. As fiscal year 2006 progresses and we look ahead to fiscal year 2007, we expect to see improvement and achieve a higher quarterly profit percentage.

     Our increased capital needs for fiscal year 2006 as compared to fiscal year 2005 will continue as we expand our facilities, production test equipment, lab development equipment and VSAT network operations to meet customer program requirements and growth forecasts. Our facility needs have normally been met with long-term lease agreements, but we do anticipate additional tenant improvements over the next two fiscal years associated with our expansion. Additionally, as our employee base increases, the need for additional computers and other equipment will also increase.

Critical Accounting Policies and Estimates

     Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We consider the policies discussed below to be critical to an understanding of our financial statements because their application places the most significant demands on management’s judgment, with financial reporting results relying on estimation about the effect of matters that are inherently uncertain. We describe the specific risks for these critical accounting policies in the following paragraphs. For all of these policies, we caution that future events rarely develop exactly as forecast, and the best estimates routinely require adjustment.

Revenue recognition

     A substantial portion of our revenues are derived from long-term contracts requiring development and delivery of products over time and often contain fixed-price purchase options for additional products. Certain of these contracts are accounted for under the percentage-of-completion method of accounting under the American Institute of Certified Public Accountants’ Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts (SOP 81-1). Sales and earnings under these contracts are recorded based on the ratio of actual costs incurred to date to total estimated costs expected to be incurred related to the contract or as products are shipped under the units-of-delivery method.

     The percentage-of-completion method of accounting requires management to estimate the profit margin for each individual contract and to apply that profit margin on a uniform basis as sales are recorded under the contract. The estimation of profit margins requires management to make projections of the total sales to be generated and the total costs that will be incurred under a contract. These projections require management to make numerous assumptions and estimates relating to items such as the complexity of design and related development costs, performance of subcontractors, availability and cost of materials, labor productivity and cost, overhead and capital costs, and manufacturing efficiency. These contracts often include purchase options for additional quantities and customer change orders for additional or revised product functionality. Purchase options and change orders are accounted for either as an integral part of the original contract or separately depending upon the nature and value of the item. Anticipated losses on contracts are recognized in full in the period in which losses become probable and estimable. During the three and six months ended September 30, 2005, we recorded charges of approximately $1.4 million and $3.3 million, respectively, related to loss contracts. There were no significant charges for loss contracts for the three and six months ended October 1, 2004.

     Assuming the initial estimates of sales and costs under a contract are accurate, the percentage-of-completion method results in the profit margin being recorded evenly as revenue is recognized under the contract. Changes in these underlying estimates due to revisions in sales and cost estimates or the exercise of contract options may result in profit margins being recognized unevenly over a contract as such changes are accounted for on a cumulative basis in the period estimates are revised. Significant changes in estimates related to accounting for long-term contracts may have a material effect on our results of operations in the period in which the revised estimate is made.

     We also have contracts and purchase orders where revenue is recorded on delivery of products in accordance with SAB 104, “Staff Accounting Bulletin No. 104: Revenue Recognition.” In this situation, contracts and customer purchase orders are used to determine the existence of an arrangement. Shipping documents and customer acceptance, when applicable, are used to verify delivery. We assess whether the sales price is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment, and assess collectibility based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer’s payment history.

     When a sale involves multiple elements, such as sales of products that include services, the entire fee from the arrangement is allocated to each respective element based on its relative fair value in accordance with EITF, 00-21, Accounting for Multiple Element Revenue Arrangements and recognized when the applicable revenue recognition criteria for each element are met. The amount of product and service revenue recognized is impacted by our judgments as to whether an arrangement includes multiple elements and, if so, whether vendor-specific objective evidence of fair value exists for those elements. Changes to the elements in an arrangement and our ability to establish vendor-specific objective evidence for those elements could affect the timing of the revenue recognition.

Capitalized software development costs

     We charge costs of developing software for sale to research and development expense when incurred, until technological feasibility has been established. Software development costs incurred from the time technological feasibility is reached until the product is available for general release to customers are capitalized and reported at the lower of unamortized cost or net realizable value. Once the product is available for general release, we amortize the software development costs based on the ratio of current to future revenue for each product with an annual minimum equal to straight-line amortization over the remaining estimated economic life of the product not to exceed five years. The determination of net realizable value involves judgment and estimates of future revenues to be derived from a product, as well as estimates of future costs of manufacturing that product. We use our experience in the marketplace in making judgments in estimating net realizable value, but our estimates may differ from the actual outcome. We periodically assess the assumptions underlying our estimates and, if necessary, we would adjust the carrying amount of capitalized software development costs downward to our new estimate of net realizable value.

     We did not capitalize any costs related to software developed for resale in the six month periods ended September 30, 2005 or October 1, 2004. Amortization expense of software development was $836,000 and $889,000 for the three months ended September 30, 2005 and October 1, 2004, respectively, and $1.7 million and $1.8 million for the six months ended September 30, 2005 and October 1, 2004, respectively. These software development costs are part of other assets on the balance sheet and we record the related amortization expense as a charge to cost of revenues on the statement of operations.

Allowance for doubtful accounts

     We make estimates of the collectibility of our accounts receivable based on historical bad debts, customer credit-worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. Historically, our bad debts have been minimal; a contributing factor to this is that a significant portion of our sales has been to the U.S. government. More recently, commercial customers comprise a larger part of our revenues. Our accounts receivables balance was $157.7 million, net of allowance for doubtful accounts of $145,000 as of September 30, 2005 and our accounts receivables balance was $141.3 million, net of allowance for doubtful accounts of $163,000 as of April 1, 2005.

Warranty reserves

     We provide limited warranties on a majority of our products for periods of up to five years. We record a liability for our warranty obligations when we ship the products based upon an estimate of expected warranty costs. We classify the amounts we expect to incur within twelve months as a current liability. For mature products, we estimate the warranty costs based on historical experience with the particular product. For newer products that do not have a history of warranty costs, we base our estimates on our experience with the technology involved and the types of failure that may occur. It is possible that our underlying assumptions will not reflect the actual experience, and in that case, we will make future adjustments to the recorded warranty obligation.

Goodwill and other intangible assets

     We account for our goodwill under Statement of Financial Accounting Standards (SFAS) No. 142 Goodwill and Other Intangible Assets. The SFAS No. 142 goodwill impairment model is a two-step process. First, it requires a comparison of the book value of net assets to the fair value of the reporting units that have goodwill assigned to them. The only reporting units which have goodwill assigned to them are the businesses which were acquired and have been included in our commercial segment. If the fair value is determined to be less than book value, a second step is performed to compute the amount of the impairment. In this process, a fair value for goodwill is estimated, based in part on the fair value of the reporting unit used in the first step, and is compared to its carrying value. The shortfall of the value below carrying value represents the amount of goodwill impairment. We test goodwill for impairment during the fourth quarter every fiscal year, and when an event occurs or circumstances change such that it is reasonably possible that an impairment may exist.

     We estimate the fair values of the related operations using discounted cash flows and other indicators of fair value. We base the forecast of future cash flows on our best estimate of the future revenues and operating costs, which we derive primarily from existing firm orders, expected future orders, contracts with suppliers, labor agreements, and general market conditions. Changes in these forecasts could cause a particular reporting unit to either pass or fail the first step in the SFAS No. 142 goodwill impairment model, which could significantly influence whether a goodwill impairment needs to be recorded. We adjust the cash flow forecasts by an appropriate discount rate derived from our market capitalization plus a suitable control premium at the date of evaluation.

Impairment of long-lived assets (Property and equipment and other intangible assets)

     We adopted SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets on April 1, 2002. In accordance with SFAS No. 144, we assess potential impairments to our long-lived assets, including property and equipment and other intangible assets, when there is evidence that events or changes in circumstances indicate that the carrying value may not be recoverable. We recognize an impairment loss when the undiscounted cash flows expected to be generated by an asset (or group of assets) are less than the asset’s carrying value. Any required impairment loss would be measured as the amount by which the asset’s carrying value exceeds its fair value, and would be recorded as a reduction in the carrying value of the related asset and charged to results of operations. We have not identified any such impairments.

Valuation allowance on deferred tax assets

     Management evaluates the realizability of our deferred tax assets and assesses the need for a valuation allowance on a quarterly basis. In accordance with SFAS No. 109, “Accounting for Income Taxes,” net deferred tax assets are reduced by a valuation allowance if, based on all the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. A valuation allowance of $769,000 has been provided on deferred tax assets at April 1, 2005, related to the California research credit carryforward realization. We are continuing to assess the realization of the deferred tax assets based on California taxable income and generation of additional California research credits projected in the future.

Derivatives

     We enter into foreign currency forward and option contracts to hedge certain forecasted foreign currency transactions. Gains and losses arising from foreign currency forward and option contracts not designated as hedging instruments are recorded in investment income (expense) as gains (losses) on derivative instruments. Gains and losses arising from the effective portion of foreign currency forward and option contracts that are designated as cash-flow hedging instruments are recorded in accumulated other comprehensive income (loss) as gains (losses) on derivative instruments until the underlying transaction affects our earnings and are then recorded in the same income statement line as the underlying transaction. We had $6.0 million of notional value of foreign currency forward contracts outstanding at September 30, 2005. We had no foreign currency forward contracts outstanding at October 1, 2004.

Results of Operations

     The following table presents, as a percentage of total revenues, income statement data for the periods indicated.

		Three months ended								Six months ended
		September 30, 2005				October 1, 2004				September 30, 2005				October 1, 2004
Revenues			100.0	%			100.0	%			100.0	%			100.0	%
Cost of revenues			75.1				76.0				75.4				75.3
Gross profit			24.9				24.0				24.6				24.7
Operating expenses:
Selling, general and administrative			12.8				13.1				12.8				13.8
Independent research and development			3.4				1.9				3.4				2.1
Amortization of intangible assets			1.4				2.0				1.5				2.1
Income from operations			7.3				7.0				6.9				6.7
Income before income taxes			7.2				6.8				6.9				6.6
Net income			5.7				4.5				5.5				4.4

     The Results of Operations for the six-month period ended September 30, 2005 include a benefit to Cost of revenues of $2.7 million relating to the Xetron settlement. See “Notes to Condensed Consolidated Financial Statements Note 8 – Commitments and Contingencies.”

Three Months Ended September 30, 2005 vs. Three Months Ended October 1, 2004

     Revenues

										Dollar				Percentage
		Three months ended								Increase				Increase
(In millions, except percentages)		September 30, 2005				October 1, 2004				(Decrease)				(Decrease)
Revenues		$	104.1			$	82.6			$	21.5				26.0	%

     The increase in revenues was due to our higher beginning backlog of $391.2 million, quarterly customer awards of $102.8 million and the conversion of certain backlog and awards into revenues. Revenue increases were experienced in both our government and commercial segments and were predominantly derived from increased revenues in our MIDS products of $4.7 million, information assurance products of approximately $4.9 million, and consumer and mobile broadband products of $10.0 million.

     Gross Profit

										Dollar				Percentage
		Three months ended								Increase				Increase
(In millions, except percentages)		September 30, 2005				October 1, 2004				(Decrease)				(Decrease)
Gross profit		$	26.0			$	19.8			$	6.1				30.9	%
Percentage of revenues			24.9	%			24.0	%

     Increase in gross profit from $19.8 million to $26.0 million was primarily due to increased revenues contributing $5.1 million in gross profit and changes in the mix of products sold increasing gross margin by approximately $1.0 million. Gross profit may fluctuate in future quarters depending on the mix of products sold and services provided, competitive pricing, new product introduction costs and other factors.

     Selling, General and Administrative Expenses

										Dollar				Percentage
		Three months ended								Increase				Increase
(In millions, except percentages)		September 30, 2005				October 1, 2004				(Decrease)				(Decrease)
Selling, general and administrative		$	13.3			$	10.8			$	2.5				23.0	%
Percentage of revenues			12.8	%			13.1	%

     The increase in selling, general and administrative (SG&A) expenses was primarily attributable to higher sales levels in the government segment. SG&A expenses consist primarily of personnel costs and expenses for business development, marketing and sales, bid and proposal, finance, contract administration and general management. Some SG&A expenses are difficult to predict and vary based on specific government and commercial sales opportunities.

     Independent Research and Development

										Dollar				Percentage
		Three months ended								Increase				Increase
(In millions, except percentages)		September 30, 2005				October 1, 2004				(Decrease)				(Decrease)
Independent research and development		$	3.6			$	1.6			$	2.0				125.8	%
Percentage of revenues			3.4	%			1.9	%

     The increase in independent research and development (IR&D) expenses reflects year over year increases in the government segment of $1.2 million and the commercial segment of $763,000. The higher IR&D expenses reflect our recognition of certain opportunities in these markets and the need to invest in the development of new technologies to meet these opportunities.

     Amortization of Intangible Assets The intangible assets from acquisitions in fiscal year 2001 and in fiscal year 2002 are being amortized over useful lives ranging from two to ten years. The amortization of intangible assets will decrease each year as the intangible assets with shorter lives become fully amortized.

     The current and expected amortization expense for each of the following periods is as follows (in thousands):

		Amortization
For the six months ended September 30, 2005		$	3,024
Expected for the remainder of fiscal year 2006			3,024
Expected for fiscal year 2007			5,378
Expected for fiscal year 2008			4,508
Expected for fiscal year 2009			3,760
Expected for fiscal year 2010			536
Expected for fiscal year 2011			395
Expected for fiscal year 2012			365
		$	17,966

     Interest Expense Interest expense was $28,000 for the three months ended September 30, 2005 and $29,000 for the three months ended October 1, 2004. We had no outstanding borrowings under our line of credit at September 30, 2005 and October 1, 2004.

     Interest Income Interest income was $2,000 for the three months ended September 30, 2005 and $3,000 for the three months ended October 1, 2004.

     Provision for Income Taxes Our effective tax rate for the three months ended September 30, 2005 was approximately 21.6% compared to 33.4% for the three months ended October 1, 2004. We currently estimate our annual effective income tax rate to be approximately 20.7% for fiscal year 2006, as compared to the actual 6.0% effective income tax rate in fiscal year 2005. Our effective tax rate of 20.7% for fiscal year 2006 reflects the expiration of the federal tax credit for research and development expenses at December 31, 2005. If the federal tax credit for research and development expenses is reinstated, we will have a lower effective tax rate. In the event the federal tax credit for research and development expenses is reinstated, the amount of the reduction in our tax rate will depend on the effective date, the terms of the reinstatement as well as the amount of eligible research and development expenses in our fourth quarter of fiscal 2006. The higher effective tax rate in the first quarter of fiscal year 2005 was attributable to the inclusion of only one quarter of the federal tax credit for research and development expenses, which had expired on June 30, 2004, but was subsequently reinstated.

     Segment Operating Profit

										Dollar				Percentage
Satellite Networks		Three months ended								Increase				Increase
(In millions, except percentages)		September 30, 2005				October 1, 2004				(Decrease)				(Decrease)
Satellite Networks operating profit (loss)		$	(0.2	)		$	(1.1	)		$	0.8				77.5	%
Percentage of Satellite Network revenues			(0.5	)%			(3.2	)%

										Dollar				Percentage
Antenna Systems		Three months ended								Increase				Increase
(In millions, except percentages)		September 30, 2005				October 1, 2004				(Decrease)				(Decrease)
Antenna Systems operating profit		$	1.5			$	0.9			$	0.6				61.7	%
Percentage of Antenna Systems revenues			12.2	%			9.2	%

										Dollar				Percentage
Total Commercial Segment		Three months ended								Increase				Increase
(In millions, except percentages)		September 30, 2005				October 1, 2004				(Decrease)				(Decrease)
Segment operating profit (loss)		$	1.2			$	(0.2	)		$	1.4				897.4	%
Percentage of commercial segment revenues			2.2	%			(0.4	)%

     The increase in commercial segment operating profit and percentage reflects an increase in antenna systems products operating profit from improved program performance and improved gross margin performance of approximately $2.0 million from mobile broadband products versus the same period last year. The satellite networks growth in gross margin was offset by increased independent research and development expenses of $900,000 associated with a new commercial radio frequency micro-positioning technology, and higher development and start-up costs related to our DOCSIS-based consumer satellite broadband products.

Six Months Ended September 30, 2005 vs. Six Months Ended October 1, 2004

     Revenues

										Dollar				Percentage
		Six months ended								Increase				Increase
(In millions, except percentages)		September 30, 2005				October 1, 2004				(Decrease)				(Decrease)
Revenues		$	204.1			$	166.8			$	37.3				22.3	%

     The increase in revenues was due to our beginning backlog of $361.9 million and customer awards of $232.2 million for the first six months of our fiscal year 2006 and the conversion of certain backlog and awards into revenues. Revenues gains were experienced in both our government and commercial segments. Growth primarily derived from our tactical data link products contributing an additional $28.4 million, certain information assurance products increasing approximately $7.4 million, increases from consumer and mobile broadband products of approximately $7.8 million, offset by a decrease in our mobile satellite communication products of approximately $11.1 million from prior year.

     Gross Profit

										Dollar				Percentage
		Six months ended								Increase				Increase
(In millions, except percentages)		September 30, 2005				October 1, 2004				(Decrease)				(Decrease)
Gross profit		$	50.2			$	41.2			$	9.0				21.8	%
Percentage of revenues			24.6	%			24.7	%

     Gross profit dollars grew from the increase in revenue, while gross profit percentage was relatively consistent with prior year. Results for the first quarter of fiscal year 2006 include a benefit related to a legal settlement with Xetron Corporation, which resulted in a net benefit to cost of revenues of $2.7 million. Excluding the effects of the Xetron Settlement, gross profit percentages decreased compared to the same quarter last year despite a 22.3% increase in revenue. This was due to cost overruns on a government development program of $450,000, higher warranty charges of $600,000 associated with one of our information assurance products, and $1.1 million higher than planned development costs related to a new commercial radio frequency micro-positioning technology, and continued development expenses on consumer broadband development programs.

     Selling, General and Administrative Expenses

										Dollar				Percentage
		Six months ended								Increase				Increase
(In millions, except percentages)		September 30, 2005				October 1, 2004				(Decrease)				(Decrease)
Selling, general and administrative		$	26.2			$	23.0			$	3.1				13.6	%
Percentage of revenues			12.8	%			13.8	%

     SG&A expenses increased due to higher selling expenses in commercial segment, from higher sales year over year, and greater bid and proposal expenses in the government segment.

     Independent Research and Development

										Dollar				Percentage
		Six months ended								Increase				Increase
(In millions, except percentages)		September 30, 2005				October 1, 2004				(Decrease)				(Decrease)
Independent research and development		$	6.9			$	3.4			$	3.4				100.7	%
Percentage of revenues			3.4	%			2.0	%

     The increase in IR&D expenses reflects year over year increases in the government segment of $2.1 million and the commercial segment of $1.3 million. The higher IR&D expenses reflect our recognition of certain opportunities in these markets and the need to invest in the development of new technologies to meet these opportunities.

     Amortization of Intangible Assets The intangible assets from acquisitions in fiscal year 2001 and in fiscal year 2002 are being amortized over useful lives ranging from two to ten years. The amortization of intangible assets will decrease each year as the intangible assets with shorter lives become fully amortized.

     The current and expected amortization expense for each of the following periods is as follows (in thousands):

		Amortization
For the six months ended September 30, 2005		$	3,024
Expected for the remainder of fiscal year 2006			3,024
Expected for fiscal year 2007			5,378
Expected for fiscal year 2008			4,508
Expected for fiscal year 2009			3,760
Expected for fiscal year 2010			536
Expected for fiscal year 2011			395
Expected for fiscal year 2012			365
		$	17,966

     Interest Expense Interest expense increased to $179,000 for the six months ended September 30, 2005 from $59,000 for the six months ended October 1, 2004. Interest expense relates to short-term borrowings under our line of credit to cover working capital requirements. The increase in interest expense was from higher loan costs and higher outstanding borrowings. We had no outstanding borrowings under our line of credit at September 30, 2005 and October 1, 2004.

     Interest Income Interest income decreased to $4,000 for the six months ended September 30, 2005 from $22,000 for the six months ended October 1, 2004.

     Provision for Income Taxes Our effective tax rate for the six months ended September 30, 2005 was approximately 20.7% compared to 33.3% for the six months ended October 1, 2004. We currently estimate our annual effective income tax rate to be approximately 20.7% for fiscal year 2006, as compared to the actual 6.0% effective income tax rate in fiscal year 2005. Our effective tax rate of 20.7% for fiscal year 2006 reflects the expiration of the federal tax credit for research and development expenses at December 31, 2005. If the federal tax credit for research and development expenses is reinstated, we will have a lower effective tax rate. In the event the federal tax credit for research and development expenses is reinstated, the amount of the reduction in our tax rate will depend on the effective date, the terms of the reinstatement as well as the amount of eligible research and development expenses in our fourth quarter of fiscal 2006. The higher effective tax rate in the first six months of fiscal year 2005 was attributable to the inclusion of only one quarter of the federal tax credit for research and development expenses, which had expired on June 30, 2004, but was subsequently reinstated.

Our Segment Results for the Six Months Ended September 30, 2005 vs. Six Months Ended October 1, 2004

Government Segment

     Revenues

										Dollar				Percentage
		Six months ended								Increase				Increase
(In millions, except percentages)		September 30, 2005				October 1, 2004				(Decrease)				(Decrease)
Revenues		$	103.0			$	79.1			$	23.9				30.2	%

     The government segment received awards of $140.1 million for the first six months of fiscal year 2006 compared to $105.5 million for the first six months of fiscal year 2005. The conversion of certain backlog and orders to revenue contributed to revenue growth. Increased revenues were primarily attributed to the following products: $28.4 million for tactical data links, principally our MIDS units, $7.4 million for certain information assurance systems and products, offset by decreases of approximately $11.1 million in our mobile satellite communications products.

     Segment Operating Profit

										Dollar				Percentage
		Six months ended								Increase				Increase
(In millions, except percentages)		September 30, 2005				October 1, 2004				(Decrease)				(Decrease)
Operating profit		$	19.7			$	13.9			$	5.7				41.3	%
Percentage of government segment revenues			19.1	%			17.6	%

     The increase in government segment operating profit dollars was primarily related to the impact from increased revenue period over period contributing approximately a $11.9 million in improved gross profit particularly in our tactical data links products partially offset by higher selling and administrative costs of $3.9 million and independent research and development expenses of $2.1 million.

Commercial Segment

     Revenues

										Dollar				Percentage
Satellite Networks		Six months ended								Increase				Increase
(In millions, except percentages)		September 30, 2005				October 1, 2004				(Decrease)				(Decrease)
Revenues		$	81.8			$	70.5			$	11.3				16.0	%

										Dollar				Percentage
Antenna Systems		Six months ended								Increase				Increase
(In millions, except percentages)		September 30, 2005				October 1, 2004				(Decrease)				(Decrease)
Revenues		$	22.7			$	19.9			$	2.8				13.9	%

										Dollar				Percentage
Total Commercial Segment		Six months ended								Increase				Increase
(In millions, except percentages)		September 30, 2005				October 1, 2004				(Decrease)				(Decrease)
Revenues		$	104.4			$	90.4			$	14.1				15.6	%

     The increase in revenues reflects improved competitive positioning across all our commercial products, more favorable market conditions in the commercial telecommunications market for our VSAT network products and further development of our in-flight and consumer satellite broadband internet systems. Revenue increases were primarily attributable to increases of $7.8 million for consumer and mobile broadband products, $3.5 million in satellite networking system and MMIC’s products, and $2.7 million for antenna systems for the first six months of fiscal year 2006 over the first six months of fiscal year 2005.

     Segment Operating Profit

										Dollar				Percentage
Satellite Networks		Six months ended								Increase				Increase
(In millions, except percentages)		September 30, 2005				October 1, 2004				(Decrease)				(Decrease)
Satellite Networks operating profit (loss)		$	(3.3	)		$	0.5			$	(3.9	)			(720.2	)%
Percentage of Satellite Network revenues			(4.1	)%			0.8	%

										Dollar				Percentage
Antenna Systems		Six months ended								Increase				Increase
(In millions, except percentages)		September 30, 2005				October 1, 2004				(Decrease)				(Decrease)
Antenna Systems operating profit		$	2.5			$	1.7			$	0.8				46.2	%
Percentage of Antenna Systems revenues			10.8	%			8.4	%

										Dollar				Percentage
Total Commercial Segment		Six months ended								Increase				Increase
(In millions, except percentages)		September 30, 2005				October 1, 2004				(Decrease)				(Decrease)
Segment operating profit (loss)		$	( 0.9	)		$	2.2			$	(3.1	)			(140.3	)%
Percentage of commercial segment revenues			(0.9	)%			2.5	%

     The decrease in commercial segment operating profit dollars was primarily attributed to decreased funded research and development expenses of $1.3 million and decrease in gross margin of $1.1 million primarily due to contract accounting charges related to cost overruns on consumer broadband programs and production close-out costs on mobile broadband programs as well as higher year over year sales of products to foreign customers with increased price pressures.

Backlog

     As reflected in the table below, funded and total firm backlog increased during the first six months of fiscal year 2006 with the increase coming from our government segments. New contract awards in the first six months of fiscal year 2006 increased firm backlog to $389.9 million.

		September 30, 2005				April 1, 2005
		(in millions)
Firm backlog
Government segment		$	231.8			$	194.6
Commercial segment			158.1				167.3
Total		$	389.9			$	361.9
Funded backlog
Government segment		$	165.1			$	109.4
Commercial segment			157.1				163.9
Total		$	322.2			$	273.3
Contract options		$	23.0			$	23.0