Hughes Communications 10Q 2006 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2006

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

Commission File Number: 000-51784

HUGHES COMMUNICATIONS, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware

13-3871202

(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. Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

(Check One):

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x

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

The number of shares of the registrant’s common stock outstanding as of November 9, 2006 was 18,972,089.

HUGHES COMMUNICATIONS, INC.

QUARTERLY REPORT ON FORM 10-Q


		Page
PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements	3

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	33

Item 3.	Quantitative and Qualitative Information About Market Risk.	47

Item 4.	Controls and Procedures.	48

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings.	50

Item 1A.	Risk Factors.	50

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	50

Item 3.	Defaults Upon Senior Securities.	50

Item 4.	Submission of Matters to a Vote of Security Holders.	50

Item 5.	Other Information.	50

Item 6.	Exhibits.	50

SIGNATURES		51

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

HUGHES COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

(Unaudited)


	September 30, 2006			December 31, 2005
ASSETS
Current Assets
Cash and cash equivalents	$	131,151		$	21,964
Short-term investments		83,753			6,000
Receivables, net		168,284			47
Inventories, net		56,598			—
Prepaid expenses and other		45,184			3,330
Deferred income taxes		1,007			23,378
Asset held for sale		—			468

Total current assets		485,977			55,187

Property, net		291,888			18
Capitalized software costs, net		32,636			—
Intangible assets, net		31,211			—
Investment in Hughes Network Systems, LLC		—			75,282
Investment in Mobile Satellite Ventures LP		—			42,761
Deferred income taxes		1,014			26,956
Other assets		41,733			5,133

Total Assets	$	884,459		$	205,337

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	47,340		$	2,380
Short term borrowings		23,864			—
Accrued liabilities		116,837			2,473
Due to affiliates		6,845			—
Liabilities held for sale		—			525

Total current liabilities		194,886			5,378

Long-term debt		465,295			—
Other long-term liabilities		10,162			—

Total liabilities		670,343			5,378

Minority interests		5,032			8,474

Commitments and contingencies

Series A Redeemable Convertible Preferred Stock, $0.01 par value, net of amortized discount of $28,194 at December 31, 2005		—			93,100
Stockholders’ Equity
Preferred stock, $0.001 par value. Authorized 1,000,000 shares, no shares issued and outstanding		—			—
Preferred stock, $0.01 par value. Authorized 10,000,000 shares, issued 1,199,077 shares as Series A Redeemable Convertible Preferred Stock at December 31, 2005		—			—
Common stock, $0.001 par value. Authorized 64,000,000 shares; issued and outstanding 18,817,289 shares at September 30, 2006 and 4,365,988 shares at December 31, 2005		19			4
Non-voting common stock, $0.01 par value. Authorized 50,000,000 shares; issued and outstanding 4,495,106 shares at December 31, 2005		—			45
Additional paid in capital		625,702			473,737
Accumulated deficit		(419,865	)		(371,295	)
Accumulated other comprehensive income (loss)		3,228			(4,106	)

Total Stockholders’ Equity		209,084			98,385

Total Liabilities and Stockholders’ Equity	$	884,459		$	205,337

See accompanying notes to condensed consolidated financial statements.

HUGHES COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except share data)

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
Revenues
Services	$	112,215		$	196		$	325,257		$	443
Hardware sales		97,546			—			290,039			—

Total Revenues		209,761			196			615,296			443

Operating costs and expenses
Cost of services		80,022			47			227,374			279
Cost of hardware products sold		74,175			—			237,193			—
Research and development		3,786			—			18,032			—
Sales and marketing		18,363			—			58,200			—
General and administrative		12,973			1,650			41,653			5,758
Amortization of intangibles		1,132			—			3,397			—

Total Operating Costs and Expenses		190,451			1,697			585,849			6,037

Operating Income (Loss)		19,310			(1,501	)		29,447			(5,594	)
Interest expense		(11,158	)		—			(32,648	)		—
Equity in earnings of Hughes Network Systems, LLC		—			6,364			—			12,887
Equity in loss of Mobile Satellite Ventures LP		—			(1,563	)		(1,521	)		(7,519	)
Other income, net		4,285			1,320			8,843			2,176

Income before discontinued operations and taxes		12,437			4,620			4,121			1,950
Income tax expense		(1,068	)		—			(52,889	)		—

Income (loss) before discontinued operations		11,369			4,620			(48,768	)		1,950
Income (loss) from discontinued operations		—			938			(42	)		(294	)
Gain on sale of discontinued operations		—			—			240			—

Net Income (Loss)		11,369			5,558			(48,570	)		1,656
Cumulative dividends and accretion of convertible preferred stock to liquidation value		—			(2,492	)		(1,454	)		(7,477	)

Net Income (Loss) Attributable to Common Stockholders	$	11,369		$	3,066		$	(50,024	)	$	(5,821	)


Basic earnings (loss) per common share:
Continuing operations	$	0.60		$	0.24		$	(3.15	)	$	(0.63	)
Discontinued operations		—			0.11			0.01			(0.03	)

Basic net earnings (loss) per share	$	0.60		$	0.35		$	(3.14	)	$	(0.66	)

Diluted earnings (loss) per common share:
Continuing operations	$	0.60		$	0.23		$	(3.15	)	$	(0.63	)
Discontinued operations		—			0.10			0.01			(0.03	)

Net earnings (loss) per share	$	0.60		$	0.33		$	(3.14	)	$	(0.66	)

Basic weighted average common shares outstanding		18,811,645			8,852,753			15,941,853			8,790,831

Diluted weighted average common shares outstanding		19,059,227			9,310,806			15,941,853			8,790,831

See accompanying notes to condensed consolidated financial statements.

HUGHES COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)


	Nine Months Ended September 30,
	2006			2005
Cash Flows from Operating Activities
Net (loss) income	$	(48,570	)	$	1,656
Adjustments to reconcile net loss to cash flows from operating activities:
Loss on discontinued operations		42			294
Depreciation and amortization		28,736			20
Amortization of debt issuance cost		698			—
Equity plan compensation expense		2,087			736
Equity in earnings of Hughes Network Systems, LLC		—			(12,887	)
Equity in losses of unconsolidated affiliates		1,970			7,519
Loss on investments in affiliates		—			1,211
Gain on disposal of assets		(221	)		(49	)
Deferred income taxes		48,313			—
Gain on receipt of investment by subsidiary		(1,787	)		—
Minority interest		(22	)		(1,531	)
Compensation for issuance of warrants by consolidated subsidiary		—			56
Change in other operating assets and liabilities, net of acquisitions:
Receivables, net		35,583			(40	)
Inventories, net		17,367			—
Prepaid expenses and other		3,946			5,419
Deferred revenue		—			(21	)
Accounts payable		(22,814	)		(5,050	)
Accrued liabilities and other		(16,731	)		(226	)

Net cash provided by (used in) continuing operations		48,597			(2,893	)
Net cash used in discontinued operations		(9	)		(932	)

Net cash provided by (used in) operating activities		48,588			(3,825	)

Cash Flows from Investing Activities
Purchase interest in HNS, LLC		—			(50,000	)
Cash paid for investments in affiliates		—			(562	)
Change in restricted cash		2,001			(3,060	)
Net (purchases) sales of short-term investments		(67,219	)		49,251
Expenditures for property		(53,835	)		(3	)
Proceeds from sale of property and intangibles		669			74
Sales of investment in affiliates		—			517
Expenditures for capitalized software		(12,962	)		—
Acquisitions/divestitures, net of cash received		12,870			—
Other, net		(54	)		—

Net cash used in continuing operations		(118,530	)		(3,783	)
Net cash used in discontinued operations		—			(58	)

Net cash used in investing activities		(118,530	)		(3,841	)

See accompanying notes to condensed consolidated financial statements.

HUGHES COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)

(Dollars in thousands)

(Unaudited)


	Nine Months Ended September 30,
	2006			2005
Cash Flows from Financing Activities
Net decrease in notes and loans payable		(1,463	)		—
Debt borrowing from Apollo		100,000			—
Debt repayment to Apollo		(100,000	)		—
Proceeds from rights offering		100,000			—
Distribution to SkyTerra		(8,789	)		—
Payment of dividends on preferred stock		(1,394	)		(4,182	)
Proceeds from short term borrowings		—			229
Proceeds from exercise of stock options and warrants		1,982			80
Repurchase of common stock of consolidated subsidiary		—			(4	)
Long-term debt borrowings		454,452			—
Repayment of long-term debt		(354,415	)		—
Debt issuance cost		(11,169	)		—

Net cash provided by (used in) continuing operations		179,204			(3,877	)
Net cash provided by (used in) discontinued operations		—			—

Net cash provided by (used in) financing activities		179,204			(3,877	)
Effect of exchange rate changes on cash and cash equivalents		(75	)		15

Net increase in cash and cash equivalents		109,187			(11,528	)
Cash and cash equivalents at beginning of the period		21,964			34,759

Cash and cash equivalents at end of the period	$	131,151		$	23,231

Supplemental Cash Flow Information
Cash paid for interest	$	18,729		$	—
Cash paid for income taxes	$	3,983		$	—

See accompanying notes to condensed consolidated financial statements.

HUGHES COMMUNICATIONS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Description of Transactions

Hughes Communications, Inc. (“HCI” and, together with its consolidated subsidiaries, the “Company” or “we”) was formed as a Delaware corporation, and a wholly owned subsidiary of SkyTerra Communications, Inc. (“SkyTerra”), on June 23, 2005. Through a series of transactions in 2005 and 2006, HCI acquired the businesses that it owned as of September 30, 2006. An overview of those transactions is as follows:

•

On September 9, 2005, SkyTerra transferred to HCI its discontinued internet services business, Rare Medium, Inc.

•

On October 12, 2005, HCI acquired Series A Preferred Shares from Hughes Systique Corporation (“Hughes Systique”), representing an ownership of approximately 24% on an undiluted basis.

•

On December 31, 2005, pursuant to a separation agreement between HCI and SkyTerra (the “Separation Agreement”), SkyTerra contributed to HCI the following:

•

its ownership of 50% of the voting, or Class A, membership interests of Hughes Network Systems, LLC (“HNS”), and as a result, HCI became HNS’ managing member. SkyTerra acquired its 50% of the Class A membership interests of HNS on April 22, 2005 from DTV Network Systems, Inc., formerly known as Hughes Network Systems, Inc. (“DTV Networks”), a wholly owned subsidiary of The DIRECTV Group, Inc. (“DIRECTV”), and from April 22, 2005 to December 31, 2005, SkyTerra served as HNS’ managing member. The events of April 22, 2005 are referred to herein as “the April 2005 Transaction”;

•

its interests in Electronic System Products, Inc. (“ESP”);

•

its interests in AfriHUB LLC (“AfriHUB”), which, as described below, have been classified and reported as a discontinued operation and which was sold on February 20, 2006;

•

certain minority investments, including SkyTerra’s interests in Navigauge, Inc. (“Navigauge”), Miraxis, LLC (“Miraxis”), Edmund Holdings, Inc. and Data Synapse, Inc.; and

•

cash and short-term investments.

•

On January 1, 2006, HCI acquired the remaining 50% of the Class A membership interests of HNS for $100.0 million in cash pursuant to the Membership Interest Purchase Agreement entered into by HCI, then a wholly owned subsidiary of SkyTerra, and DIRECTV on November 10, 2005 (the “November 2005 Agreement”). The events of January 1, 2006 are referred to herein as “the January 2006 Transaction.” As a result, as of January 1, 2006, HNS is a wholly owned subsidiary of HCI. HNS’ results from that date forward are consolidated by HCI, and the bases of HNS’ assets and liabilities were adjusted to their fair values (see Note 4).

•

On February 21, 2006, SkyTerra separated into two publicly owned companies (the “Distribution”): HCI and SkyTerra. To effect the Distribution, SkyTerra distributed to each of its stockholders one-half of one share of HCI common stock for each share of SkyTerra’s common or non-voting common stock held as of the close of business on February 13, 2006 (or, in the case of the Series A redeemable convertible preferred stock (the “Series A Preferred Stock”) and Series 1-A and 2-A warrants, in accordance with their terms, one-half of one share of HCI common stock for each share of SkyTerra’s common stock issuable upon conversion or exercise of such preferred stock and warrants held as of the close of business on February 13, 2006). As the Distribution did not qualify as a tax free spin-off, SkyTerra expects to generate significant taxable income in 2006 for federal and state income tax purposes (see Note 15).

•

SkyTerra retained its interest in Mobile Satellite Ventures, LP, (the “MSV Joint Venture”), its stake in TerreStar Networks, Inc. (“TerreStar”), the obligations pursuant to the Series A Preferred Stock and $12.5 million of cash, cash equivalents and marketable securities, the balance, if any, of which will be transferred to the Company upon a change of control of

HUGHES COMMUNICATIONS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

SkyTerra. In accordance with Accounting Principles Board (“APB”) Opinion No. 29, “Accounting for Non-Monetary Transactions” (“APB No. 29”), the Company distributed these assets at their historical basis on the date of the Distribution. On September 25, 2006 SkyTerra closed a transaction in connection with MSV which triggered a change in control. SkyTerra has preliminarily indicated that there are no remaining funds to be transferred to the company as a result of qualified expenditures as defined under the agreement.

To finance the January 2006 Transaction, the Company obtained $100.0 million of short-term debt financing from Apollo Investment Fund IV, L.P. and Apollo Overseas Partners IV, L.P. (together with AIF IV/RRRR LLC, ST/RRRR LLC and AP/RM Acquisition LLC, the “Apollo Stockholders”). Concurrent with the Distribution, the Company conducted a rights offering, pursuant to which it issued 7,843,141 shares of its common stock to its stockholders at a subscription price of $12.75 per share in order to repay the short-term debt financing provided by the Apollo Stockholders. In connection with such rights offering, the Company received proceeds of $100.0 million, of which $68.4 million was received from the Apollo Stockholders. The Company used the proceeds of the rights offering to repay the short-term debt financing obtained from the Apollo Stockholders.

Note 2: Description of Business

Through HNS, the Company is a leading provider of network services that utilize very small aperture terminals (“VSATs”) to distribute signals via satellite. The Company’s services and products serve a variety of consumers, small and medium sized businesses (“Consumer/SMB”) and enterprise customers worldwide. VSAT networks utilize satellite communications as a means of connecting participants in private and shared data networks and are typically used by enterprises with a large number of geographically dispersed locations to provide reliable, scalable, and cost-effective applications such as credit card verification, inventory tracking and control, and broadcast video. The Company also operates a VSAT service that provides broadband Internet access to Consumer/SMB customers.

The Company also provides hardware and point-to-multipoint networking systems solutions to customers with mobile satellite voice and data systems or terrestrial microwave radio transmission systems, respectively. These services are generally provided on a contract or project basis and may involve the use of proprietary products engineered by the Company. As with the VSAT systems, the Company also provides ongoing network support services under contracts with its mobile satellite or terrestrial transmission systems customers.

SPACEWAY is a next-generation digital satellite communications system designed to utilize high-capacity Ka-band satellites and spot beam technology to offer site-to-site network connectivity at faster data rates than that of existing Ku-band satellite connections. The system is designed to offer full-mesh, single-hop connectivity between user terminals by means of an end-to-end digital communications system. The Company expects to launch its SPACEWAY 3 satellite in early 2007 and introduce service in North America on SPACEWAY’s network the first half of 2007.

In addition, the Company has interests in other companies in the telecommunications industry, including:

•

ESP, formerly a product development and engineering services firm, now focused on maximizing the license revenues from its existing intellectual property portfolio; and

•

certain minority investments, including Hughes Systique, Navigauge, Edmund Holdings, Inc. and DataSynapse, Inc.

Note 3: Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and the instructions to Form 10-Q and following the guidance of Rule 10-01 of Regulation S-X under the Securities and Exchange Act of 1934, as amended, for interim financial statements required to be filed with the U.S. Securities and Exchange Commission (“SEC”). They include the assets,

HUGHES COMMUNICATIONS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

liabilities, operating results, and cash flows of the Company, including its domestic and foreign subsidiaries that are more than 50% owned or otherwise controlled by the Company. As permitted under such rules, certain notes and other financial information normally required by GAAP have been condensed or omitted. Management believes it has made all adjustments, consisting of only those of a normal recurring nature, necessary for a fair presentation of the Company’s financial position, results of operations and cash flows at the dates and for the periods presented herein. These condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005, and the financial statements and related notes contained therein, filed with the Securities and Exchange Commission on April 17, 2006.

The Company’s consolidated financial statements include the results of operations and financial position of the Company, its controlled majority-owned subsidiaries and variable interest entities (“VIEs”), as defined by Financial Accounting Standards Board (“FASB”) Interpretation No. 46R (“FIN 46R”), for which the Company is deemed the primary beneficiary, as defined by FIN 46R. As such, the consolidated financial statements of the Company include the accounts of HNS (from January 1, 2006, the date of the January 2006 Transaction), ESP, and Miraxis. The Company’s results of operations for the three and nine month periods ended September 30, 2005 only include the activity of HNS subsequent to April 22, 2005, the date of the April 2005 Transaction. The Company’s results for the period April 23, 2005 through September 30, 2005 reflect the Company’s proportionate share of HNS’ results using the equity method of accounting because the Company was not the primary beneficiary as defined in FIN 46R.

The Company accounts for subsidiaries which are VIEs but for which the Company is not the primary beneficiary under the equity method of accounting, whereby the Company records its proportionate share of the subsidiary’s operating results. As such, the Company accounts for its interest in Hughes Systique and Navigauge under the equity method. The Company also accounts for minority owned subsidiaries in which the Company owns greater than 20% of the outstanding voting interests but less than 50% and for which the Company possesses significant influence over their operations under the equity method of accounting.

Notwithstanding the legal form of the Distribution, the Distribution was accounted for as a reverse spin-off in accordance with Emerging Issues Task Force (“EITF”) Issue No. 02-11, “Accounting for Reverse Spin-offs” (“EITF 02-11”). Accordingly, the Company was considered the divesting entity and was treated as the “accounting successor” to SkyTerra for financial reporting purposes, and SkyTerra was treated as if it had been distributed by the Company. This treatment was required because, among other things, (i) the businesses transferred to the Company generated all of SkyTerra’s historical consolidated revenues and constituted a majority of the book value of SkyTerra’s assets immediately preceding the Distribution and (ii) the businesses transferred to the Company included SkyTerra’s discontinued operating subsidiaries and all of the assets and liabilities relating to such subsidiaries. Accordingly, the Company’s historical results through December 31, 2005 are those previously reported by SkyTerra, including the results of the business and assets retained by SkyTerra in accordance with EITF 02-11. For the nine month period ended September 30, 2006, the Company’s results include the results of the business and assets retained by SkyTerra through February 21, 2006, the date of the Distribution, and reflect the results of HNS on a consolidated basis effective January 1, 2006, the date on which the Company completed the January 2006 Transaction.

In December 2005, SkyTerra made a decision to discontinue operating AfriHUB and signed a letter of intent to sell its interests in AfriHUB for a promissory note with a principal amount of $0.2 million (see Note 14). The discontinuance of this business represents the disposal of a business segment under Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Accordingly, the results of this operation have been classified as discontinued operations, and prior period results were reclassified.

All material intercompany balances and transactions have been eliminated.

Business Combinations and Intangibles

The Company accounts for business combinations in accordance with SFAS No. 141, “Business Combinations” (“SFAS No. 141”). Intangible assets acquired in connection with business combinations which have definite lives are amortized over their estimated

HUGHES COMMUNICATIONS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

useful lives. The estimated useful lives are based on estimates of the period during which the assets will generate revenue. Intangibles with definite lives are tested for impairment annually and whenever events or changes in circumstances indicate that the carrying amount of the assets may no longer be recoverable.

Revenue Recognition

Service revenues and hardware sales, excluding lease revenues described below, are recognized as services are rendered or products are installed or shipped to third-party installers and as title passes to those customers. In situations where customer offerings represent a bundled arrangement for both services and hardware, revenue elements are separated into their relevant components (services or hardware) for revenue recognition purposes. The Company offers a rebate to qualifying new consumer subscribers and records a reduction in revenue in the same period the related sale occurs, based on an estimate of the number of rebates that will be redeemed. This estimate is based on historical experience and actual sales during the promotion.

Included in hardware sales revenue for the three and nine months ended September 30, 2006 are revenues of $1.6 million and $23.3 million, respectively, representing annual revenues under VSAT hardware operating leases with customers which are funded by third-party financial institutions and for which the Company has retained a financial obligation to the financial institution. At the inception of the operating lease, the Company receives cash from the financial institution for a substantial portion of the aggregate lease rentals and, for those transactions in which the Company has retained a continuing obligation to the financing institution to indemnify it from losses it may incur (up to the original value of the hardware), recognizes a corresponding liability to the financial institution for those transactions.

Hardware lease revenues are recognized over the term of the operating lease. The Company capitalizes the book value of the installed equipment used to provide services to the customer as VSAT operating lease hardware and depreciates these costs over the term of the customer lease agreement. For transactions in which the Company has not retained a continuing obligation to the financing institution, hardware revenues are recognized at the inception of the transaction.

Revenues are also earned from long-term contracts for the sale of mobile satellite communications systems. Sales under these long-term contracts are recognized using the percentage-of-completion (cost-to-cost) method of accounting. Under this method, sales are recorded equivalent to costs incurred plus a portion of the profit expected to be realized, determined based on the ratio of costs incurred to estimated total costs at completion. Profits expected to be realized on long-term contracts are based on estimates of total sales value and costs at completion. These estimates are reviewed and revised periodically throughout the lives of the contracts, and adjustments to profits resulting from such revisions are recorded in the accounting period in which the revisions are made. Estimated losses on contracts are recorded in the period in which they are identified.

Income Taxes

Through the date of the Distribution, the Company’s results will be included in the consolidated federal income tax return to be filed by SkyTerra. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Under the terms of the agreement entered into in connection with the April 2005 Transaction, DIRECTV retained the tax benefits from the net operating losses generated by DTV Networks and has responsibility for all of the pre-closing domestic and international income tax liabilities of DTV Networks. The Company has recorded a liability in the balance sheet for the estimated amount the Company may be required to pay to DIRECTV resulting from prepaid taxes that exceeded tax liabilities as of April 22, 2005.

HUGHES COMMUNICATIONS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Earnings (Loss) Per Common Share

Basic earnings (loss) per common share is computed by dividing net income (loss) attributable to the common stockholders by the weighted average number of common shares outstanding. Diluted earnings (loss) per common share reflects the potential dilution from the exercise or conversion of securities into common stock. However, in accordance with FAS 128, “Earnings per Share,” potential common shares have been excluded from the computation of any diluted per share amount in periods when a loss from continuing operations exists or when their inclusion would be anti-dilutive. The potential dilutive effect of outstanding stock options and warrants is calculated using the “treasury stock” method.

For purposes of computing weighted average common shares outstanding, the number of shares of SkyTerra stock outstanding through the date of the Distribution were converted into equivalent shares of Company stock by multiplying the number of shares of SkyTerra stock by the exchange ratio used in the Distribution. The exchange ratio was one-half share of Company stock for each share of SkyTerra stock.

The following table provides a reconciliation of the shares used in calculating earnings (loss) per common share:


	Three Months Ended September 30,		Nine Months Ended September 30,
	2006	2005	2006	2005
Weighted average common shares outstanding—basic	18,811,645	8,852,753	15,941,853	8,790,831
Effect of dilutive securities:
Restricted stock units	130,000	—	—	—
Restricted stock awards	15,271	—	—	—
Options to purchase common stock	102,311	458,053	—	—

Weighted average common shares outstanding—diluted	19,059,227	9,310,806	15,941,853	8,790,831

Stock Option Plans

The Company adopted SFAS No. 123R “Share-Based Payment” (“SFAS No. 123R”) on January 1, 2006. SFAS No. 123R requires entities to recognize compensation expense for all share-based payments to employees, including stock options, based on the estimated fair value of the instrument on the date it is granted. The expense will be recognized over the requisite service period, usually the vesting period, of the award. The Company adopted SFAS No. 123R using the modified prospective method, whereby compensation expense is recognized for all awards issued or modified subsequent to the effective date, as well as for awards granted to employees prior to the effective date that are unvested on the effective date. The adoption of SFAS No. 123R had no material impact on the Company’s results of operations or financial position.

Until December 31, 2005, the Company elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB Opinion No. 25”) and related interpretations in accounting for employee stock options as allowed pursuant to SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), as amended by SFAS No. 148, “Accounting for Stock-Based Compensation.” APB Opinion No. 25 did not require the recognition of compensation expense for stock options granted to employees at fair market value. However, any modification to previously granted awards generally resulted in compensation expense or contra-expense recognition using the cumulative expense method, calculated based on quoted prices of SkyTerra’s common stock and vesting schedules of underlying awards. Following the adoption of SFAS No. 123R, the Company no longer records compensation expense or contra-expense related to previously modified options.

HUGHES COMMUNICATIONS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table provides a reconciliation of net income to pro forma net income (loss) as if the fair value method had been applied to all SkyTerra employee awards:


	Three Months Ended September 30, 2005			Nine Months Ended September 30, 2005
Net income, as reported	$	5,558		$	1,656
Stock-based employee (contra-expense) compensation expense, as reported		(50	)		292
Total stock-based employee compensation expense determined under fair value based method for all awards		(427	)		(947	)

Pro forma net income		5,081			1,001
Cumulative dividends and accretion of convertible preferred stock to liquidation value		(2,492	)		(7,477	)

Pro forma Net Income (Loss) Attributable to Common Stockholders	$	2,589		$	(6,476	)

Basic net income (loss) attributable to common stockholders per share
As reported	$	0.35		$	(0.66	)
Pro forma	$	0.29		$	(0.74	)

Diluted net income (loss) attributable to common stockholders per share
As reported	$	0.33		$	(0.66	)
Pro forma	$	0.28		$	(0.74	)

Restricted Stock Awards

In January 2006, the board of directors of the Company approved the Hughes Communications, Inc. 2006 Equity and Incentive Plan (the “Incentive Plan”). The Incentive Plan provides for the issuance of up to 2,700,000 shares of common stock which may be issued in the form of restricted stock, stock options or stock appreciation rights; provided that the maximum number of shares that may be issued pursuant to the exercise of incentive stock options may not exceed 1,350,000 shares. The Company issues shares under the Incentive Plan to officers and key employees and contractors of the Company and its wholly-owned subsidiaries. In accordance with the terms of the Incentive Plan, in August 2006 the board delegated to Mr. Pradman P. Kaul, the Chief Executive Officer of HCI, the authority to award, at his discretion, up to 250,000 shares in the aggregate of restricted stock to employees (other than Section 16 reporting persons) up to a maximum award of 4,000 shares per employee. These awards are issued at their fair market value on the date of grant.

During September 2006, the Company issued 156,100 restricted shares under the Incentive Plan. These shares vest 50% on the second anniversary of issuance and an additional 25% on each of the third and fourth anniversaries of issuance. The fair value is calculated as the market price upon issuance. The Company accounts for the issuance of shares in accordance with the provisions of SFAS 123(R), “Share Based Payments.” The Company records compensation expense for restricted stock awards on a straight-line basis over their vesting period. The Company recorded compensation expense of approximately $38,000 for the quarter and year to date.

Short-Term Investments

The Company considers all debt securities with original maturities of more than ninety days but less than one year as short-term investments and classifies investments in such short-term debt securities as either held to maturity or available-for-sale. These investments are diversified among high credit quality securities in accordance with the Company’s investment policy. All short-term investments at September 30, 2006 have been classified as available-for-sale. Available-for-sale securities are stated at fair value with the related unrealized gains and losses reported as a component of accumulated other comprehensive income (loss). As of September 30, 2006 and December 31, 2005, the book value of available-for-sale securities approximates fair value and was $83.8 million and $6.0 million, respectively. The cost of these securities is adjusted for amortization of premiums and accretion of discounts to maturity over the contractual life of the security. Such amortization and accretion are included in interest income.

HUGHES COMMUNICATIONS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Restricted Cash

Restricted cash deposits expiring within one year are included in prepaid expenses and other, and deposits expiring beyond one year are included in other assets in the accompanying balance sheets. At September 30, 2006, the Company had $5.9 million of restricted cash which secures certain letters of credit and $0.8 million of restricted cash equal to the value of the surety bond issued in connection with the Company’s license application submitted to the Federal Communications Commission (“FCC”) in April 2005. At December 31, 2005, the Company had $3.1 million of restricted cash related to such FCC license application. The letters of credit expire in 2007, with automatic renewal provisions until 2015. Restrictions on the cash securing the letters of credit will be removed as the letters of credit expire.

Receivables, Net

Receivables, net includes contracts in process that are stated at costs incurred plus estimated profit, less amounts billed to customers and advances and progress payments applied. Advances and progress billings are offset against contract-related receivables, as appropriate.

Inventories

Inventories are stated at the lower of cost or market, principally using standard costs adjusted to reflect actual based on variance analyses performed throughout the year. Cost of sales for services are based on actual costs incurred for service cost elements.

Prepaid Expenses and Other

Prepaid expenses and other includes subscriber acquisition costs (“SAC”) incurred to acquire new consumer subscribers. SAC consists of dealer and customer service representative commissions on new installations, and, in certain cases, the cost of hardware and installation provided to customers at the inception of service. SAC is deferred when a customer commits to a 12- to 24-month service agreement, and amounts deferred are amortized to expense over the commitment period as the related service revenue is earned. Customers who receive hardware and installation under these service agreements have a higher monthly service rate than is charged to customers who purchase their equipment outright at the inception of service. The Company monitors the recoverability of subscriber acquisition costs and is entitled to an early termination fee (secured by customer credit card information obtained up-front) if the subscriber cancels service prior to the end of the commitment period. The recoverability of deferred subscriber acquisition costs is reasonably assured through the increased monthly service fee charged to customers, the ability to recover the equipment, or the ability to charge an early termination fee.

Property and Depreciation

Except as described in Note 4 with respect to the acquisition by HCI, property is carried at cost, which includes construction costs and capitalized interest for qualifying projects. Depreciation is computed generally using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the lesser of the life of the asset or term of the lease.

Software Development Costs

Software development costs are capitalized in accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.” Capitalized software development costs are amortized using the straight-line method over their estimated useful lives, not in excess of five years. Software program reviews are conducted periodically to ensure that capitalized software development costs are not impaired and that costs associated with programs that do not generate revenues are expensed.

HUGHES COMMUNICATIONS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Foreign Currency

Some of the Company’s foreign operations have determined the local currency to be their functional currency. Accordingly, these foreign entities translate assets and liabilities from their local currencies to U.S. dollars using period-end exchange rates while income and expense accounts are translated at the average rates in effect during the period. The resulting translation adjustment is recorded as part of accumulated other comprehensive income (loss) (“OCI”), a separate component of equity. Translation adjustments for foreign currency denominated equity investments are not material and are recorded as part of OCI.

The Company also has foreign operations where the U.S. dollar has been determined as the functional currency. Gains and losses resulting from remeasurement of the foreign currency denominated assets, liabilities, and transactions into the U.S. dollar are recognized currently in the statements of operations and were not material in any of the periods presented herein.

Investments and Financial Instruments

The Company maintains investments in equity securities of unaffiliated companies, and such investments are included in other assets in the balance sheets. Nonmarketable equity securities are carried at cost. Marketable equity securities are considered available-for-sale and carried at current fair value based on quoted market prices with unrealized gains or losses (excluding other-than-temporary losses), reported as part of OCI. The Company continually reviews its investments to determine whether a decline in fair value below the cost basis is “other-than-temporary.” The Company considers, among other factors: the magnitude and duration of the decline; the financial health and business outlook of the investee, including industry and sector performance, changes in technology, and operational and financing cash flow factors; and the Company’s intent and ability to hold the investment. If the decline in fair value is judged to be other-than-temporary, the cost basis of the security is written down to fair value, and the amount is recognized in the statements of operations as part of “Other income, net” and recorded as a reclassification adjustment from OCI.

Investments in which the Company owns at least 20% of the voting securities or has significant influence are accounted for under the equity method of accounting. Equity method investments are recorded at cost and adjusted for the appropriate share of the net earnings or losses of the investee. The carrying value of investments may include a component of goodwill if the cost of the Company’s investment exceeds the fair value of the investment, and any such goodwill is subject to an evaluation for impairment pursuant to APB Opinion No. 18 “The Equity Method of Accounting for Investments in Common Stock.” Investee losses are recorded up to the amount of the investment plus advances and loans made to the investee, and financial guarantees made on behalf of the investee. In certain instances, this can result in the Company recognizing investee earnings or losses in excess of its ownership percentage.

The carrying value of cash and cash equivalents; short-term investments; receivables, net; other assets; accounts payable; and amounts included in accrued liabilities and other liabilities meeting the definition of a financial instrument and debt approximated fair value at September 30, 2006 and December 31, 2005.

The Company carries all derivative financial instruments in the balance sheets at fair value based on quoted market prices. The Company uses derivative contracts to minimize the financial impact of changes in the fair value of recognized assets, liabilities, and unrecognized firm commitments, or the variability of cash flows associated with forecasted transactions in accordance with internal risk management policies. Changes in fair value of designated, qualified, and effective fair value hedges are recognized in earnings as offsets to the changes in fair value of the related hedged items. Changes in fair value of designated, qualified, and effective cash flow hedges are deferred and recorded as a component of OCI until the hedged transactions occur and are recognized in earnings. Changes related to amounts excluded from the effectiveness assessment of a hedging derivative’s change in fair value and the ineffective portion of a hedge are immediately recognized in the statements of operations. Both at the inception of the hedge and on an on-going basis, the Company assesses whether the derivatives are highly effective. Hedge accounting is prospectively discontinued when hedge instruments are no longer highly effective. During each of the periods presented herein there were no material hedge transactions.

HUGHES COMMUNICATIONS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company’s 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 its equity investments. The Company manages its exposure to these market risks through internally established policies and procedures and, when deemed appropriate, through the use of derivative financial instruments. The Company enters into derivative instruments only to the extent considered necessary to meet its risk management objectives and does not enter into derivative contracts for speculative purposes.

The Company generally conducts its business in U.S. dollars with some business conducted in a variety of foreign currencies and therefore is exposed to fluctuations in foreign currency exchange rates. The Company’s objective in managing its exposure to foreign currency changes is to reduce earnings and cash flow volatility associated with foreign exchange rate fluctuations. Accordingly, the Company enters into foreign exchange contracts to mitigate risks associated with foreign currency denominated assets, liabilities, commitments, and anticipated foreign currency transactions. The gains and losses on derivative foreign exchange contracts offset changes in value of the related exposures. As of September 30, 2006, HNS had purchased foreign exchange contracts totaling $2.0 million to mitigate foreign currency fluctuation risks associated with short-term U.S. dollar denominated obligations. The face amount of the foreign exchange contracts approximated their estimated fair values at September 30, 2006.

The Company is exposed to credit risk in the event of non-performance by the counterparties to its derivative financial instrument contracts. While the Company believes this risk is remote, credit risk is managed through the periodic monitoring and approval of financially sound counterparties.

New Accounting Pronouncements

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140,” (“SFAS No. 155”), an amendment to FASB Statements No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends Statement 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company does not expect the adoption of SFAS No. 155 to have a material impact on its results of operations or financial position.

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement 109” (“FIN48”). FIN 48 provides a comprehensive model for recognizing, measuring, presenting and disclosing uncertain tax positions that an entity has taken or expects to take on a tax return. Under FIN 48, a tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable, based on its merits. FIN 48 is effective as of the beginning of fiscal years that start after December 15, 2006. The Company has not yet determined what impact, if any, FIN 48 will have on its results of operations or financial position.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” or SFAS No. 157. SFAS No. 157 establishes a framework for measuring fair value in generally accepted accounting principles, clarifies the definition of fair value and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements. However, the application of SFAS No. 157 may change current practice for some entities. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We have not yet determined what impact, if any, SFAS No. 157 will have on our results of operations or financial position.

HUGHES COMMUNICATIONS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108 on Quantifying Misstatements, or SAB No. 108. SAB No. 108 requires companies to use both a balance sheet and an income statement approach when quantifying and evaluating the materiality of a misstatement, and contains guidance on correcting errors under the dual approach. SAB No. 108 also provides transition guidance for correcting errors existing in prior years. SAB No. 108 is effective for annual financial statements covering the first fiscal year ending after November 15, 2006, with earlier application encouraged for any interim period of the first fiscal year ending after November 15, 2006, and filed after September 13, 2006. We have not yet determined what impact, if any, SAB 108 will have on our results of operations or financial position.

Note 4: Acquisition of Hughes Network Systems, LLC

In April 2005, SkyTerra completed its acquisition of 50% of the Class A membership interests of HNS from DTV Networks, a wholly owned subsidiary of DIRECTV, for $50.0 million in cash and 300,000 shares of SkyTerra’s common stock. The acquisition occurred pursuant to an agreement among SkyTerra, DIRECTV, DTV Networks and HNS, dated December 3, 2004, as amended. Immediately prior to the acquisition, DTV Networks contributed substantially all of the assets and certain liabilities of its very small aperture terminal, mobile satellite and terrestrial microwave businesses, as well as certain portions of its SPACEWAY Ka-band satellite communications platform that is under development, to HNS, which at the time was a wholly-owned subsidiary of DTV Networks. In consideration for the contribution of assets by DTV Networks, HNS paid DTV Networks $190.7 million of cash. This payment represented the $201.0 million stated in the agreement less an estimated purchase price adjustment of $10.3 million, which was subject to further adjustment depending principally upon the closing value of HNS’ working capital (as defined in the agreement). On January 3, 2006, HNS paid DTV Networks $10.0 million in final satisfaction of all purchase price adjustments.

Concurrent with the acquisition, HNS incurred $325.0 million of term indebtedness and obtained a $50.0 million revolving credit facility. The Company and DTV Networks each pledged their respective membership interests of HNS to secure the obligations of HNS under the term indebtedness. The indebtedness was otherwise non-recourse to the Company or DTV Networks. On April 13, 2006, the term indebtedness was repaid with a portion of the proceeds of HNS’ offering of $450.0 million of 9 ¹/2% senior notes due in 2014 (see Note 10).

Through December 31, 2005, the Company accounted for its interest in HNS under the equity method in accordance with FIN 46R, as HNS was a variable interest entity as defined in FIN 46R and the Company was not the primary beneficiary as defined in FIN 46R. Accordingly, the Company recorded its proportionate share of the net income of HNS, subject to certain adjustments. These adjustments related primarily to the amortization of the excess of the Company’s proportionate share of HNS’ net assets over the Company’s carrying amount on the date of acquisition. This excess was being amortized over the remaining useful life of certain HNS long-lived assets on a straight line basis. As of December 31, 2005, the Company’s proportionate share of HNS’ net assets exceeded its book investment by approximately $7.0 million.

Upon the closing of the January 2006 Transaction, the Company includes the accounts of HNS in its consolidated financial statements. In accordance with SFAS No. 141, the Company has allocated the total purchase price paid by SkyTerra and the Company in the April 2005 Transaction and the January 2006 Transaction to the assets acquired and liabilities assumed at their estimated fair value. Management determined the preliminary fair value based upon a number of factors, including the use of a preliminary independent appraisal of property and equipment and intangible assets. The estimated excess of the fair value of the net assets acquired over the amount paid of approximately $344.5 million has been reflected as a reduction of fair value, on a pro rata basis, of long-lived assets in accordance with SFAS No. 141. The estimated fair value is preliminary and subject to revision, including the finalization of the valuation of property and equipment and intangible assets and evaluation of the Company’s other long lived assets and non-current liabilities, which is expected to be completed in the fourth quarter of 2006. The final valuation will be based on the actual assets acquired and liabilities assumed at the acquisition date and management’s consideration of the independent appraisal work. Although the final determination may result in asset and liability fair values that are different than the preliminary estimates of these amounts included herein, it is not expected that those differences will be material to an understanding of the impact of this

HUGHES COMMUNICATIONS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

transaction to the Company. The estimated fair values of the assets acquired, less the excess of fair value over acquisition cost, and liabilities assumed as of January 1, 2006 are as follows (dollars in thousands):


	Amount
Cash consideration ($50,000 paid in April 2005, $100,000 paid in January 2006)	$	150,000
Equity consideration (300,000 shares at $17.20 per share)		5,160
Direct acquisition costs		547
HCI equity in earnings of HNS following the April 2005 transaction through December 31, 2005		20,122

Total Purchase Price	$	175,829

Based upon the valuation mentioned above, the purchase price and the value of net assets acquired have preliminarily been allocated as follows (dollars in thousands):


	Preliminary Fair Market Value of Net Assets			Pro rata Allocation of Negative Goodwill			Adjusted Net Assets
Current assets	$	450,036		$	—		$	450,036
Property, net		538,920			(279,774	)		259,146
Other assets		143,871			(64,687	)		79,184

Total Assets		1,132,827		$	(344,461	)		788,366

Current liabilities		(240,869	)					(240,869	)
Non-current liabilities		(365,074	)					(365,074	)
Minority interests		(6,594	)					(6,594	)

Net Assets Acquired	$	520,290					$	175,829

Note 5: Receivables, Net

Receivables, net as of September 30, 2006 and December 31, 2005 is as follows (dollars in thousands):


	September 30, 2006			December 31, 2005
Trade receivables	$	151,257		$	125
Contracts in process		25,891			—
Other receivables		1,982			—

Total Receivables		179,130			125
Allowance for doubtful accounts		(10,846	)		(78	)

Total Receivables, Net	$	168,284		$	47

The Company expects to collect $9.0 million of the contracts in process balance of $25.9 million at September 30, 2006 by December 31, 2006 and $6.5 million, $5.3 million, $2.9 million and $2.2 million are due in the years ending December 31, 2007, 2008, 2009 and 2010, respectively.

Amounts due from affiliates totaling $0.8 million at September 30, 2006 are included in trade receivables. There were no amounts due from affiliates included in trade receivables at December 31, 2005.

HUGHES COMMUNICATIONS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 6: Inventories, Net

The Company had no inventory prior to the January 1, 2006 acquisition of HNS. Inventories, net at September 30, 2006 is as follows (dollars in thousands):


	September 30, 2006
Productive material and supplies	$	16,621
Work in process		11,886
Finished goods		43,177

Total inventories		71,684
Provision for excess or obsolete inventories		(15,086	)

Total Inventories, net	$	56,598

Provisions for excess or obsolete inventories are provided using management’s best estimates of future use or recovery of inventory. 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.

In June 2006, the Company made a decision to shift its primary focus exclusively to the broadband market. As a result of this decision, the Company evaluated the narrowband products in its inventory and recorded an addition to its provision for excess or obsolete inventories of $11.9 million to reduce the net book value of its narrowband products to their net realizable value. This charge was included in cost of hardware products sold for the quarter ended June 30, 2006 and primarily relates to the VSAT segment. Of this amount, $8.4 million of narrowband products were disposed of during the third quarter and substantially all of the remaining balance is expected to be disposed of in the next six months.

Note 7: Property, Net

Property, net at September 30, 2006 and December 31, 2005 is as follows (dollars in thousands):


	Estimated Useful Lives (years)	September 30, 2006			December 31, 2005
Land and improvements	10-30	$	6,971		$	—
Buildings and leasehold improvements	1-40		17,812			—
Machinery and equipment	3-23		58,193			263
Furniture, fixtures, and office machines	3-15		253			32
VSAT operating lease hardware	2-5		33,003			—
Construction in progress - SPACEWAY	—		193,227			—
- Other	—		4,335			—

Total Property			313,794			295
Accumulated depreciation			(21,906	)		(277	)

Total Property, Net		$	291,888		$	18

HUGHES COMMUNICATIONS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 8: Intangible Assets, Net

The following table sets forth the preliminary amounts recorded for intangible assets acquired in connection with the January 1, 2006 acquisition of HNS:


	Estimated Useful Lives (years)	September 30, 2006
Backlog and customer relationships	5-13	$	19,437
Patented technology and trademarks	10		15,171

Total Intangible Assets			34,608
Accumulated amortization			(3,397	)

Total Intangible Assets, Net		$	31,211

Note 9: Interest in MSV Joint Venture

Prior to the Distribution, the Company owned approximately 23% of the limited partnership interests (on an undiluted basis) of the MSV Joint Venture. Through the date of the Distribution, the Company accounted for its interest in the MSV Joint Venture under the equity method and, accordingly, recorded its proportionate share of the net loss of the MSV Joint Venture, subject to certain adjustments. These adjustments related primarily to the amortization of the excess of the Company’s carrying amount over its proportionate share of the MSV Joint Venture’s long-lived assets on a straight line basis. In accordance with APB Opinion No. 29, the Company’s investment in the MSV Joint Venture was distributed to SkyTerra on the date of the Distribution at its historical basis.

The following table presents summarized consolidated financial information for the MSV Joint Venture. Balance sheet information is only presented as of December 31, 2005, as the Company had no interest in the MSV Joint Venture as of September 30, 2006. Statement of operations information for 2006 is provided for the three month period ended March 31, 2006, the quarterly period in which the Distribution occurred. The Company’s statement of operations for periods ending in 2006 includes results through the date of the Distribution. The net loss of the MSV Joint Venture through the date of the Distribution includes a gain of $0.7 million for the cumulative effect of change in accounting principle recognized by the MSV Joint Venture upon the adoption of FIN 46R.


	December 31, 2005
Consolidated balance sheet information of the MSV Joint Venture:
Current assets	$	119,806
Noncurrent assets	$	96,978
Current liabilities	$	11,811
Noncurrent liabilities	$	23,713
Partners’ equity	$	181,260


	Three Months Ended						Nine Months Ended September 30, 2005
	March 31, 2006			September 30, 2005			Nine Months Ended September 30, 2005
Consolidated statement of operations information of the MSV Joint Venture:
Revenues	$	8,142		$	7,905		$	22,554
Loss from operations	$	(12,245	)	$	(9,529	)	$	(29,351	)
Net loss	$	(10,701	)	$	(6,710	)	$	(33,414	)

HUGHES COMMUNICATIONS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 10: Short-Term Borrowing and Long-Term Debt

The Company had no short-term borrowings or long-term debt prior to the January 1, 2006 acquisition of HNS. Borrowings and debt as of September 30, 2006 are summarized as follows (dollars in thousands):

Short-Term Borrowings and Current Portion of Long-Term Debt


	September 30, 2006
	Interest Rates	Amount
Revolving bank borrowings	6.75% - 14.25%	$	2,219
Term loans payable to banks	8.50% - 9.75%		1,412
VSAT hardware financing	4.00% - 9.00%		20,233

Total Short Term Borrowings and CurrentPortion of Long -Term Debt		$	23,864

Outstanding revolving bank borrowings at September 30, 2006 consist of borrowings by a subsidiary in India under revolving lines of credit with local banks. Borrowings at the Indian subsidiary are with several banks, and there is no requirement for compensating balances. Outstanding revolving borrowings of $0.4 million are at variable rates tied to the Mumbai Inter Bank Offer Rate, and are adjusted monthly. The balances of outstanding revolving borrowings of $1.8 million are at fixed rates. The total remaining available for borrowing by the Indian subsidiary under the revolving lines of credit is $1.1 million at September 30, 2006.

Long-Term Debt


	September 30, 2006
	Interest Rates	Amount
Senior notes	9.50%	$	450,000
Term loans payable to banks	8.50% - 9.75%		1,308
VSAT hardware financing	4.00% - 9.00%		13,987

Total Long-Term Debt		$	465,295

The April 2005 Transaction was financed by HNS with (i) a $250.0 million first lien term loan and a secured $50.0 million first lien revolving credit facility and (ii) a $75.0 million second lien term loan. In June 2005, the above two facilities were syndicated with a larger number of financial institutions, at which time the first lien loan was increased to $275.0 million and the second lien loan was reduced to $50.0 million. At the election of HNS, which could be made monthly, the term indebtedness bore interest at either the ABR Rate as defined in the credit agreement (the “ABR Rate”) plus 2.75% for the first lien credit facility and the ABR Rate plus 7.0% for the second lien credit facility or for Eurocurrency borrowings at the London Interbank Offered Rate (“LIBOR”) plus 3.75% for the first lien credit facility and LIBOR plus 8.0% for the second lien credit facility. The $50.0 million revolving credit facility was available under the first lien credit agreement for borrowings and for issuance of letters of credit.

On April 13, 2006, HNS completed an offering of $450.0 million of 9¹/2% Senior Notes. Interest on the Senior Notes is paid semi-annually in arrears on April 15 and October 15. Accrued interest as of September 30, 2006 of $20.0 million is included in accrued liabilities. With a portion of the proceeds of the Senior Notes, HNS repaid in full the borrowings outstanding under the first and second lien term loans. In connection with the offering of the Senior Notes, HNS entered into a registration rights agreement with the purchasers of the Senior Notes requiring HNS to complete a registered exchange offer related to the Senior Notes within 360 days after April 13, 2006. HNS’ registration statement relating to the exchange offer for the Senior Notes was declared effective by the SEC on October 27, 2006, at which time HNS commenced the registered exchange offer for the Senior Notes. The expiration of the exchange offer is November 29, 2006, unless extended.

HUGHES COMMUNICATIONS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Effective April 13, 2006, the credit agreement was amended and restated whereby all of the first lien term loan provisions were deleted as a result of them being paid down in full, and the revolver was amended to reflect revised covenants, pricing terms and other related amendments. The amended revolving credit facility matures on April 22, 2011. The interest rate with respect to the revolving loans, if any, is based on, at HNS’ option, the ABR rate plus 1.5% or LIBOR plus 2.5%. The revolving credit facility is guaranteed by, subject to certain exceptions, HNS’ direct and indirect wholly-owned domestic subsidiaries, and is secured by substantially all of HNS’ domestic tangible and intangible assets. For outstanding letters of credit issued under the revolving credit facility, the Company pays a participation fee of 2.5% per annum and an issuance fee of 0.25% per annum. In addition, the Company is charged a commitment fee of 0.5% per annum for any unused portion of the revolving credit facility.

As of April 13, 2006, the issuer of the revolver was changed from J.P. Morgan Chase (“JPM”) to Bank of America (“BOA”). Letters of credit outstanding under the JPM revolving credit facility prior to April 13, 2006 remained in place between the parties to the letters of credits and JPM. At that date, JPM was issued a letter of credit under the BOA revolving credit facility for the amount of outstanding letters of credit totaling $13.9 million. As the JPM letters of credit expire, the letter of credit issued to JPM under the BOA revolving credit facility is reduced. New letters of credit and renewals of existing letters of credit are issued under the BOA revolving credit facility. As of September 30, 2006, $5.8 million remained outstanding on the letter of credit issued to JPM. Other outstanding letters of credit issued under the BOA revolving credit facility totaled $7.2 million. As a result, the total available for borrowing or issuing of additional letters of credit under the BOA revolving credit facility totaled $37.0 million at September 30, 2006.

The agreement governing the amended revolving credit facility and the indenture governing the Senior Notes require HNS to comply with certain covenants, for as long as, (1) in the case of the amended revolving credit facility, the amended and revolving credit agreement is in effect and, (2) in the case of the indenture, so long as any Senior Notes are outstanding. Negative covenants contained in these agreements include limitations on HNS’ ability and/or certain of HNS’ 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 HNS’ subsidiaries; sell assets and capital stock of HNS’ subsidiaries; enter into certain transactions with affiliates; consolidate or merge with or into, or sell substantially all of HNS’ assets to, another person; and enter into new lines of business. In addition to these negative covenants, the amended revolving credit facility contains affirmative covenants such as preserving HNS’ businesses and properties, maintaining insurance over HNS’ assets, paying and discharging all material taxes when due, and furnishing the lenders’ administrative agent HNS’ 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. HNS was in compliance with all of its debt covenants at September 30, 2006.

In connection with certain commercial VSAT sales, the Company enters into long-term operating leases (generally three to five years) for the use of the VSAT hardware installed at a customer’s facilities. HNS has an arrangement with two financial institutions to borrow against the future operating lease revenues at the inception of the operating lease. When amounts are funded under these arrangements, customer credit risk for the operating lease passes to the financial institution. The financial institution receives title to the equipment and obtains the residual rights to the equipment after the operating lease with the customer has expired. For the majority of the transactions with the financial institutions, the Company has retained a continuing obligation to the financing institution to indemnify it from losses it may incur (up to the original value of the hardware) from non-performance of the HNS system (a “Non-Performance Event”). Since the inception of the borrowing program in 1997, the Company has not been required to make any indemnification payments for a Non-Performance Event; however, the Company did incur nominal costs in a period prior to 2002 to re-establish service for a group of customers who were impacted by the failure of a third-party satellite. The Company has not provided a reserve for a Non-Performance Event because it believes that the possibility of an occurrence of a Non-Performance Event due to a service outage is remote, given the ability to quickly re-establish customer service at relatively nominal costs.

HUGHES COMMUNICATIONS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 11: Transactions with Related Parties

In the ordinary course of its operations, the Company enters into transactions with related parties to purchase and/or sell telecommunications services, equipment, and inventory. In addition, the Company purchases certain advertising services from DIRECTV. Related parties previously included News Corporation, who became a related party on December 23, 2003 when it purchased a minority interest in DIRECTV from General Motors Corporation (“GM”), and its affiliates, including DIRECTV and its affiliates. In connection with the January 2006 Transaction, News Corporation and its affiliates, including DIRECTV and its affiliates, ceased to be related parties as of January 1, 2006. Subsequent to the April 2005 Transaction, related parties of the Company include Apollo Management, L.P., Apollo Investment Fund IV, L.P. and their affiliates (collectively, “Apollo”), which includes SkyTerra.

Sponsor Investment

At September 30, 2006, Apollo owned, directly or indirectly, approximately 23% of Intelsat Holdings Limited (“Intelsat”), which owns 100% of Intelsat, Ltd. We lease satellite transponder capacity from Intelsat. In addition, our Italian subsidiary, Hughes Network Systems, S.r.L., entered into a cooperation agreement with Intelsat, Telespazio and Telecom Italia. Under this agreement, the parties are cooperating to provide broadband satellite services for Italian businesses operating in Eastern Europe and North Africa.

Hughes Systique

On October 12, 2005, the Company acquired Series A Preferred Shares from Hughes Systique for $3.0 million, representing an ownership of approximately 24% on an undiluted basis. The founders of Hughes Systique include the Chief Executive Officer and President of the Company, as well as certain former employees of HNS, including the Chief Executive Officer and President’s brother. The Chief Executive Officer and President of the Company and his brother own an aggregate of approximately 20% of Hughes Systique on an undiluted basis.

Separation Agreement

On December 30, 2005, in preparation for the Distribution, SkyTerra and the Company entered into a Separation Agreement pursuant to which SkyTerra contributed to the Company, effective December 31, 2005, all of its assets, liabilities and operations other than those associated with the MSV Joint Venture and TerreStar and $12.5 million of cash, cash equivalents and short-term investments. SkyTerra retained its interest in each of the MSV Joint Venture and TerreStar, $12.5 million of cash, cash equivalents and short-term investments and the obligations pursuant to the Series A Preferred Stock. Upon a change of control of SkyTerra, the remaining balance of the $12.5 million of cash, cash equivalents and short-term investments at such time, if any, will be transferred to the Company from SkyTerra. The Separation Agreement also provides that the Company was responsible for paying all fees, costs and expenses directly related to the Distribution, except to the extent such fees were paid by SkyTerra. In addition, the Separation Agreement provides for certain indemnifications, tax sharing, consulting services and access to facilities.

Indemnification. The Separation Agreement provides that the Company will indemnify SkyTerra against losses based on, arising out of, or resulting from (i) the ownership or the operation of the assets or properties transferred to the Company under the Separation Agreement, and the operation or conduct of the business of, including contracts entered into and any activities engaged in by, the Company, whether in the past or future; (ii) any other activities the Company engages in; (iii) any guaranty or keepwell of or by SkyTerra provided to any parties with respect to any of the Company’s actual or contingent obligations; and (iv) certain other matters described in the Separation Agreement. The Separation Agreement provides that SkyTerra will indemnify the Company against losses based on, arising out of, or resulting from the ownership or operation of the assets or properties of the MSV Joint Venture or TerreStar, or the operation or conduct of their businesses, including the contracts entered into by them, and certain other matters described in the Separation Agreement.

HUGHES COMMUNICATIONS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Tax sharing agreement. The tax sharing agreement governs the allocation between the Company and SkyTerra of tax liabilities and related tax matters, such as the preparation and filing of tax returns and tax contests, for all taxable periods. The Company will generally be responsible for, and indemnify SkyTerra and its subsidiaries against, all tax liabilities imposed on or attributable to (i) the Company and any of its subsidiaries relating to all taxable periods and (ii) SkyTerra and any of its subsidiaries for all taxable periods or portions thereof ending on or prior to a change of control of SkyTerra, in each case, after taking into account any tax attributes of SkyTerra or any of its subsidiaries that are available to offset such tax liabilities. Notwithstanding the foregoing, the Company is not responsible for any taxes relating to the MSV Joint Venture, TerreStar or a change of control of SkyTerra. Additionally, under the tax sharing agreement, SkyTerra is responsible for, and indemnifies the Company and its subsidiaries against, all tax liabilities imposed on or attributable to the MSV Joint Venture and TerreStar relating to all taxable periods, SkyTerra and any of its subsidiaries relating to all taxable periods or portions thereof beginning and ending after a change of control, and any change of control of SkyTerra.

Consulting services. SkyTerra has agreed to provide the Company with the consulting services of its officers, not to exceed an aggregate of 200 hours per month, for a monthly fee of $25,000. Such services may be terminated by either party at any time with or without cause by providing ten business days notice to the non-terminating party.

Access to facilities. SkyTerra has agreed to provide the Company with use of its facilities, including information technology and communications equipment and services at such premises, until the earlier of a change of control of SkyTerra or such other time that the parties mutually agree. In exchange, the Company will pay SkyTerra $7,500 per month.

Miraxis

In May 2002, SkyTerra acquired ownership interests in Miraxis. Miraxis License Holdings, LLC (“MLH”), an entity unaffiliated with Miraxis, other than as described herein, holds the rights to certain orbital slots, one of which Miraxis has the ability to use so long as it implements its business plan. Miraxis issued 10% of its outstanding common equity on a fully diluted basis to MLH as partial consideration for access to that slot. In addition, Miraxis was to pay certain royalties to MLH for use of the slot if it ever launched satellites. Miraxis ceased operations during the year ended December 31, 2005 and was dissolved in May 2006 and, accordingly, the arrangement with MLH terminated.

Orbital Slot Agreement

In July 2006, HNS entered into an agreement with two related parties whereby such parties will allow HNS to operate its SPACEWAY 3 satellite at an orbital position where such parties have higher-priority rights. The related parties are controlled by an affiliate of Apollo Investment Fund IV, the Company’s controlling shareholder. A member of the Company’s board of directors and of HNS’ board of managers is the Managing Director of one of the related parties, is the CEO and President of the other related party, and also owns a small interest in each. Another member of HNS’ board of managers and a director of the Company is a director of one of the related parties. As part of the agreement, HNS agreed to pay $9.3 million, in annual installments of $0.3 million in 2006, $0.75 million annually between 2007 and 2010, and $1.0 million annually between 2011 and 2016.

Agreement with Hughes Telematics Inc.

In July 2006, we granted a limited license to Hughes Telematics Inc., or HTI, allowing HTI to use the HUGHES trademark. The license is limited in that HTI may use the HUGHES mark 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 commence paying a reasonable royalty to us in the event HTI no longer has a commercial or affiliated relationship with us. As contemplated by the license terms, we have commenced providing engineering development services to HTI and we will be compensated at customary rates for such services. As of September 30, 2006, we have been authorized to provide services in the amount of $1.9 million.

HUGHES COMMUNICATIONS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

HTI is controlled by an Apollo affiliate. The Company is controlled by Apollo. A member of HNS’ board of managers is the Chief Executive Officer and a director of the HTI and owns approximately 1.0% of the equity of HTI. In addition, another member of HNS’ board of managers and a director of the Company is a director of HTI.

Agreement with Mobile Satellite Ventures LP

On November 3, 2006 we signed a definitive sales contract, with Mobile Satellite Ventures LP, or MSV, to design, develop and supply of a satellite base transceiver sub-system for a fixed price of approximately $43.0 million. Our controlling stockholder, Apollo Investment Fund IV, L.P., and its affiliates own approximately 25% of SkyTerra and three individuals associated with Apollo currently serve on the five member board of directors of SkyTerra. As of November 3, 2006 SkyTerra owned a majority of and controls MSV. Two members of HNS’ board of managers who are also directors of the Company are directors of MSV and SkyTerra. Another member of HNS’ board of managers and a director of the Company is chief executive officer of SkyTerra and a director of MSV.

Other

Certain of the Company’s directors and officers serve on the board of directors of affiliates, including Hughes Systique, the MSV Joint Venture and TerreStar. In some cases, such directors 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 Company’s directors and officers is comparable to stock-based compensation awarded to other non-executive members of the affiliates’ board of directors.

The following table summarizes sales and purchase transactions with related parties including satellite transponder payments (dollars in thousands):


	Three months ended September 30,				Nine months ended September 30,
	2006		2005		2006		2005
Sales	$	1,511	$	7	$	2,599	$	18
Purchases	$	16,608	$	—	$	33,777	$	—

The following table sets forth the amount of assets and liabilities resulting from transactions with related parties (dollars in thousands):


	September 30, 2006		December 31, 2005
Due from related parties	$	750	$	—
Due to related parties	$	7,066	$	—

Note 12: Comprehensive Income (Loss)

Total comprehensive income (loss) was as follows (dollars in thousands):


	Three months ended September 30,					Nine months ended September 30,
	2006		2005			2006			2005
Net income (loss) attributable to common stockholders	$	11,369	$	3,066		$	(50,024	)	$	(5,821	)
Other comprehensive income:
Foreign currency translation adjustments		611		(82	)		2,078			354
Unrealized gains on securities		2,499		—			5,256			—

Total Other Comprehensive Income		3,110		(82	)		7,334			354

Total Comprehensive Income (Loss)	$	14,479	$	2,984		$	(42,690	)	$	(5,467	)

HUGHES COMMUNICATIONS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 13: Segment Information

The Company’s consolidated operations have been classified into four reportable segments: VSAT (including SPACEWAY), which provides satellite-based private networks and broadband Internet access to Consumer/SMB customers; Telecom Systems, consisting of the Company’s mobile satellite communications business and its terrestrial microwave network services business; MSV Joint Venture (through the date of the Distribution), which provides mobile digital voice and data communications services via satellite; and Parent and Other.

The following tables present certain financial information on the Company’s reportable segments as of and for the three and nine months ended September 30, 2006 (dollars in thousands). For the MSV Joint Venture, information is provided as of and for the three months ended March 31, 2006, the period in which the Distribution occurred. The Company’s statements of operations for the three and nine months ended June 30, 2006 only includes results of the MSV Joint Venture through the date of the Distribution. As of September 30, 2006, the Company no longer had an investment in the MSV Joint Venture. Since the Company’s 23% share of the results of the MSV Joint Venture operations through the date of the Distribution are already included in the Parent and Other column, the Eliminate MSV Joint Venture column removes the results of the MSV Joint Venture shown in the MSV Joint Venture column.


	Three months ended September 30, 2006
	VSAT		Telecom		Parent and Other			Consolidated
Revenues	$	186,608	$	23,007	$	146		$	209,761
Segment operating (loss) income	$	13,740	$	6,312	$	(742	)	$	19,310
Depreciation and amortization	$	11,413	$	107	$	—		$	11,520
Segment assets	$	613,042	$	31,392	$	240,025		$	884,459
Capital expenditures	$	18,710	$	1,369	$	—		$	20,079


	Nine months ended September 30, 2006
	VSAT		Telecom		MSV Joint Venture⁽¹⁾			Parent and Other			Eliminations⁽²⁾			Consolidated
Revenues	$	551,772	$	63,138	$	8,142		$	386		$	(8,142	)	$	615,296
Segment operating income (loss)	$	19,194	$	13,529	$	(12,245	)	$	(3,276	)	$	12,245		$	29,447
Depreciation and amortization	$	28,471	$	265	$	—		$	—		$	—		$	28,736
Segment assets	$	613,042	$	31,392	$	646,587		$	240,025		$	(646,587	)	$	884,459
Capital expenditures	$	60,758	$	6,039	$	—		$	—		$	—		$	66,797

⁽¹⁾	Represent the Company’s 23% share of the MSV Joint Venture’s result of operations as of and for the three months ended March 31, 2006, the period in which the Distribution occurred.

⁽²⁾	To eliminate the Company’s share of the MSV Joint Venture’s results as it is shown in both the MSV Joint Venture and the Parent and Other columns.

HUGHES COMMUNICATIONS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following tables present the results of operations for the Company’s reportable segments for the three and nine months ended September 30, 2005:


	Three months ended September 30, 2005
	MSV Joint Venture⁽¹⁾			HNS⁽²⁾			Parent and other			Eliminations⁽³⁾			Consolidated
Revenues	$	7,905		$	200,618		$	196		$	(208,523	)		196
Operating expenses		(17,434	)		(181,263	)		(1,697	)		198,697			(1,697	)

(Loss) income from operations		(9,529	)		19,355			(1,501	)		(9,826	)		(1,501	)
Equity in earnings of Hughes Network Systems, LLC		—			—			6,364			—			6,364
Equity in loss of Mobile Satellite Ventures LP		—			—			(1,563	)		—			(1,563	)
Other income (expense), net		2,819			(6,883	)		1,320			4,064			1,320

(Loss) income before discontinued operations	$	(6,710	)	$	12,472		$	4,620		$	(5,762	)	$	4,620


	Nine months ended September 30, 2005
	MSV Joint Venture⁽¹⁾			HNS⁽²⁾			Parent and other			Eliminations⁽³⁾			Consolidated
Revenues	$	22,554		$	355,337		$	443		$	(377,891	)	$	443
Operating expenses		(51,905	)		(318,916	)		(6,037	)		370,821			(6,037	)

(Loss) income from operations		(29,351	)		36,421			(5,594	)		(7,070	)		(5,594	)
Equity in earnings of Hughes Network Systems, LLC		—			—			12,887			—			12,887
Equity in loss of Mobile Satellite Ventures LP		—			—			(7,519	)		—			(7,519	)
Other income (expense), net		(4,063	)		(11,793	)		2,176			15,856			2,176

(Loss) income before discontinued operations	$	(33,414	)	$	24,628		$	1,950		$	8,786		$	1,950

⁽¹⁾	Represents the Company’s 23% share of the MSV Joint Venture’s results of operations.

⁽²⁾	Represents the Company’s 50% share of HNS’s results of operations for the period following the April 2005 Transaction.

⁽³⁾	To eliminate the Company’s share of the MSV Joint Venture results and HNS results as each is included in the MSV Joint Venture and HNS columns, respectively, and are also included in the Parent and Other column.

HUGHES COMMUNICATIONS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 14: Discontinued Operations

In April 2004, SkyTerra signed an agreement to acquire 80% of the outstanding membership interests of AfriHUB for an aggregate purchase price of $1.5 million in cash. AfriHUB planned to provide instructor led and distance based technical training and satellite based broadband Internet access and domestic and international calling services through exclusive partnerships with certain Nigerian based universities. While establishing centers which provide these services on two university campuses during the fourth quarter of 2004, AfriHUB experienced significant unanticipated delays and costs in opening these facilities, as well as greater price sensitivity within the university communities. As a result, AfriHUB suspended its planned roll out of service to additional campuses and is actively pursuing other opportunities to provide technical training in the Nigerian market, including establishing a facility on a single additional campus. Effective February 20, 2006, the Company entered into a Membership Interest and Note Purchase Agreement and sold its equity and debt interests in AfriHUB for a promissory note with a principal amount of $0.15 million and a maturity date of February 20, 2007. A gain on the sale of $0.2 million is included in the Company’s statement of operations for the nine month period ended September 30, 2006.

Note 15: Income Taxes

For Federal income tax purposes, the Company’s results through the date of the Distribution will be included in the consolidated returns to be filed by SkyTerra. Prior to the Distribution, SkyTerra had unused net operating loss (“NOL”) carryforwards of approximately $227.2 million expiring in 2008 through 2025 and capital loss carryforwards of approximately $93.3 million expiring in 2006 through 2010. Following the issuance of a private letter ruling by the Internal Revenue Service with respect to whether an “ownership change” as defined by Section 382 of the Internal Revenue Code occurred during a period from 1999 through 2004, SkyTerra expects that its carryforwards will not be subject to such limitation and, therefore, will be available to offset future taxable income unless subject to other limitation. Following the Distribution, a portion of the SkyTerra NOL and capital loss carryforwards belong to the Company. The Company estimates that its share of the NOL carryforward is approximately $135.2 million and its share of the capital loss carryforward is approximately $3.3 million.

Prior to the year ended December 31, 2005, due to SkyTerra’s operating losses and the uncertainty surrounding the ability of SkyTerra to realize its deferred tax assets, a full valuation allowance had been established related to the NOL and capital loss carryforwards. As the Distribution did not qualify as a tax-free spin-off, SkyTerra expects to generate significant taxable income in 2006 for Federal and state income tax purposes. As the Company is the accounting successor to SkyTerra, as described in note 1(a), the taxes associated with the Distribution are included in the Company’s results. In addition, due to the tax sharing agreement between SkyTerra and the Company (the “Tax Sharing Agreement”), the Company will be responsible for paying all taxes associated with the Distribution. The Company expects existing NOL and capital loss carryforwards will be sufficient to offset any federal income taxes payable on the gain from the Distribution, other than alternative minimum taxes.

During the year ended December 31, 2005, the Company recognized a $50.3 million income tax benefit, and associated deferred tax asset, related to the reversal of the valuation allowance associated with the loss carryforwards which are expected to be utilized to offset the Federal taxable income on the Distribution. During the nine months ended September 30, 2006, the Company recorded income tax expense of $52.9 million. This amount relates primarily to the gain on the Distribution, and includes the utilization of the deferred tax asset recorded as of December 31, 2005. In addition, income tax expense includes taxes on income earned by the Company’s subsidiaries in India and Brazil and estimated domestic state income taxes. As the Company has not met the more likely than not criteria of SFAS 109, “Accounting for Income Taxes,” the Company maintained a full valuation allowance on its deferred tax assets as of September 30, 2006.

The Company estimates that alternative minimum taxes in the amount of $1.3 million will be payable by SkyTerra as a result of the gain from the Distribution. In accordance with the Tax Sharing Agreement, the Company will be entitled to reimbursement from SkyTerra at such time as SkyTerra realizes the benefit of the alternative minimum tax credit. This reimbursement has been reflected on the Company’s books as a receivable from SkyTerra.

HUGHES COMMUNICATIONS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 16: Redeemable Convertible Preferred Stock

On June 4, 1999, SkyTerra issued and sold Series A and B Preferred Stock and Warrants to the Apollo Stockholders for an aggregate purchase price of $87.0 million. As approved at SkyTerra’s 1999 annual meeting of stockholders, all Series B securities were converted to Series A securities. As part of the Distribution, all outstanding Series A Preferred Stock and Warrants were distributed to SkyTerra. In accordance with APB No. 29, the distribution of the Series A redeemable convertible preferred stock on the date of the Distribution was accounted for as a distribution to SkyTerra at its historical basis. As a result of the Distribution, SkyTerra Series A and B securities are not an authorized class of securities for the Company.

Note 17: Stockholders’ Equity

HCI is a publicly-traded company and its common stock is traded on the NASDAQ Global Market under the symbol “HUGH”. The Company’s certificate of incorporation was amended and restated in February 2006 in connection with the Distribution and the Separation Agreement. The Company is authorized to issue 64,000,000 shares of common stock, par value $0.001 per share, of which 18,817,289 shares were outstanding at September 30, 2006. Additionally the Company is authorized to issue 1,000,000 shares of Preferred Stock, par value $0.001 per share, of which none were outstanding at September 30, 2006. The Preferred Stock can be issued in one or more classes or series, and the board of directors has the authority to establish voting rights, preferences, and other rights related to dividends, convertibility, redemptions and other limitations as may be permitted by the General Corporation Law of the State of Delaware. As of September 30, 2006, no class or series of preferred stock had been established by the Company’s board of directors.

Note 18: Stock-Based Compensation Plans

HCI Plans

The Company’s 2006 Equity and Incentive Plan (“the HCI Plan”), which was adopted effective January 30, 2006, 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 its directors, officers and other employees, advisors and consultants who are selected by its compensation committee for participation in the HCI Plan. Unless earlier terminated by the Company’s board of directors, the HCI Plan will expire on the tenth anniversary of the date of its adoption. Termination of the HCI Plan is not intended to adversely affect any award that is then outstanding without the award holder’s consent. The Company’s board of directors may amend the HCI Plan at any time. Plan amendments are not intended to adversely affect any award that is then outstanding without the award holder’s consent, and the Company must obtain stockholder approval of a plan amendment if stockholder approval is required to comply with any applicable law, regulation or stock exchange rule.

Pursuant to SkyTerra’s 1998 Long Term Incentive Plan (the “SkyTerra Plan”), the compensation committee of the board of directors of SkyTerra is required to make an equitable adjustment to the terms of options issued under the SkyTerra Plan in the event a special, large and nonrecurring dividend or distribution affects SkyTerra’s common stock such that an adjustment is appropriate in order to prevent dilution or enlargement of the rights of the participants under the SkyTerra Plan. SkyTerra’s compensation committee has discretion to make such an adjustment to any option issued under the SkyTerra Plan by adjusting the number and kind of shares that may be issued in respect of outstanding options or the exercise price relating to such options. Pursuant to this provision, SkyTerra’s compensation committee determined that holders of stock options issued under the SkyTerra Plan who were members of SkyTerra’s management and board of directors as of the date of the Distribution, as well as a consultant and former directors who were involved with SkyTerra’s acquisition of HNS, would receive an option to purchase one share of HCI common stock for each option to purchase two shares of SkyTerra common stock that they held as of the date of the Distribution. The issuance of such options to purchase HCI common stock was in lieu of a larger adjustment to the exercise price of the SkyTerra options that such holders would have been otherwise entitled had they not received options to purchase HCI common stock. A reduction in the exercise price (or in some

HUGHES COMMUNICATIONS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

cases, an increase in the number of shares) was the manner in which all other SkyTerra options outstanding under the plan were adjusted. In February 2006, the Company issued options to purchase 435,836 shares of HCI common stock to holders of SkyTerra options under the HCI Plan.

The exercise price of such options to purchase shares of HCI common stock that were issued to certain holders of options to purchase SkyTerra common stock was determined by multiplying the exercise price of such SkyTerra option by a fraction, the numerator of which was the closing price of a share of HCI common stock on the first trading day after the Distribution date multiplied by the exchange ratio of 0.5 and the denominator of which was that price multiplied by the exchange ratio plus the closing price of a share of SkyTerra common stock on the first trading day after the Distribution date and further dividing such result by the exchange ratio.

During the nine months ended September 30, 2006, in addition to the options to acquire 435,836 shares of HCI common stock as previously described, the Company issued the following equity instruments under the HCI Plan:

•

70,000 shares of restricted stock which vest over a two year period;

•

60,000 shares of restricted stock which vest over a three year period; and

•

fully vested options to acquire 40,000 shares of HCI common stock at an exercise price of $10.35/share.

The fair value of each share or option, as applicable, was determined on the date of grant, except for shares of restricted stock issued to a consultant. In accordance with EITF 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” the fair value of such shares is determined at the end of the reporting period, and accordingly, the fair value as of September 30, 2006 was used for determining compensation expense attributable to such shares. Stock-based compensation expense totaling $.5 million and $2.0 million was recorded in the three and nine month period ended September 30, 2006, respectively. For the three month period ended September 30, 2006, $0.4 million and $0.1 million was related to HCI and HNS, respectively. For the nine month period ended September 30, 2006, $1.7 million, $0.1 million and $0.2 million was related to HCI, SkyTerra and HNS, respectively. As of September 30, 2006, the Company had approximately $11.4 million of unrecognized compensation expense related to the HCI and HNS equity instruments that will be recognized over the weighted average life of such instruments, which is estimated to be 3.3 years. As a result of the re-pricing of certain SkyTerra stock options, the Company recognized compensation contra-expense of $0.1 million for the three months ended September 30, 2005 and compensation expense of $0.3 million for the nine months ended September 30, 2005.

The following table summarizes stock option stock activity and related information for the HCI Plan for the nine months ended September 30, 2006:


	Number of Shares		Weighted Average Exercise Price		Aggregate Intrinsic Value ($ thousands)
Outstanding at January 1, 2006	—		$	—
Issued:
Issued to holders of SkyTerra options	435,836		$	4.39
Issued to an HCI officer and a former HCI officer	40,000		$	10.35
Exercised:
Exercised by holders of SkyTerra options	(359,169	)	$	1.33	$	11,851
Exercised by an HCI officer	(20,000	)	$	10.35	$	493

Outstanding at September 30, 2006	96,667		$	16.97	$	1,742

Exercisable at September 30, 2006	96,667		$	16.97	$	1,742

HUGHES COMMUNICATIONS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table summarizes information about stock options that are outstanding and exercisable as of September 30, 2006:


	Stock Options Outstanding				Stock Options Exercisable
Range of Exercise Prices	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Life (years)	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Life (years)
$1.48*	5,000	$	1.48	7.39	5,000	$	1.48	7.39
$3.09*	5,833	$	3.09	7.71	5,833	$	3.09	7.71
$10.35	20,000	$	10.35	0.25	20,000	$	10.35	0.25
$20.23-$22.53*	65,834	$	21.39	8.51	65,834	$	21.39	8.51

	96,667	$	16.97	6.70	96,667	$	16.97	6.70

*	Consists of options issued to holders of SkyTerra options.

Restricted Stock Awards

In January 2006, the board of directors of the Company approved the Hughes Communications, Inc. 2006 Equity and Incentive Plan (the “Incentive Plan”). The Incentive Plan provides for the issuance of up to 2,700,000 shares of common stock which may be issued in the form of restricted stock, stock options or stock appreciation rights; provided that the maximum number of shares that may be issued pursuant to the exercise of incentive stock options may not exceed 1,350,000 shares. In accordance with the terms of the Incentive Plan, in August 2006 the board delegated to Mr. Pradman P. Kaul, the Chief Executive Officer of HCI, the authority to award, at his discretion, up to 250,000 shares in the aggregate of restricted stock to employees (other than Section 16 reporting persons) up to a maximum award of 4,000 shares per employee. The Company issues shares under the Incentive Plan to officers and key employees and contractors of the Company and its wholly-owned subsidiaries. These awards are issued at their fair market value on the date of grant.

During September 2006 the Company issued 156,100 shares of restricted stock under the Incentive Plan. These shares vest 50% on the second anniversary of issuance and an additional 25% on each of the third and fourth anniversaries of issuance. The fair value is calculated as the market price upon issuance. The Company accounts for the issuance of shares in accordance with the provisions of SFAS 123(R), “Share Based Payments.” The Company records compensation expense for restricted stock awards on a straight-line basis over their vesting period. The Company recorded compensation expense of approximately $38,000 for the quarter and fiscal year to date.

SkyTerra Plans

SkyTerra provided incentive and nonqualified stock option plans for directors, officers, and key employees of SkyTerra and others. The number of options to be granted and the option prices were determined by the compensation committee of SkyTerra’s board of directors in accordance with the terms of the plans. Options generally expired five to ten years after the date of grant.

During 1998, SkyTerra’s board of directors approved the Stock Incentive Plan under which “non-qualified” stock options (“NQSOs”) to acquire shares of SkyTerra common stock could be granted to non-employee directors and consultants of SkyTerra, and “incentive” stock options (“ISOs”) to acquire shares of SkyTerra common stock could be granted to employees. The Stock Incentive Plan also provided for the grant of stock appreciation rights, shares of restricted stock, deferred stock awards, dividend equivalents, and other stock-based awards to SkyTerra’s employees, directors, and consultants. Under the Stock Incentive Plan, the option price of any ISO could not be less than the fair market value of a share of SkyTerra common stock on the date on which the option is granted. The option price of an NQSO could be less than the fair market value on the date the NQSO is granted if the SkyTerra

HUGHES COMMUNICATIONS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

board of directors so determined. An ISO could not be granted to a “ten percent stockholder” (as such term is defined in section 422A of the Internal Revenue Code) unless the exercise price was at least 110% of the fair market value of the common stock and the term of the option could not exceed five years from the date of grant. Common stock subject to a restricted stock purchase or a bonus agreement was transferable only as provided in such agreement. The maximum term of each stock option granted to persons other than ten percent stockholders was ten years from the date of grant.

Under the Nonqualified Stock Option Plan, which provided for the issuance of up to 510,000 shares, the option price as determined by the compensation committee was permitted to be greater or less than the fair market value of SkyTerra common stock as of the date of the grant, and the options were generally exercisable for three to five years subsequent to the grant date. The Nonqualified Stock Option Plan expired on July 18, 2000, and thereafter, no new options could be granted under the plan.

For the nine months ended September 30, 2005, the Company issued options to purchase 152,500 shares of SkyTerra common stock at a weighted average fair value of $16.82 using the Black-Scholes option pricing model. During the period from January 1, 2006 through the date of the Distribution, the Company received approximately $1.3 million in proceeds from the exercise of SkyTerra stock options.

At September 30, 2006 there were no SkyTerra stock options exercisable or outstanding. The following table summarizes SkyTerra stock option activity and related information for the period from January 1, 2006 through the date of the Distribution:


	Number of Shares		Weighted Average Exercise Price		Aggregate Intrinsic Value ($ thousands)
Outstanding at January 1, 2006	1,092,093		$	11.81
Exercised	(25,700	)	$	6.29	$	921
Effect of the Distribution	(1,066,393	)	$	8.30		14,949

Outstanding at September 30, 2006	—			—		—

Exercisable at September 30, 2006	—			—		—

Note 19: Contingencies and Commitments

Regulatory

In April 2005, the Federal Communications Commission (“FCC”) approved a license application submitted by the Company which provides the Company with access to a satellite orbital slot. To ensure that the Company complies with certain milestones with respect to the construction, launch and initial operation of a satellite in the orbital slot, the FCC requires the Company to maintain a surety bond with an initial amount of $3.0 million. As the milestones are achieved over a five year schedule, the amount of the surety bond will be reduced. To secure the Company’s obligation to the issuer of the surety bond, the Company must maintain a letter of credit in an amount equal to the value of the surety bond. The letter of credit agreement requires the Company to maintain a restricted cash account for 102% of the amount of the letter of credit. In July 2006, the FCC approved a reduction in the value of the surety bond to $0.8 million. In August 2006, the Company reduced the restricted cash balance securing the surety bond to this amount. As of September 30, 2006, the Company had approximately $0.8 million in the restricted cash account related to the license application.

HUGHES COMMUNICATIONS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Litigation

Litigation is subject to uncertainties, and the outcome of individual litigated matters is not predictable with assurance. Various legal actions, claims, and proceedings, including disputes with customers, are pending against HNS arising in the ordinary course of business. The Company has a policy of establishing loss provisions for matters in which losses are probable and can be reasonably estimated. Some of the matters may involve compensatory, punitive, or treble damage claims, or sanctions, that if granted, could require us to pay damages or make other expenditures in amounts that could not be estimated at September 30, 2006.

Following a voluntary disclosure by DIRECTV and DTV Networks in June 2004, DIRECTV and DTV Networks entered into a consent agreement (the “Consent Agreement”) with the US Department of State in January 2005 regarding alleged violations of the International Traffic in Arms regulations involving exports of technology related to the VSAT business primarily to China. As part of the Consent Agreement, which applies to the Company, one of the Company’s subsidiaries was debarred from conducting certain international business, although it may seek reinstatement in the future. In addition, the Company is required to enhance its export compliance program to avoid future infractions. As a result of its voluntary disclosure and the Consent Agreement, the Company is currently unable to perform its obligations under certain contracts with certain customers in China and Korea addressed by the Consent Agreement. If ultimately unable to perform, the Company may be liable for certain damages which are not expected to be material. In June 2006, the Company settled a claim by one of these customers in China for $0.5 million.

After discussion with counsel representing the Company in the actions described above, it is the opinion of management that such litigation is not expected to have a material adverse effect on the Company’s results of operations, financial position, or cash flows.

Other

The Company is contingently liable under standby letters of credit and bonds in the aggregate amount of $27.9 million that were undrawn at September 30, 2006. Of this amount, $13.0 million were issued under the $50.0 million revolving credit facility (see Note 10), $4.8 million were secured by restricted cash (see Note 3), and $10.1 million were secured by letters of credit issued under credit arrangements available to the Company’s Indian subsidiaries. Certain of the letters of credit issued by the Company’s Indian subsidiaries are secured by those entities’ assets. These obligations expire as follows: $2.4 million by December 31, 2006, $8.1 million in 2007, $6.4 million in 2008, and $6.8 million in 2009 and $4.2 million in 2010.

In connection with the prior disposition by DTV Networks of a subsidiary that was an affiliate of the Company, the Company entered into a services contract under which it agreed to procure a minimum amount of services from the former subsidiary over a two year period ending March 31, 2007. The minimum total amount to be procured during that period was $23.8 million. On August 4, 2006, in connection with the planned disposition by that former subsidiary of a business unit from which the Company had been procuring services, this agreement and the related commitment amount was amended to establish a revised minimum expenditure of $5.4 million for the period June 1, 2006 through September 30, 2007. The Company estimates that the amended purchase commitment will not have a material adverse effect on the Company’s results of operations, financial position or cash flows. The Company had spent $2.6 million through September 30, 2006 and had $2.8 million remaining to be spent through September 30, 2007.

Pursuant to the terms of the December 2004 Agreement, HNS has limited rights with respect to its investment in common stock of an unconsolidated affiliate carried in other assets in the balance sheets. Among other things, HNS may not pledge or otherwise encumber these shares, and while it may sell the shares to an unaffiliated third party, it must deliver the net proceeds from such sale to DIRECTV. The shares must be returned to DIRECTV within three years of the closing of the April 2005 Transaction unless a qualifying disposition of the shares has occurred. Accordingly, at September 30, 2006, HNS recorded a liability in the balance sheet for this investment in the amount of $8.9 million.

Upon closing of the April 2005 Transaction, the Company assumed responsibility for the satellite manufacturing contract with Boeing to complete construction of the SPACEWAY 3 satellite. The remaining obligation at that time was $49.0 million. Of the $49.0 million, $26.0 million was paid through September 30, 2006. The Company expects to pay $3.0 million of the balance by December 31, 2006 and the remainder in 2007. Additionally, the Company has entered into commitments with two companies totaling $73.7 million related to launch and launch operations services. Of this amount, $34.4 million was paid through September 30, 2006. Based on the expected launch of SPACEWAY 3 in the first half of 2007, the Company expects to pay $11.0 million by December 31, 2006 and the remainder in 2007.

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

The following discussion and analysis of our 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 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 that statements that use the terms “believe,” “do not believe,” “anticipate,” “expect,” “plan,” “estimate,” “strive,” “intend” and 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, uncertainties and risk factors, our actual results could differ materially from those anticipated in the forward-looking statement, including those set forth below under this “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and 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 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 we make in this report are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved.

As a result of the January 2006 Acquisition, as described below, our business has changed materially. For periods following the closing of the January 2006 Acquisition, we include the financial position and operating results of Hughes Network Systems, LLC (“HNS”) in our consolidated financial statements. From April 22, 2005 (the date of the April 2005 Transaction, as described below) through December 31, 2005, we recorded our investment in HNS using the equity method of accounting. On April 13, 2006, HNS and HNS Finance Corp. (together the “Issuers”) issued $450,000,000 principal amount of 9¹/2% Senior Notes due 2014 (the “Senior Notes”).

Overview

We operate our business primarily through HNS, a leading global provider of broadband satellite networks and services to the enterprise market and the largest satellite Internet access provider to the North American consumer and small and medium sized business (“Consumer/SMB”) market. In addition, HNS has leveraged its VSAT technology expertise to develop communication equipment for other end markets, where it supplies turn-key networking and terminal systems to mobile satellite-based voice and data service operators. Subsequent to April 2005, when SkyTerra Communications, Inc. (“SkyTerra”) completed the acquisition of 50% of the Class A membership interests of HNS, SkyTerra served as the managing member of HNS. In December 2005, SkyTerra contributed its Class A membership interest of HNS to us and we became the managing member. In January 2006, we acquired the remaining 50% of the Class A membership interests of HNS.

In addition, we have interests in other companies in the telecommunications industry, including:

•

Electronic System Products, Inc. (“ESP”), formerly a product development and engineering services firm, now focused on maximizing the license revenues from its existing intellectual property portfolio; and

•

certain minority investments, including Hughes Systique Corporation (“Hughes Systique”), Navigauge, Inc. (“Navigauge”), Edmund Holdings, Inc. and DataSynapse, Inc.

We provide corporate resources, strategic direction, transactional assistance and financial support to enable each of these companies to focus on and exploit opportunities within their lines of business.

On April 22, 2005, SkyTerra acquired 50% of HNS’ Class A membership interests (which it contributed to us on December 31, 2005) from DTV Network Systems, Inc., formerly known as Hughes Network Systems, Inc. (“DTV Networks”), a wholly owned subsidiary of The DIRECTV Group, Inc. (“DIRECTV”), and became HNS’ managing member. The events of April 22, 2005, are referred to herein as the “April 2005 Transaction.” Our results for 2005 reflect our investment in HNS after the April 2005 Transaction under the equity method of accounting, whereby we record our proportionate share of HNS’ operating results.

On January 1, 2006, we consummated the purchase (the “January 2006 Acquisition”), from DTV Networks of the remaining 50% of HNS’ Class A membership interests for a purchase price of $100.0 million. As a result of the January 2006 Acquisition, we now own 100% of the Class A membership interests of HNS. The January 2006 Acquisition was funded by a $100.0 million loan from certain of SkyTerra’s controlling stockholders, various investment vehicles that are affiliated with Apollo Advisors IV L.P. (“Apollo”). Our consolidated financial statements for periods beginning on or after January 1, 2006 include the results of HNS and its controlled, majority-owned subsidiaries.

On February 21, 2006, SkyTerra distributed (the “Distribution”) all of the outstanding shares of our common stock to SkyTerra’s common, non-voting common and preferred stockholders and its Series 1-A and 2-A warrant holders. The Distribution was the method by which SkyTerra was separated into two publicly traded companies. Although SkyTerra no longer owns any of our capital stock following the Distribution, SkyTerra’s controlling stockholder, Apollo, became our controlling stockholder following the Distribution. SkyTerra retained its interest in Mobile Satellite Ventures, LP (the “MSV Joint Venture”), a joint venture which provides mobile digital voice and data communications via satellite, its stake in TerreStar Networks, Inc. (“TerreStar”), and $12.5 million of cash, the balance, if any, of which will be transferred to us upon a change of control of SkyTerra.

Notwithstanding the legal form of the Distribution, we are treated as the “accounting successor” to SkyTerra for financial reporting purposes. This treatment is required because, among other things, (i) the businesses transferred to us generated all of SkyTerra’s historical consolidated revenues and constituted a majority of the book value of SkyTerra’s assets immediately preceding the Distribution and (ii) the businesses transferred to us included SkyTerra’s discontinued operating subsidiaries and all of the assets and liabilities relating to such subsidiaries. Accordingly, our historical results through December 31, 2005 are those previously reported by SkyTerra, including the results of the business and assets retained by SkyTerra. For the nine months ended September 30, 2006, our results include the results of the business and assets retained by SkyTerra through the date of the Distribution and reflect the results of HNS on a consolidated basis effective January 1, 2006.

On March 27, 2006, we closed our rights offering, pursuant to which we issued 7,843,141 shares of our common stock at a subscription price of $12.75 per share in order to repay the loan from Apollo. The portion of the loan, $68.4 million, necessary to purchase all of the shares allocated to Apollo was automatically converted into common stock in the rights offering based on the rights offering subscription price. The principal amount of the loan that was not converted in the rights offering, $31.6 million, was repaid in cash from proceeds from the rights offering. Accrued interest under the loan of $1.7 million was paid by us from available cash.

During the three and nine months ended September 30, 2005, our consolidated revenues were primarily derived from fees generated from services performed by ESP. During the fourth quarter of 2004, ESP experienced a significant decline in demand for its services, including from its existing customers. This decline resulted from the decreased amount of outsourced development and engineering services contracted for by its traditional customer base. As a result, in January 2005, ESP reduced its workforce from 21 employees to four employees to compensate for the reduced cash inflows. ESP subsequently reduced its headcount to one employee and has ceased performing services for clients. Instead, ESP is focusing on maximizing the licensing revenue from its intellectual property portfolio and is expected to continue those efforts. During the nine months ended September 30, 2006, our consolidated revenues were primarily derived from HNS’ operations, which we consolidate beginning January 1, 2006, as a result of the January 2006 Acquisition.

In December 2005, SkyTerra made a decision to discontinue operating AfriHUB. On December 31, 2005, SkyTerra contributed its 70% ownership interests in AfriHUB to us. Effective February 20, 2006, we entered into a Membership Interest and Note Purchase Agreement and sold our interests in AfriHUB for a promissory note with a principal amount of $0.15 million and a maturity date of February 20, 2007. The sale of our ownership interest in AfriHUB did not have a material impact on our financial position or results of operations. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), the results of operations of AfriHUB have been classified as discontinued operations on our consolidated statements of operations and prior period results have been reclassified.

In October 2005, we acquired Series A preferred shares from Hughes Systique for $3.0 million, representing an ownership of approximately 24% on an undiluted basis. Hughes Systique provides software development services with technology resources and

expertise in wireless broadband communications for terrestrial and satellite applications. Hughes Systique also supports other application areas such as wireless based networking, radio frequency identification device enterprise applications and multimedia applications for in-home broadband entertainment networks. The founders of Hughes Systique include Pradman Kaul, our Chief Executive Officer and President, as well as certain former employees of HNS, including Mr. Kaul’s brother, Pradeep Kaul, who serves as Chief Executive Officer of Hughes Systique.

Distribution

On February 21, 2006, SkyTerra completed the Distribution and separated into two publicly traded companies: (i) Hughes Communications, which consists of, among other things, the assets, liabilities and operations associated with the HNS and ESP businesses and certain minority investments in entities including Edmunds Holdings, Inc., Data Synapse, Inc. and Hughes Systique, along with all of SkyTerra’s cash, cash equivalents and marketable securities, excluding $12.5 million, and certain other liabilities expressly allocated from SkyTerra and (ii) SkyTerra, consisting of the assets and liabilities associated with its interest in the MSV Joint Venture and its stake in TerreStar, $12.5 million in cash, cash equivalents and marketable securities and the obligations pursuant to the Series A Preferred Stock. Upon a change of control of SkyTerra, the remaining balance of the $12.5 million of cash, cash equivalents and marketable securities at such time, if any, will be transferred to us from SkyTerra.

To effect the Distribution, SkyTerra distributed to each of its stockholders one-half of one share of our common stock for each share of SkyTerra common stock (or, in the case of holders of SkyTerra preferred stock and Series 1-A and 2-A warrants, in accordance with their terms, one-half of one share of our common stock for each share of SkyTerra common stock issuable upon conversion or exercise of such preferred stock and warrants).

Pursuant to SkyTerra’s 1998 Long Term Incentive Plan, the compensation committee of SkyTerra’s board of directors is required to make an equitable adjustment to the terms of options issued under that plan in the event a special, large and nonrecurring dividend or distribution affects SkyTerra’s common stock such that an adjustment is appropriate in order to prevent dilution or enlargement of the rights of the participants under such plan. SkyTerra’s compensation committee has discretion to make such an adjustment to any option issued under the plan by adjusting the number and kind of shares that may be issued in respect of outstanding options or the exercise price relating to such options. Pursuant to this provision, SkyTerra’s compensation committee determined that holders of stock options issued under the plan who were current members of SkyTerra’s management and board of directors, as well as a consultant and former directors who were involved with the acquisition of HNS, should receive an option to purchase one share of our common stock for each option to purchase two shares of SkyTerra’s common stock that they held as of the date of the Distribution. The issuance of such options to purchase our common stock was in lieu of a larger adjustment to the exercise price of SkyTerra’s options that such holders would have been otherwise entitled had they not received options to purchase our common stock. A reduction in the exercise price (or in some cases, an increase in the number of shares) was the manner in which all of SkyTerra’s other options outstanding under the plan were adjusted. On February 24, 2006, options to purchase 435,836 shares of our common stock were issued to holders of SkyTerra options.

We and SkyTerra have entered into a separation agreement (the “Separation Agreement”). The Separation Agreement effected, on December 31, 2005, the transfer, by way of contribution from SkyTerra to us, of the assets related to our business, and the assumption by us of certain liabilities. The Separation Agreement and certain related agreements govern, among other things, certain of the ongoing relations between us and SkyTerra following the Distribution.

In general, pursuant to the terms of the Separation Agreement, all of SkyTerra’s assets and liabilities, other than those specifically relating to the MSV Joint Venture and TerreStar, $12.5 million in cash, cash equivalents and marketable securities and the obligations pursuant to the Series A Preferred Stock, became our assets and liabilities. Upon a change of control of SkyTerra, the remaining balance of the $12.5 million of cash, cash equivalents and marketable securities at such time, if any, will be transferred to us from SkyTerra. The Separation Agreement also provides for assumptions of liabilities and cross-indemnities designed to allocate generally, effective as of the date of the Separation Agreement, financial responsibility for all liabilities arising out of or in connection with our businesses to us and all liabilities arising out of or in connection with SkyTerra’s interest in the MSV Joint Venture and TerreStar to SkyTerra. In addition, we will indemnify SkyTerra for liabilities relating to certain litigation in which SkyTerra or SkyTerra’s subsidiaries were involved.

HNS Transactions

On April 22, 2005, SkyTerra acquired 50% of the Class A membership interests of HNS from DTV Networks, a wholly owned subsidiary of DIRECTV, for $50.0 million in cash and 300,000 shares of SkyTerra’s common stock. The acquisition occurred pursuant to an agreement among SkyTerra, DIRECTV, DTV Networks and HNS, dated December 3, 2004, as amended. Immediately prior to the acquisition, DTV Networks contributed substantially all of the assets and certain liabilities of its very small aperture terminal, mobile satellite and terrestrial microwave businesses, as well as certain portions of its SPACEWAY Ka-band satellite communications platform that is under development, to HNS, which at the time was a wholly-owned subsidiary of DTV Networks. In consideration for the contribution of assets by DTV Networks, HNS paid DTV Networks $190.7 million of cash. This payment represented the $201.0 million stated in the agreement less an estimated purchase price adjustment of $10.3 million, which was subject to further adjustment depending principally upon the closing value of HNS’ working capital (as defined in the agreement). On December 31, 2005, SkyTerra contributed to us its 50% Class A membership interest of HNS. On January 3, 2006, HNS paid DTV Networks $10.0 million in final satisfaction of all purchase price adjustments.

On January 1, 2006, we consummated the acquisition of the remaining 50% of the Class A membership interests of HNS from DTV Networks for $100.0 million in cash. In order to fund the purchase price, we borrowed $100.0 million from Apollo. The loan bore interest at a rate of 8% per annum and had a final maturity date of January 1, 2007. The loan was repaid in March 2006 following the consummation of the rights offering conducted by us.

Effects of Strategic Initiatives on HNS’ Results of Operations

For a discussion of the effects of strategic initiatives on HNS’ results of operations, see “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” in the Form 10-Q filed by HNS with the SEC related to the period ended September 30, 2006, which Form 10-Q is included as Exhibit 99.1 herein.

Factors Affecting HNS’ Results of Operations

For a discussion of the factors affecting HNS’ results of operations, see “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” in the Form 10-Q filed by HNS with the SEC related to the period ended September 30, 2006, which Form 10-Q is included as Exhibit 99.1 herein.

Key Business Metrics for HNS

For a discussion of HNS’ key business metrics, see “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” in the Form 10-Q filed by HNS with the SEC related to the period ended September 30, 2006, which Form 10-Q is included as Exhibit 99.1 herein.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. These accounting principles require us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported amounts of income and expense during the periods presented. Although these estimates are based on our knowledge of current events and actions we may undertake in the future, actual results may differ from estimates. The following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results from operations, and that require judgment. Also, see the notes accompanying the condensed consolidated financial statements, which contain additional information regarding our accounting policies.

Consolidation

We consolidate the operating results and financial position of subsidiaries in which we own a controlling financial interest, which is usually indicated by ownership of a majority voting interest of over 50% of the outstanding voting shares. We own approximately 93% of the voting interests of ESP and 100% of the voting interests of HNS, both of which have been included in our consolidated financial statements. Prior to the February 20, 2006 sale, we owned 70% of AfriHUB, which has been classified and reported as a discontinued operation in our consolidated financial statements, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets.”

Revenue Recognition

Service revenues and hardware sales, excluding lease revenues described below, are recognized as services are rendered or products are installed or shipped to third-party installers and as title passes to those customers. In situations where customer offerings represent a bundled arrangement for both services and hardware, revenue elements are separated into their relevant components (services or hardware) for revenue recognition purposes. We offer a rebate to qualifying new consumer subscribers and record a reduction in revenue in the same period the related sale occurs, based on an estimate of the number of rebates that will be redeemed. This estimate is based on historical experience and actual sales during the promotion.

Included in hardware sales for the three and nine months ended September 30, 2006 are revenues of $1.6 million and $23.3 million, respectively, representing annual revenues under VSAT hardware operating leases with customers which are funded by third-party financial institutions and for which we have retained a financial obligation to the financial institution. At the inception of the operating lease, we receive cash from the financial institution for a substantial portion of the aggregate lease rentals and, for those transactions in which we have retained a continuing obligation to the financing institution to indemnify it from losses it may incur (up to the original value of the hardware), recognize a corresponding liability to the financial institution for those transactions.

Hardware lease revenues are recognized over the term of the operating lease. We capitalize the book value of the installed equipment used to provide services to the customer as VSAT operating lease hardware and depreciate these costs over the term of the customer lease agreement. For transactions in which we have not retained a continuing obligation to the financing institution, hardware revenues are recognized at the inception of the transaction.

Business Combinations and Intangibles

We account for business combinations in accordance with SFAS No. 141, “Business Combinations.” Intangible assets acquired in connection with business combinations which have definite lives are amortized over their estimated useful lives. The estimated useful lives are based on estimates of the period during which the assets will generate revenue. Intangibles with definite lives are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may no longer be recoverable.

Income Taxes

Through the date of the Distribution, our results will be included in the consolidated federal income tax return to be filed by SkyTerra. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Under the terms of the agreement entered into in connection with the April 2005 Transaction, DIRECTV retained the tax benefits from the net operating losses generated by DTV Networks and has responsibility for all of the pre-closing domestic and international 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.

Accounting for the Distribution

We accounted for the Distribution by SkyTerra as a reverse spin-off in accordance with EITF No. 02-11, “Accounting for Reverse Spin-offs” which provides guidance in situations in which a transferred business generated substantially all of the transferor’s historical consolidated revenues and constituted a majority of the book value of the transferor’s assets immediately prior to the spin-off. Further, we accounted for the Distribution as a non-monetary transaction in accordance with APB No. 29, “Accounting for Non-Monetary Transactions” resulting in transfer of the net assets at their historical basis as of the date of the transfer.

Results of Operations for the Three Months Ended September 30, 2006 Compared to the Three Months Ended September 30, 2005

Services Revenues

Services revenues for the three months ended September 30, 2006 increased to $112.2 million from $0.2 million for the three months ended September 30, 2005, an increase of $112.0 million. This increase was due to the consolidation of HNS into our operations in connection with the January 2006 Acquisition. HNS’ revenues for the three months ended September 30, 2006 were $112.0 million. See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” included in the Form 10-Q filed by HNS with the SEC related to the period ended September 30, 2006, which Form 10-Q is included as Exhibit 99.1 herein, for a comparison of HNS’ results for the three months ended September 30, 2006 with the three months ended September 30, 2005.

Hardware Sales

Hardware sales revenue for the three months ended September 30, 2006 were $97.5 million, and all are related to HNS operations. There were no hardware sales in the three months ended September 30, 2005, as we did not sell hardware products prior to our acquisition of HNS. See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” included in the Form 10-Q filed by HNS with the SEC related to the period ended September 30, 2006, which Form 10-Q is included as Exhibit 99.1 herein, for a comparison of HNS’ results for the three months ended September 30, 2006 with the three months ended September 30, 2005.

Cost of Services

Our cost of services relates to costs associated with the provision of network services, and consists primarily of satellite capacity leases, hub infrastructure, customer care, depreciation expense related to network infrastructure and the salaries and related employment costs for those employees who manage our network operations and other project areas. Cost of services for the three months ended September 30, 2006 increased to $80.0 million from $0.05 million for the three months ended September 30, 2005, an increase of $80.0 million. This increase was due to the consolidation of HNS into our operations in connection with the January 2006 Acquisition. HNS’ cost of services for the three months ended September 30, 2006 was $80.0 million. See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” included in the Form 10-Q filed by HNS with the SEC related to the period ended September 30, 2006, which Form 10-Q is included as Exhibit 99.1 herein, for a comparison of HNS’ results for the three months ended September 30, 2006 with the three months ended September 30, 2005.

Cost of Hardware Products Sold

Our cost of hardware products sold relates primarily to the cost of direct materials and subsystems (electronic components, antennas, etc.), 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 for the three months ended September 30, 2006 was $74.2 million. We had no cost of hardware products sold in the three months ended September 30, 2005, as we did not sell hardware products prior to our acquisition of HNS. See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” included in the Form 10-Q filed by HNS with the SEC related to the period ended September 30, 2006, which Form 10-Q is included as Exhibit 99.1 herein, for a comparison of HNS’ results for the three months ended September 30, 2006 with the three months ended September 30, 2005.

Research and Development

Research and development expenses relate to costs associated with engineering support for existing platforms and development efforts to build new products and software applications relating to our business. Research and development costs consist primarily of the salaries of certain members of our engineering staff burdened with an applied overhead charge as well as subcontractors, material purchases and other direct costs in support of product developments. Research and development expense for the three months ended September 30, 2006 was $3.8 million. We had no research and development expense prior to the January 1, 2006 acquisition of HNS. See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” included in the Form 10-Q filed by HNS with the SEC related to the period ended September 30, 2006, which Form 10-Q is included as Exhibit 99.1 herein, for a comparison of HNS’ results for the three months ended September 30, 2006 with the three months ended September 30, 2005.

Sales and Marketing

Sales and marketing expense consists primarily of the salaries, commissions and related benefit costs of our direct sales force and marketing staff, advertising, travel, allocation of facilities and other directly related overhead costs for our domestic and international businesses, as well as other subscriber acquisition costs related to our Consumer/SMB business. Sales and marketing expense for the three months ended September 30, 2006 was $18.4 million. We had no sales and marketing expense prior to the January 1, 2006 acquisition of HNS. See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” included in the Form 10-Q filed by HNS with the SEC related to the period ended September 30, 2006, which Form 10-Q is included as Exhibit 99.1 herein, for a comparison of HNS’ results for the three months ended September 30, 2006 with the three months ended September 30, 2005.

General and Administrative

General and administrative expense includes facilities costs, finance, legal and other corporate costs, as well as the salaries and related employee benefits for those employees that support such functions. General and administrative expense for the three months ended September 30, 2006 increased to $13.0 million from $1.7 million for the three months ended September 30, 2005, an increase of $11.3 million. This increase relates primarily to the consolidation of HNS into our operations in connection with the January 2006 Acquisition. HNS’ general and administrative expenses for the three months ended September 30, 2006 were $12.1 million. See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” included in the Form 10-Q filed by HNS with the SEC related to the period ended September 30, 2006, which Form 10-Q is included as Exhibit 99.1 herein, for a comparison of HNS’ results for the three months ended September 30, 2006 with the three months ended September 30, 2005.

Amortization of Intangibles

As a result of the January 2006 Acquisition, we have recorded a preliminary estimate of intangible assets as of January 1, 2006 relating to customer relationships, technology patents, trademarks and backlog in accordance with SFAS No. 141. Amortization of intangible assets was $1.1 million for the three months ended September 30, 2006. We had no intangible assets prior to the January 1, 2006 acquisition of HNS.

Interest Expense

Interest expense was $11.1 million for the three months ended September 30, 2006. We had no interest expense in the prior year. Interest expense during the three months ended September 30, 2006 consists primarily of interest on debt incurred by HNS related to the Senior Notes and VSAT hardware financing. Approximately $1.2 million of interest costs were capitalized in connection with the SPACEWAY program.

Equity in Earnings of Hughes Network Systems, LLC

For the three months ended September 30, 2005, we recorded income of $6.4 million relating to our 50% ownership of HNS for the period from April 22, 2005 through September 30, 2005. We recorded no income or loss under the equity method of accounting during the three months ended September 30, 2006 as we began to consolidate HNS’ results subsequent to the January 2006 Acquisition.

Equity in Loss of Mobile Satellite Ventures LP

For the three months ended September 30, 2005, we recorded expense of $1.6 million relating to our proportionate share of the MSV Joint Venture’s net loss. We recorded no income or loss associated with the MSV Joint Venture in the three months ended September 30, 2006 as we distributed our interest in the MSV Joint Venture to SkyTerra on the date of the Distribution.

Other Income, Net

For the three months ended September 30, 2006 and 2005, we recorded other income, net of $4.3 million and $1.3 million, respectively, an improvement of $3.0 million. The improvement is attributable to an increase of $3.0 million in interest income earned on the cash acquired in the January 1, 2006 acquisition of HNS and the excess cash generated from the proceeds of HNS’s Senior Notes offering.

Income Tax Expense

For the three months ended September 30, 2006, we recorded income tax expense of $1.1 million, attributable primarily to income earned by the international subsidiaries in India and Brazil that we acquired as part of the acquisition of HNS. For the three months ended September 30, 2005, no income tax expense was recorded, because we had incurred a year-to-date loss and were maintaining a full valuation allowance on our deferred tax assets at that time.

Income from Discontinued Operations

For the three months ended September 30, 2005, we recognized income from operations of AfriHUB of $0.9 million. AfriHUB was sold in February 2006, and accordingly no income or loss was recorded for the three months ended September 30, 2006.

Cumulative Dividends and Accretion of Convertible Preferred Stock to Liquidation Value

For the three months ended September 30, 2005, we recorded dividends and accretion of $2.5 million, related to amounts payable quarterly on SkyTerra’s Series A Preferred Stock and to accretion of the carrying amount of the Series A Preferred Stock to its $100 per share face value redemption amount over 13 years. We recorded no dividends and accretion during the three months ended September 30, 2006, as the Series A Preferred Stock remained with SkyTerra subsequent to the Distribution.

Results of Operations for the Nine months Ended September 30, 2006 Compared to the Nine months Ended September 30, 2005

Services Revenues

Services revenues for the nine months ended September 30, 2006 increased to $325.3 million from $0.4 million for the nine months ended September 30, 2005, an increase of $324.9 million. This increase was due to the consolidation of HNS into our operations in

connection with the January 2006 Acquisition. HNS’ revenues for the nine months ended September 30, 2006 were $324.9 million. See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” included in the Form 10-Q filed by HNS with the SEC related to the period ended September 30, 2006, which Form 10-Q is included as Exhibit 99.1 herein, for a comparison of HNS’ results for the nine months ended September 30, 2006 with the nine months ended September 30, 2005.

Hardware Sales

Hardware sales for the three months ended September 30, 2006 were $290.0 million. There were no hardware sales in the three months ended September 30, 2005, as we did not sell hardware products prior to our acquisition of HNS. See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” included in the Form 10-Q filed by HNS with the SEC related to the period ended September 30, 2006, which Form 10-Q is included as Exhibit 99.1 herein, for a comparison of HNS’ results for the nine months ended September 30, 2006 with the nine months ended September 30, 2005.

Cost of Services

Our cost of services relates to costs associated with the provision of network services, and consists primarily of satellite capacity leases, hub infrastructure, customer care, depreciation expense related to network infrastructure and the salaries and related employment costs for those employees who manage our network operations and other project areas. Cost of services for the nine months ended September 30, 2006 increased to $227.4 million from $0.3 million for the nine months ended September 30, 2005, an increase of $227.1 million. This increase was due to the consolidation of HNS into our operations in connection with the January 2006 Acquisition. HNS’ cost of services for the nine months ended September 30, 2006 was $227.3 million. See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” included in Form 10-Q filed by HNS with the SEC related to the period ended September 30, 2006, which Form 10-Q is included as Exhibit 99.1 herein, for a comparison of HNS’ results for the nine months ended September 30, 2006 with the nine months ended September 30, 2005.

Cost of Hardware Products Sold

Our cost of hardware products sold relates primarily to the cost of direct materials and subsystems (electronic components, antennas, etc.), 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 for the nine months ended September 30, 2006 was $237.2 million. We had no cost of hardware products sold in the nine months ended September 30, 2005, as we did not sell hardware products prior to our acquisition of HNS. See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” included in the Form 10-Q filed by HNS with the SEC related to the period ended September 30, 2006, which Form 10-Q is included as Exhibit 99.1 herein, for a comparison of HNS’ results for the nine months ended September 30, 2006 with the nine months ended September 30, 2005.

Research and Development

Research and development expenses relate to costs associated with engineering support for existing platforms and development efforts to build new products and software applications relating to our business. Research and development costs consist primarily of the salaries of certain members of our engineering staff burdened with an applied overhead charge as well as subcontractors, material purchases and other direct costs in support of product developments. Research and development expense for the nine months ended September 30, 2006 was $18.0 million. We had no research and development expense prior to the January 1, 2006 acquisition of HNS. See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” included in the Form 10-Q filed by HNS with the SEC related to the period ended September 30, 2006, which is included as Exhibit 99.1 herein, for a comparison of HNS’ results for the nine months ended September 30, 2006 with the nine months ended September 30, 2005.

Sales and Marketing

Sales and marketing expense consists primarily of the salaries, commissions and related benefit costs of our direct sales force and marketing staff, advertising, travel, allocation of facilities and other directly related overhead costs for our domestic and international businesses, as well as other subscriber acquisition costs related to our Consumer/SMB business. Sales and marketing expense for the nine months ended September 30, 2006 was $58.2 million. We had no sales and marketing expense prior to the January 1, 2006 acquisition of HNS. See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” included in the Form 10-Q filed by HNS with the SEC related to the period ended September 30, 2006, which Form 10-Q is included as Exhibit 99.1 herein, for a comparison of HNS’ results for the nine months ended September 30, 2006 with the nine months ended September 30, 2005.

General and Administrative

General and administrative expense includes facilities costs, finance, legal and other corporate costs, as well as the salaries and related employee benefits for those employees that support such functions. General and administrative expense for the nine months ended September 30, 2006 increased to $41.7 million from $5.8 million for the nine months ended September 30, 2005, an increase of $35.9 million. This increase relates primarily to the consolidation of HNS into our operations in connection with the January 2006 Acquisition. HNS’ general and administrative expenses for the nine months ended September 30, 2006 were $38.1 million. See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” included in the Form 10-Q filed by HNS with the SEC related to the period ended September 30, 2006, which Form 10-Q is included as Exhibit 99.1 herein, for a comparison of HNS’ results for the nine months ended September 30, 2006 with the nine months ended September 30, 2005.

Amortization of Intangibles

As a result of the January 2006 Acquisition, we have recorded a preliminary estimate of intangible assets as of January 1, 2006 relating to customer relationships, technology patents, trademarks and backlog in accordance with SFAS No. 141, and amortization of intangible assets was $3.4 million for the nine months ended September 30, 2006. We had no intangible assets prior to the January 1, 2006 acquisition of HNS.

Interest Expense

Interest expense was $32.6 million for the nine months ended September 30, 2006. We had no interest expense in the prior year. Interest expense during the nine months ended September 30, 2006 primarily consists of $30.9 million of interest on debt incurred by HNS and $1.7 million of interest paid to Apollo in connection with the $100.0 million loan from Apollo to finance the January 2006 Acquisition. Interest expense at HNS primarily relates to the Senior Notes and the impact of increased interest of $2.0 million related to VSAT hardware financing and $1.5 million associated with the payment of the $325 million term indebtedness in the second quarter. Approximately $3.0 million of interest costs were capitalized in connection with the SPACEWAY program.

Equity in Earnings of Hughes Network Systems, LLC

For the nine months ended September 30, 2005, we recorded income of $12.9 million relating to our 50% ownership of HNS for the period from April 22, 2005 through September 30, 2005. We recorded no income or loss under the equity method of accounting during the nine months ended September 30, 2006 as we consolidate HNS’ results subsequent to the January 2006 Acquisition.

Equity in Loss of Mobile Satellite Ventures LP

For the nine months ended September 30, 2006 and 2005, we recorded expense of $1.5 million and $7.5 million, respectively, relating to our proportionate share of the MSV Joint Venture’s net loss. Our share of the loss in the nine months ended September 30, 2006 is our proportionate share through the date of the Distribution, as we distributed our interest in the MSV Joint Venture to SkyTerra on that date.

Other Income, Net

For the nine months ended September 30, 2006 and 2005, we recorded other income, net of $8.8 million and $2.2 million, respectively, an improvement of $6.6 million. The improvement is primarily attributable to an increase of $6.9 million in interest income earned on the cash acquired in the January 1, 2006 acquisition of HNS which is partially offset by a loss of $0.3 million in equity earnings of its affiliates.

Income Tax Expense

For the nine months ended September 30, 2006, we recorded income tax expense of $52.9 million. For the nine months ended September 30, 2005, no income tax benefit was recorded on our net loss before income taxes for that period as we were maintaining a full valuation allowance on our deferred tax assets at that time. During the year ended December 31, 2005, we recognized a $50.3 million income tax benefit, and associated deferred tax asset, related to the reversal of the valuation allowance for the net operating and capital loss carryforwards which are expected to be utilized to offset the Federal taxable income on the Distribution, which did not qualify as a tax-free spin-off. The $52.9 million of income tax expense recorded in the nine months ended September 30, 2006 consisted of a $50.3 million reversal of the previously established deferred tax asset, $0.6 million in estimated state taxes payable, and $2.0 million in estimated foreign taxes payable by our international subsidiaries.

Loss from Discontinued Operations

For the nine months ended September 30, 2006, we recognized a loss from operations of AfriHUB for the period prior to the sale of approximately $42,000. For the nine months ended September 30, 2005, we recognized a loss from operations of AfriHUB of $0.3 million.

Gain on Sale of Discontinued Operations

During the nine months ended September 30, 2006, we recognized a gain of $0.2 million on the February 20, 2006 sale of AfriHUB.

Cumulative Dividends and Accretion of Convertible Preferred Stock to Liquidation Value

For the nine months ended September 30, 2006 and 2005, we recorded dividends and accretion of $1.5 million and $7.5 million, respectively, related to amounts payable quarterly on SkyTerra’s Series A Preferred Stock and to accretion of the carrying amount of the Series A Preferred Stock to its $100 per share face value redemption amount over 13 years. The amount recorded in the nine months ended September 30, 2006 represents the amount recognized through the date of the Distribution.

Liquidity and Capital Resources

Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005

Net Cash Flows from Operating Activities

We had $214.9 million in cash, cash equivalents and short-term investments as of September 30, 2006. Upon a change of control of SkyTerra, the balance of the cash, cash equivalents and marketable securities retained by SkyTerra in the Distribution, if any, will be transferred to us from SkyTerra.

Cash provided by operating activities from continuing operations for the nine months ended September 30, 2006 improved to $48.6 million from a $2.9 million use of cash for the nine months ended September 30, 2005, an improvement of $51.5 million. As a result of the January 2006 Acquisition, we consolidated the results of HNS’ operations from January 1, 2006 forward. During the nine months ended September 30, 2005, we accounted for our interest in HNS using the equity method to reflect our 50% share of their results from April 22, 2005 forward. During the nine months ended September 30, 2006, we generated operating income before depreciation and amortization expense of $58.2 million, primarily attributable to HNS’ operations. During the nine months ended September 30, 2005, we generated an operating loss before depreciation and amortization expense of $5.6 million, resulting in an increase of $63.8 million. In addition, cash flows from operating activities increased $17.3 million as a result of changes in operating assets and liabilities. These increments were offset by $32.6 million of interest expense in the nine months ended September 30, 2006, consisting of interest on HNS’ debt and interest on the $100.0 million loan from Apollo to finance the January 2006 Acquisition, compared with no interest expense in the comparable period in 2005.

Net Cash Flows from Investing Activities

Cash used in investing activities for the nine months ended September 30, 2006 increased to $118.5 million from $3.8 million for the nine months ended September 30, 2005, an increase of $114.7 million. The increase resulted primarily from the $66.8 million used for capital expenditures and $67.2 million used to purchase short-term investments in 2006 compared to a $49.3 million source of cash in 2005 resulting from the sale of short-term investments. Partially offsetting these uses in 2006 was the $50.0 million in cash used in 2005 to purchase the first 50% of the Class A membership interests in HNS along with a $12.9 million source of cash in 2006 related primarily to the acquisition of the remaining 50% of the Class A membership interests of HNS. The total cash purchase price for the remaining 50% was $100.5 million. At the date of purchase, HNS had cash of $113.3 million.

Capital expenditures for the nine months ended September 30, 2005 and 2006 consists of the following (dollars in thousands):


	Nine Months Ended September 30,				Increase (Decrease)
	2006		2005		Increase (Decrease)
Capital expenditures
SPACEWAY program	$	32,137	$	—	$	32,137
VSAT operating lease hardware		650		—		650
Capitalized software		12,961		—		12,961
Other capital expenditures—VSAT		16,711		—		16,711
Capital expenditures—other		4,338		3		4,335

Total Capital Expenditures	$	66,797	$	3	$	66,794

Net Cash Flows From Financing Activities

Cash provided by financing activities increased to a source of $179.2 million for the nine months ended September 30, 2006 from a use of $3.9 million for the nine months ended September 30, 2005, an increase of $183.1 million. Cash provided by financing activities in the nine months ended September 30, 2006 consisted primarily of $100 million of cash borrowed from Apollo in connection with the acquisition of HNS; the net proceeds of $125 million from HNS’ $450 million Senior Notes offering after repayment of $325 million in outstanding term indebtedness, which was further reduced by debt issuance cost of $11.2 million. The loan from Apollo was repaid with the proceeds of the $100 million rights offering completed during the nine months ended September 30, 2006. These items were offset by the payments of preferred stock dividends of $1.4 million, a final distribution to SkyTerra of $8.9 million and repayments of VSAT related debt and other revolver and term debt at HNS’ foreign subsidiaries of $31.2 million.

Future Liquidity Requirements

We are significantly leveraged primarily as a result of the HNS debt. We expect that our principal future liquidity requirements will be for working capital, HNS’ debt service, the costs to complete and launch the SPACEWAY 3 satellite, and, to a lesser extent, other capital expenditures such as VSAT operating lease hardware and other VSAT capital expenditures. Pursuant to the April 2005 Transaction, HNS incurred $325.0 million of term indebtedness with a floating interest rate and obtained a $50.0 million revolving credit facility which was undrawn at September 30, 2006. The $50.0 million revolving credit facility was available under the first lien credit agreement for borrowings and for issuance of letters of credit. On April 13, 2006, HNS, along with HNS Finance Corp. as co-issuer, issued the Senior Notes in a private placement. The Senior Notes are guaranteed on a senior unsecured basis by each of HNS’ current and future domestic subsidiaries that guarantee any of HNS’ indebtedness or indebtedness of other HNS subsidiary guarantors, including the indebtedness under HNS’ revolving credit facility. A portion of the net proceeds of the offering was used to repay the $325.0 million of term indebtedness incurred pursuant to the April 2005 Transaction, including accrued interest and an early termination fee. The remainder, after paying the fees and expenses associated with the issuance of the Senior Notes, is available to HNS for general corporate purposes. In connection with the offering, HNS amended its $50.0 million revolving credit facility pursuant to an amendment and restatement of the credit agreement governing this credit facility. The $50.0 million revolving credit facility is available for borrowings and for issuance of letters of credit. At September 30, 2006, HNS had issued letters of credit totaling $13.0 million under the revolving credit facility. As a result, the available borrowing capacity under the revolving credit facility as of September 30, 2006 was $37.0 million. The Senior Notes were offered and sold in the United States only to qualified institutional buyers pursuant to Rule 144A of the Securities Act of 1933, as amended, (the “Securities Act”) and in offshore transactions to non-United States persons in reliance on Regulation S of the Securities Act. In connection with the offering of the Senior Notes, the Company entered into a registration rights agreement with the purchasers of the Senior Notes requiring us to complete a registered exchange offer relating to the Senior Notes within 360 days after April 13, 2006. The Company’s registration statement relating to the exchange offer for the Senior Notes was declared effective by the SEC on October 27, 2006, at which time the Company commenced the registered exchange offer for the Senior Notes. The expiration date for the exchange offer is November 29, 2006, unless extended.

capital stock; prepay, redeem or repurchase debt; make loans and investments; enter into agreements that restrict distributions from HNS’ subsidiaries; sell assets and capital stock of HNS’ subsidiaries; enter into certain transactions with affiliates; consolidate or merge with or into, or sell substantially all of HNS’ assets to, another person; and enter into new lines of business. In addition to these negative covenants, the amended revolving credit facility contains affirmative covenants such as preserving HNS’ businesses and properties, maintaining insurance over HNS’ assets, paying and discharging all material taxes when due, and furnishing the lenders’ administrative agent HNS’ 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. HNS was in compliance with all of its debt covenants at September 30, 2006.

Our Indian subsidiary, HCIL, has various revolving and term loans funded by local banks in Indian Rupees. The balances outstanding as of September 30, 2006 and December 31, 2005 were $4.9 million and $4.8 million, respectively. HCIL may be restricted from paying dividends to us under the terms of these loans.

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 working capital, capital expenditure, including construction costs for SPACEWAY estimated to be $98.4 million, debt service, research and development and other funding requirements for the foreseeable future. However, our ability to fund our working capital needs, research and development activities, debt payments and other obligations, and to comply with the financial covenants under HNS’ debt agreements, depends on our future operating performance and cash flow, which are in turn subject to prevailing economic conditions, the level of spending by our customers and other factors, many of which are beyond our control.

Commitments and Contingencies

Litigation is subject to uncertainties, and the outcome of individual litigated matters is not predictable with assurance. Various legal actions, claims, and proceedings, including disputes with customers, are pending against us arising in the ordinary course of business. The Company has a policy of establishing loss provisions for matters in which losses are probable and can be reasonably estimated. Some of the matters may involve compensatory, punitive, or treble damage claims, or sanctions, that if granted, could require us to pay damages or make other expenditures in amounts that could not be estimated at September 30, 2006.

Following a voluntary disclosure by DIRECTV and DTV Networks in June 2004, DIRECTV and DTV Networks entered into a consent agreement with the U.S. Department of State in January 2005 regarding alleged violations of the International Traffic in Arms regulations involving exports of technology related to the VSAT business primarily to China. As part of the consent agreement, which applies to HNS, one of its subsidiaries was debarred from conducting certain international business, although it may seek reinstatement in the future. In addition, HNS is required to enhance its export compliance program to avoid future infractions. As a result of the voluntary disclosure and the consent agreement, HNS is currently unable to perform its obligations under certain contracts with certain customers in China and Korea addressed by the consent agreement, and if ultimately unable to perform, HNS may be liable for certain damages which are not expected to be material. In June 2006, we settled a claim by one of these customers in China for $0.5 million.

The Company is also involved in various claims and lawsuits arising in the normal conduct of its business. Its management is not aware of any claims or adverse developments with respect to such matters which are expected to have a material adverse effect on our consolidated financial position, results of operations, cash flows or ability to conduct our business.

Off-Balance Sheet Arrangements

The Company is 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 RFP 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 expire typically when the warranty expires, generally one year after the installation of the equipment.

As of September 30, 2006, $27.9 million of our contractual obligations to customers and other statutory/governmental agencies were secured by letters of credit and bond issued through our and our subsidiaries’ credit facilities. Of this amount, $13.0 million were issued under HNS’ $50.0 million revolving credit facility, $4.8 million were secured by restricted cash, and $10.1 million were secured by letters of credit issued under credit arrangements available to our Indian subsidiaries. Certain of the letters of credit issued by our Indian subsidiaries are secured by those entities’ assets.

Seasonality

Like many communications infrastructure equipment vendors, a significant amount of our hardware sales occurs 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 the Company’s results of operations.

Recently Issued Accounting Standards

In November 2004, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs—an amendment of Accounting Research Bulletin No. 43 (“ARB 43”) Chapter 4 (“SFAS No. 151”). SFAS No. 151 amends ARB 43, Chapter 4 to clarify the accounting for idle facility expense, freight, handling costs, and wasted material. SFAS No. 151 requires that these types of costs be recognized as current period expenses when incurred. SFAS No. 151 is effective for HNS for inventory costs incurred on or after January 1, 2006. The adoption of this standard did not have a significant impact on our results of operations or financial position.

We adopted SFAS No. 123R “Share-Based Payment” (“SFAS No. 123R”) on January 1, 2006. SFAS No. 123R requires entities to recognize compensation expense for all shared-based payments to employees, including stock options, based on the estimated fair value of the instrument on the date it is granted. The expense will be recognized over the requisite service period, usually the vesting period, of the award. We adopted SFAS No. 123R using the modified prospective method, whereby compensation expense is recognized for all awards issued or modified subsequent to the effective date, as well as for awards granted to employees prior to the effective date that are unvested on the effective date. The adoption of SFAS No. 123R had no material impact on our results of operations or financial position. Until December 31, 2005, we elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB Opinion No. 25”) and related interpretations in accounting for employee stock options as allowed pursuant to SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), as amended by SFAS No. 148, “Accounting for Stock-Based Compensation.”

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” a replacement of APB Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements,” (“SFAS No. 154”). SFAS No. 154 applies to all voluntary changes in accounting principle and changes the requirements for accounting for and reporting a change in accounting principle. SFAS No. 154 requires the retrospective application to prior periods’ financial statements of the direct effect of a voluntary change in accounting principle unless it is impracticable to determine either the period-specific effects or the cumulative effective of the change. SFAS No. 154 is effective for HNS for accounting changes made on or after January 1, 2006; however the statement does not change the transition provisions of any existing accounting pronouncements. The adoption of SFAS No. 154 did not have a material impact on our results of operations or financial position.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140,” (“SFAS No. 155”), an amendment to FASB Statements No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends Statement 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. We do not expect the adoption of SFAS No. 155 to have a material impact on our results of operations or financial position.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108 on Quantifying Misstatements, or SAB No. 108. SAB No. 108 requires companies to use both a balance sheet and an income statement approach when quantifying and evaluating the materiality of a misstatement, and contains guidance on correcting errors under the dual approach. SAB No. 108 also provides transition guidance for correcting errors existing in prior years. SAB No. 108 is effective for annual financial statements covering the first fiscal year ending after November 15, 2006, with earlier application encouraged for any interim period of the first fiscal year ending after November 15, 2006, and filed after September 13, 2006. The Company has not yet determined what impact, if any, SAB 108 will have on its results of operations or financial position.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” or SFAS No. 157. SFAS No. 157 establishes a framework for measuring fair value in generally accepted accounting principles, clarifies the definition of fair value and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements. However, the application of SFAS No. 157 may change current practice for some entities. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company has not yet determined what impact, if any, SFAS No. 157 will have on its results of operations or financial position.

Item 3. Quantitative and Qualitative Information 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, we are 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. The gains and losses on derivative foreign exchange contracts offset changes in value of the related exposures. As of September 30, 2006, the Company, through an Indian subsidiary, had purchased $2.0 million of foreign exchange contracts to mitigate foreign currency fluctuation risks associated with short-term U.S. dollar denominated obligations. The differences between the face amount of the foreign exchange contracts and their estimated fair values were not material at September 30, 2006. The gains and losses on derivative foreign exchange contracts offset changes in value of the related exposures. The impact of a hypothetical 10% adverse change in exchange rates on the fair value of foreign currency denominated assets and liabilities would be an estimated loss of $4.9 million as of September 30, 2006.

Interest Rate Risk

The Company has a significant amount of cash that is invested in short-term investments which are subject to market risk due to changes in interest rates. We have established an investment policy which governs our investment strategy and stipulates that we diversify our 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.

The Senior Notes issued on April 13, 2006 and outstanding borrowings related to VSAT hardware financing are not subject to interest rate fluctuations because the interest rate is fixed for the term of the instrument. The Company is subject to fluctuating interest rates on certain other debt including the $50.0 million revolving credit facility. To the extent that the Company draws against its credit facility, increases in interest rates would have an adverse impact on the Company’s results of operations.

Credit Risk

The Company is exposed to credit risk in the event of non-performance by the counterparties to our derivative financial instrument contracts. While we believe this risk is remote, credit risk is managed through the periodic monitoring and approval of financially sound counterparties.

Commodity Price Risk

All of our products contain components whose base raw materials have undergone dramatic cost increases in the last six to 12 months. Increases in pricing of crude oil, gold and other metals such as zinc and aluminum have the ability to affect our product costs. The Company has been successful in offsetting or mitigating its exposure to these raw material cost increases through September 30, 2006. However, if we are unable to mitigate future increases, this could have an adverse impact on our product costs. We are unable to predict the possible impact of changes in commodity prices.

Item 4. Controls and Procedures.

As of the end of the period covered by this report, members of management of our company, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our company’s disclosure controls and procedures, as required by Exchange Act Rule 13a-15(f). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.

Management, including the Company’s Chief Executive Officer and Chief Financial Officer, does not expect that our Company’s disclosure controls and procedures will prevent all errors and all fraud. 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 our 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.

There has been no change in the Company’s internal control over financial reporting during the third quarter of 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

There have been no material changes in legal proceedings from those previously disclosed in our Quarterly Report on Form 10-Q as of and for the periods ended June 30, 2006.

Item 1A. Risk Factors.

There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K as of and for the year ended December 31, 2005.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

Exhibits (listed according to the number assigned in the table in item 601 of Regulation S-K):


Exhibit No.		Description

11*		Statement regarding Computation of per Share Earnings.

31.1*		Certification of Chief Executive Officer of Hughes Communications, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of Chief Financial Officer of Hughes Communications, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32*		Certification of Chief Executive Officer and Chief Financial Officer of Hughes Communications, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.1*		Quarterly Report on Form 10-Q for Hughes Network Systems, LLC as of and for the periods ended September 30, 2006.

*	Filed herewith.

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.


	HUGHES COMMUNICATIONS, INC.

Date: November14, 2006	/s/ Grant A. Barber
	Name:	Grant A. Barber
	Title:	Executive Vice President and
		Chief Financial Officer (Principal Financial Officer)

EXHIBIT INDEX


Exhibit No.		Description

11*		Statement regarding Computation of per Share Earnings.

31.1*		Certification of Chief Executive Officer of Hughes Communications, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of Chief Financial Officer of Hughes Communications, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32*		Certification of Chief Executive Officer and Chief Financial Officer of Hughes Communications, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.1*		Quarterly Report on Form 10-Q of Hughes Network Systems, LLC as of and for the periods ended September 30, 2006.

*	Filed herewith.

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Avg

Hughes Communications (HUGH) Inactive 10-Q2006 Q3 Quarterly report

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