Ladies and Gentlemen, welcome to the KVH Industries third quarter earnings conference call. Today’s call is being recorded. Now for opening remarks and introductions, I would like to turn the call over to Mr. Patrick Spratt, Chief Financial Officer. Please go ahead sir.

Good morning. I am Patrick Spratt, Chief Financial Officer of KVH Industries and with me today is Martin Kits Van Heyningen, Chief Executive Officer. This call will address the third quarter earnings release that we issued earlier this morning. Copies of the release are available on our web site, KVH.com and are also available from our investor relations department. This call is being simulcast on the internet, and will also be archived on our website for future reference. For those of you listening via the web, feel to submit questions related to the content of today’s discussion to IR@KVH.com and we’ll be happy to answer them following the call. This conference call will contain certain forward looking statements that involve risks and uncertainties. For example, statements regarding financial and product development goals are forward looking. The company’s future results may differ materially from the projections described in today’s discussion. Factors that might cause these differences include, but are not limited to, those mentioned in today’s call and risk factors described in our quarterly report on form 10Q filed with the SEC on August 8, 2008. The company’s SEC filings are directly available from us, from the SEC, or from the investor information section of our website. Now, I’d like to turn the call over to Martin to begin today’s discussion of results. Martin.

Thanks, Pat. Thank you all for joining us today. You know, during times like these in the global economy, a company’s health and long-term prospects depend on being well positioned. Overall, KVH is probably more diversified and better positioned to weather these economic storms, than any company our size. Since we address multiple market segments, like military, marine, land mobile, and even commercial aviation. In fact, our military group has further diversified into satellite, fiber optic gyros, and tactical navigation products. In all, because we’re not dependent on a single market or product line, we have positioned KVH so that we can weather this recession. We’ve managed KVH conservatively for the last few years. We’ve invested in new business opportunities. But, we have also conserved our cash. With nearly $50 million on hand, and virtually no debt, we have the financial strength some of our competitors lack. All in all, I feel very comfortable about where we are and what we have in our portfolio. Not that KVH won’t be impacted just like everyone else, but we have the diversity of products, markets, and customers to fair it better than most. We have a strong backlog going into Q4 and into 2009. Right now, the easing of fuel prices could help some of these segments recover while the credit crisis and the stock market crash are hurting other parts of our business. We do expect continued growth in the fourth quarter and return to profitability despite some of our markets declining dramatically, declines that are being more than offset by dramatic growth in other parts of our business. While I feel comfortable saying that about Q4, obviously, the markets are far too volatile to give any specific guidance for 2009 at this point. We’ll just have to wait and see…

Thank you Martin. The financial results for the third quarter were clearly not up to our expectations. However, in the face of very weak economic conditions, we feel that we are continuing to make very good headway toward executing our strategic initiatives for the long term for growth and for profit. Now, to some of the specifics. Gross margin was just over 41%. Contributing to this result was a favorable mix of marine and military products, and continuing progress with product cost improvements. We continued to ramp our FOG production capacity to meet the indicated strong demand for remote weapon systems. For Q3, operating expenses were down 5% compared to last year. We have continued to carefully control discretionary spending. For the third quarter, reported R&D spending was 20% lower than last year. This reflects the impact of the capitalization of the antenna development for the live TV in-flight entertainment system. Although we saw a reduction in the reported engineering expense, we have actually increased the total absolute level of investment by approximately 15%. This has been necessary to accomplish the live TV development objectives while also sustaining our other strategic new product initiatives. Third quarter sales and marketing expenses increased 1% year-over-year. But were down to sequentially, due in part to the season slow-down in consumer marine activities. In the face of the tough economic conditions and depressed RV expectations, we continue to take steps to selectively reduce spending programs. The mini-VSAT business is one area in which we will grow investments and we anticipate quarter-to-quarter increases in spending to drive these seven related sales initiatives. Administration expenses were also up 1% compared to last year. The administration spending was higher than the second quarter, and this was largely due to the timing of accruals for compensation-related expenses. Turning…

(Operator Instructions) We’ll hear first from Chris Quilty with Raymond James. Chris Quilty – Raymond James: Hi gentlemen. Can you hear me okay?

I can. Chris Quilty – Raymond James: Great, I was hoping you could give us, perhaps, a little bit more color on the mini-VSAT service in terms of, perhaps, number of ships deployed or at least when we look at the service revenue or as I guess you’d call it now, the non-product, non-hardware revenue, how much of that is actually starting to be generated from mini-VSAT?

Well, we don’t want to talk about specific numbers of units for competitive reasons, but I think Pat may be able to give you a better detail. But it’s certainly the majority of the service revenue now for their airtime business is coming from the mini-VSAT. So we have seen the very rapid growth there in terms of subscriber revenue growth. Chris Quilty – Raymond James: Okay, and in terms of, I think you mentioned, there’s a couple of other fleet opportunities, presumably the recent one where you announced M9 sales was around 60 units. Is it fair to assume a fleet deal in order of 60, 100 units?

Yes, some of the fleets are bigger than that, but yes, that’s what we would call a fleet deal. We’ve already won some fleet orders that were 10 to 20 at a time for the V7. But when I’m talking about a big fleet order, it would be in the range of 50 to 200, somewhere in there. Chris Quilty – Raymond James: Okay, great and last quarter you gave us some metrics on the monthly ARPU and it had trended from 1,800 up to 2,000. Is that a trend you’re still seeing?

I don’t think we’ve seen any further increases, but certainly it’s still above 2,000 last time I checked. Chris Quilty – Raymond James: Okay, and in terms of any competitive responses you’ve seen out there or other indicators in the channel that competitors may try to match the service or do you think there are major competitive risks?

Well, I think probably the most significant new competitor would be Iridium with their open port system. But it’s an L-band system so it’s really more of a competitor for Inmarsat because you’re still paying by the megabyte and it’s fairly expensive to get started. But I think that’s probably the most significant new competitor in the market. Christ Quilty – Raymond James: Okay, and Pat, from your guidance with regard to the Mark 54, is it fair to assume that in your guidance, you’re not assuming any Mark 54 FOG shipments for the fourth quarter?

In the guidance, Chris, we’re assuming a very small quantity of shipments in the quarter, but it’s not a material amount. Chris Quilty – Raymond James: And obviously on the remote weapons system your guidance would include the fact that you expect shipments to begin in the next several weeks and then pick up pace through the end of the year.

That is correct. Chris Quilty – Raymond James: Okay, and again, I missed it and I missed the front part of the conference call. Did you get the backlog number?

Yes, the backlog—and this is for defense only—is $16 million as of the end of September. Chris Quilty – Raymond James: And that’s up from, what was it in the second quarter?

At the end of June, it was about $13 million. Shortly after the start of the quarter, we received another order from Kongsberg. But the quarter-to-quarter comparable, it’s up about $3 million quarter-to-quarter. Chris Quilty – Raymond James: And again, the guidance you had previously given about, obviously you may not be exiting the year a 4 to 6 million quarterly run rate on RWS systems because you got a later start. But that still seems to be sort of a sustainable production rate through next year.

Well, that’s sort of our goal from a production point-of-view. And just to get back to your earlier question, we are capacity constrained in the current quarter, so if for some reason there was a further delay on one program, we would ramp up with the other program. So the reason we’re not shipping more Raytheon units is production constrained. We don’t expect to be order constrained in Q4. So there is that level of backstop there. Chris Quilty – Raymond James: Okay, and biggest area of concern here for the company is your demand picture for the marine TracVision business, which as your traditional business is probably round about order magnitude 50% of company sales but we’ve obviously seen a slowing trend there. I can’t tell exactly how much because you’re now blending in the positive impact of the TracFone V7 product line. But given all the announcements we’re hearing for MarineMax and Brunswick and other public companies in the space, is it fair to assume that as you look out into the fourth quarter and perhaps into next year, you’re going to go from what had traditionally been sort of mid-teens grow comps to perhaps negative?

Well, what we’re seeing is that the marine market has not been growing quickly, but we haven’t seen any difference between Q3 and Q2. So when we look internally at the year-over-year sales figures, we see sort of more of the same, which is very different from the pattern we saw in the land-mobile market where you just see these dramatic declines. So right now, looking at the first couple of weeks of October and what we saw in Q3, we see a sort of steady business in the marine TracVision part of our business, meaning it's not robust growth. We may see some modest decline like we did in Q3, but nothing dramatic and that's built into those numbers.

If we scratched out the incremental positive you picked up from selling these high-end tract vision systems, and you look just down on the more consumer/leisure market albeit a high-end leisure market, if we just defined it as that, have you seen any weakening trend there?

We have seen weakening trends but what we haven't seen is a change in the trend line. In other words, what we saw for the last couple of quarters is a fairly consistent picture with no rate of change. You know what I mean. So we saw sort of a little bit of softness but that softness had not gotten worse.

Let me add a little bit there, Chris. If you were to see the profile of our marine TV sales, what we saw in the third quarter is quite consistent with what we've seen year to date in 2008. So as Martin said, we've seen softness in that market in the consumer space for TV antennas for quite some time, actually dating back all the way to the end of 2006 in the U.S. But we haven't seen a falloff in the year-to-year numbers from where they've been now for the last several quarters.

Okay. Good. That's good to hear and keep up the good work, guys.

One other thing I will add to get back to your very first question about airtime, I can give you a little bit of help in terms of total airtime for VSAT and Inmarsat in the third quarter, represented certainly the majority of the services' revenue, probably roughly two-thirds of it. The VSAT revenue is already a greater amount than the Inmarsat revenue for the company and is growing on a sequential basis quarter to quarter.

Great. Thank you very much.

Thank you.

(Operator instructions) We'll hear next from Jim McIlree with Colin Stewart.

Thank you. Good morning. Has the gyro for the Kongsberg Remote Weapons Station passed qualification now or are you still working on it?

Thank you. Good morning. Has the gyro for the Kongsberg Remote Weapons Station passed qualification now or are you still working on it?

No, we're still working on that.

Who needs to sign the document? Is that Kongsberg or Kongsberg's customer or customers?

Who needs to sign the document? Is that Kongsberg or Kongsberg's customer or customers?

It's Kongsberg.

Okay. Is there more testing that needs to be done? What has to happen between now and the end of the month for them to sign the document and you start shipping?

Okay. Is there more testing that needs to be done? What has to happen between now and the end of the month for them to sign the document and you start shipping?

As far as we're concerned, we're done with all development-type activities and all the key testing is finished. We're really at a paperwork stage now, where we expect formal signatory approval. So there are no technical issues or no spec parameter issues or anything like that.

You don't have to go through more, I don't know, environmental testing or stress testing or anything like that?

You don't have to go through more, I don't know, environmental testing or stress testing or anything like that?

No. We're at a stage now where we're just wrapping up the paperwork. All the testing has been performed and we continue to do testing in process, so that type of work will continue. There's no further development work and no further specs that need to be improved or performance, reliability, quality. To our knowledge, there's nothing further that needs to be done.

Okay, great. I know that '09 is a question mark for just about everybody. But can you try to articulate a little bit how you're viewing your expense growth in R&D, sales and marketing, and G&A for '09, at least from what you can tell so far?

Okay, great. I know that '09 is a question mark for just about everybody. But can you try to articulate a little bit how you're viewing your expense growth in R&D, sales and marketing, and G&A for '09, at least from what you can tell so far?

That's an interesting question, Jim. Like you said, at this time, because of the difficult environment, it's really tough to get a read on some things. But we think we've got the strong prospects in the mini-VSAT business and in the fiber optic gyro business for 2009. At this point, we're looking at some very healthy growth in 2009 on the top line. We will certainly continue to invest but I would say that if you looked at our total profile of operating expenses across the company, our objective will continue to be to invest at a slower pace than the growth of the top line. That's not helping you a lot because it's not giving you the top line percentage increase numbers, but we will grow our operating spending but our plan will be to grow it at a slower pace than the top line growth so that we continue to improve the operating margins of the company.

Right. It sounds like in a sense, you're high grading your OpEx, putting it into areas where you do have better growth prospects.

Right. It sounds like in a sense, you're high grading your OpEx, putting it into areas where you do have better growth prospects.

Exactly. We're going through shifts certainly on a very regular basis. Month-to-month what we're doing is we're shifting some of the operating expenses and some of the investments that we had made historically out of the areas that just are not growing. In fact, they're declining like in the land space for satellite television, and moving it into the marine space and to the mini-VSAT business, certainly fiber optic gyroscopes. When you look at R&D, I'd say that we have felt pretty comfortable at about the net 10%, 10-11% as a percent of revenue level. And I would say that that is a good planning, you know, perspective for the foreseeable future. But we will be shifting investments internally within operating expenses to the high-growth businesses.

Right, okay, and last one. The capacity that you are leasing on GE23, is this a fixed take or pay contract? And if so, you know, approximately how much is that on an annual basis?

Well, the answer is yes, this is a straight lease so, you know, we are starting with a certain amount of capacity and then it grows fairly quickly to a full transponder. I don’t want to tell you explicitly what this particular satellite costs, but you know, as a rule of thumb, a transponder is on the order of a million and a half dollars per year, just to put a figure around it.

Right, right. Okay. And so at some point you have a full transponder; can you go beyond that if need be?

Yes, so there are a number of additional beams on that satellite and there is still additional capacity which we have, you know, have options on as well, that we can take more capacity, should we need it.

Right. Okay, very good, thank you.

But just to follow up on your point, you know, so that’s also baked into the Q4 numbers is that we now have some start-up costs where we have capacity before we have customers.

Right, right, that is what I assumed you guys were talking about, at least partially. And that is in cost of sales, right? The transponder lease?

It will be.

Right.

When it kicks in, yes, it will be in cost of service.

Right, okay, awesome. Thank you.

We will take our next question from Jim Roumell with Roumell Asset Management.

Thank you. Hi, guys.

Hi, Jim.

Hi, Jim.

A couple questions. One is, Martin, anymore discussions with any competitors in the space on the V7? I’m thinking primarily on Schlumberger or Raytheon in terms of them looking at the market and wanting to partner with you in some way, given some of the competitive advantages of the V7?

Well, part of our sales strategy is to look at various ISPs around the world that might be selling a competitive service, you know, whether that is a VSAT service or iridium service or Inmarsat, because those companies typically sell more than one type of product. Now one of the issues for us is that we normally do not wholesale the products, you know. In other words, this end-to-end business model is not necessarily conducive to a wholesale plan. And what we do not want to do is we do not want to give away our competitive advantages of being a single provider and guaranteed service and support and just having an all-in-one product offering that works really, really well. We'ree not willing to compromise on that. So if we can find a sales outlook where we can not compromise on the service and the price advantages that we offer and build a wholesale business model around that, that is something that we are definitely considering doing.

Uh-huh. So you have talked, you have had discussions with Schlumberger?

We talk to a lot of different people, so our sales guys are talking to a number of different people in the industry.

Well, I guess I’m more referring to you specifically, if you’ve had any contact with them.

I’ve spoken to many people. I do not want to get into specifics about which, you know, customers, you know, we’ve spoken to.

Okay, alright. Next question was, and maybe you have provided this in the past, but what do you think the market opportunity is on the V7? In other words, if you kind of, you know, add up the number of possible boats in the world as you roll this out in the Pacific, and given that this is really geared toward a kind of big broadband user, and that’s where the real savings is if you are a big user, have you kind of identified a market size, so to speak, on the V7?

Well, I think that we have looked at some various estimates of the market, you know, and in around numbers it is a billion-dollar-a-year opportunity in terms of the service revenue, between the broadband services that are out there today from Inmarsat and the services that are out there today from the existing VSAT providers. So, you know, we look at that opportunity and say well, that’s the airtime component. Adding on top of that would be the hardware component which, you know, the hardware right now has a list price of over $30,000, so it's also not an insignificant part of the equation.

Roughly the estimate of what is spent currently for airtime?

Yes, is approximately $1 billion U.S. per year.

Okay, and I mean, have you done any internal—I mean can you share anything in terms of, you know, what realistically you can grab of that given, you know, where the V7 is, you know, most productive in terms of kind of heavy users of broadband and whatnot? I mean, do you kind of provide any handicapping of what you expect in terms of a kind of base worst-case, best-case scenario?

No. We don’t have a specific sales forecast to give you. But we do expect to get the majority of that business over time, and we also expect that over time that market will grow, meaning that broadband on ships today is not yet prevalent. So if you look at some of the oil and gas customers that you mentioned, the shipping companies, all the various aeronautical, bus-jet applications, or just the whole broadband, the mobile broadband market is still in its infancy. Even though it sounds big now, it’s going to be much bigger than it is today. And also I’d like to comment on your point that only heavy users are VSAT customers. Really the crossover point happens so quickly. If you look at the average monthly consumption of data. If you are using even hundreds of megabytes a month, which is really nothing, today with Inmarsat that’s $1300 a month, which is more than our base package starts at. Operator, any other questions?

At this time we have no other callers in the queue. (Operator Instructions) We’ll hear from Rich Valera with Needham and Company.

Thanks and good morning. First just a quick book keeping, Pat. Do you have the depreciation and amortization for the quarter?

Yes I do, Rich. It was $528,000.

Great. And then Pat, in talking about the increase in the inventory mentioned you had a buildup on the RV side and expected multiple quarters to work that off. What’s the risk of obsolescence? What’s the typical shelf life of an RV product?

The shelf life is actually quite good. We’re selling products today that were designed multiple years ago, and customers are still using products that we sold six or seven years ago. So we’re not concerned about the shelf life of the product. Naturally we are a bit concerned about carrying that inventory for a length of time and the cost of doing that. But we’re not concerned about the actual content of the inventory and our ability to be able to use it over time.

Also adding to that was that all of our products have the ability to be remotely flashed both by us as well as by end users. So if there was an improved feature, 90% of the time it’s software. So those software updates are available today for free.

Yes, and another thing, one other thing, Rich. I don’t want to leave anybody with the impression that all of this inventory increase is in finished goods, because that is not the case. So the inventory increase is a combination of a little bit of finished goods, not very much at all, and mostly raw materials and sub-assemblies.

And mostly it’s fiber optic, not RV.

Overall, yes. Correct.

Great. That’s helpful color. And Pat, I know that we’ve talked before about at some point potentially reversing I think the valuation allowance on your tax, on your NOLs. And I know you have a loss this quarter; I don’t know where that puts that. But can you give us any update, there, on where you think that process stands?

Well, it really stands about where it stood at the end of June. We do look at that every quarter, and we review it with our auditors. And at this point in time we continue to believe that it’s more appropriate to keep the valuation allowance on the books. I don’t have a precise number for you, Rich but there's probably still a valuation allowance that would cover potentially around $2 million of profit in the U.S. company. And at this point in time, based on our projection for the fourth quarter, I would expect that in the fourth quarter we will look at it again and it’s a combination—the decision is a combination of not only historical performance but also our projections and our confidence level going forward. So I can’t state when the valuation allowance will be fully consumed or when we will take it down to the P&L but I would say as of this moment, our decision has been to leave it on the balance sheet. Our decision as of the end of the third quarter is to continue to leave it there on the balance sheet. And we will take another hard look at it at the end of the fourth quarter.

Okay, that’s helpful. Thanks very much.

At this time we have no further questions. I’ll turn the conference back over to our presenters for closing remarks.

Okay. If you have any follow-up questions, please feel free to contact Pat or myself. Thank you.

Again, thank you all for joining us today. That does conclude our call.