KVH Industries, Inc.

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

(Mark One)
È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF

1934

For the fiscal year ended December 31, 2010
OR
‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT

OF 1934

For the transition period from

to
Commission File Number 0-28082

KVH Industries, Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware
(State or Other Jurisdiction of Incorporation or Organization)

05-0420589
(I.R.S. Employer Identification Number)

50 Enterprise Center, Middletown, RI 02842
(Address of Principal Executive Offices) (Zip Code)

(401) 847-3327
(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Name of Each Exchange on Which Registered

Common Stock, $0.01 par value per share

The NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ‘ No È
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ‘ No È

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 È No ‘

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ‘

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

Large accelerated filer ‘
Non-accelerated filer ‘
(Do not check if a smaller reporting company)

Accelerated filer È
Smaller reporting company ‘

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

As of June 30, 2010, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $156,733,681
based on the closing sale price of $12.42 per share as reported on the NASDAQ Global Market.

As of March 4, 2011, the registrant had 14,757,082 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement relating to its 2011 Annual Meeting of Stockholders are incorporated herein by reference in Part III.

INDEX TO FORM 10-K

PART I

Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases

of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . .
Item 7A. Quantitative and Qualitative Disclosure About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART III

Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder

Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions and Director Independence . . . . . . . . . . . . . . . . .
Item 14. Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART IV

Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page

3
12
24
25
25

26
28
29
42
43
43
43
44

45
45

45
45
45

46
49

2

ITEM 1. Business

Cautionary Statement Regarding Forward-Looking Information

PART I

In addition to historical facts, this annual report contains forward-looking statements. Forward-looking
statements are merely our current predictions of future events. These statements are inherently uncertain, and
actual events could differ materially from our predictions. Important factors that could cause actual events to
vary from our predictions include those discussed in this annual report under the headings “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and “Item 1A. Risk
Factors.” We assume no obligation to update our forward-looking statements to reflect new information or
developments. We urge readers to review carefully the risk factors described in this annual report and in the other
documents that we file with the Securities and Exchange Commission. You can read these documents at
www.sec.gov.

Additional Information Available

Our principal Internet address is www.kvh.com. Our website provides a hyperlink to a third-party website
through which our annual, quarterly, and current reports, as well as amendments to those reports, are available
free of charge. We believe these reports are made available as soon as reasonably practicable after we
electronically file them with, or furnish them to, the SEC. We do not provide any information regarding our SEC
filings directly to the third-party website, and we do not check its accuracy or completeness.

Introduction

We are a leading manufacturer of solutions that provide global high-speed Internet, television, and voice
services via satellite to mobile users at sea, on land, and in the air. We are also a premier manufacturer of high-
performance navigational sensors and integrated inertial systems for defense and commercial guidance and
stabilization applications. Our research and development, manufacturing and quality control capabilities have
enabled us to meet
the demanding standards of our military, consumer and commercial customers for
performance and reliability. This combination of factors has allowed us to create products offering important
differentiating advantages to our customers. We are based in Middletown, Rhode Island, with offices in Illinois,
Denmark, Norway and Singapore.

We sell our mobile communications products and airtime services, including the TracVision, TracPhone,
and CommBoxTM systems and mini-VSAT Broadband airtime, through an extensive international network of
distributors and retailers worldwide. We are nearing completion of the initial global coverage plan for our mini-
VSAT Broadband service, which primarily supports maritime applications along with land-based mobile and
aeronautical uses on a more limited basis currently. We may also pursue expanded coverage in the future to
support customer, market, or capacity demands. We also developed and now manufacture a satellite TV antenna
system sold on an original equipment manufacturer, or OEM, basis to LiveTV, LLC, a leading provider of
entertainment systems on commercial aircraft. In addition, we are pursuing opportunities to apply our mobile
communications expertise to military applications that require affordable, high-bandwidth mobile connections.

Our guidance and stabilization products include precision fiber optic gyro (FOG)-based systems that help
stabilize platforms, such as gun turrets, remote weapon stations, and radar units, and provide guidance for
munitions, as well as tactical navigation systems for a broad range of military vehicles. We sell our guidance and
stabilization products directly to United States (U.S.) and allied governments and government contractors, as
well as through an international network of authorized independent sales representatives. Our fiber optic products
are also used in such commercial applications as train track geometry measurement systems, industrial robotics,
surveying, optical stabilization, autonomous vehicles, and undersea remotely operated submersibles.

In September 2010, we acquired Virtek Communication AS, which develops and distributes middleware
software solutions known as CommBox technology, which will be integrated into our satellite communications
products.

3

Our Products and Services

Mobile Satellite Communications

We believe that there is an increasing demand for mobile access to television, voice services and the Internet
on the move. Our objective is to connect mobile users on sea, land, and air to the satellite TV, communications,
and Internet services they wish to use. We have developed a comprehensive family of products and services
marketed under the TracVision, TracPhone, and CommBox brand names as well as the mini-VSAT Broadband
airtime network to address the unique needs of our communications markets.

Our mobile satellite products are typically installed on mobile platforms and use sophisticated robotics,
stabilization and control software, sensing technologies, transceiver integration, and advanced antenna designs to
automatically search for, identify and point directly at the selected television and communications satellite while
the vehicle, vessel, or plane is in motion. Our antennas use gyros and inclinometers to measure the pitch, roll and
yaw of an antenna platform in relation to the earth. Microprocessors and our proprietary stabilization and control
software use that data to compute the antenna movement necessary for the antenna’s motors to point the antenna
properly and maintain contact with the satellite. If an obstruction temporarily blocks the satellite signal, our
products continue to track the satellite’s location according to the movement of the antenna platform in order to
carry out automatic, rapid reacquisition of the signal when a direct line of sight to the satellite is restored.

Our Certified Support Network offers our TracVision and TracPhone customers an international network of
skilled technical dealers and support centers in many locations where our customers are likely to travel. We have
selected distributors based on their technical expertise, professionalism and commitment to quality and regularly
provide them with extensive training in the sale, installation and support of our products.

We offer a broad array of products to address the needs of a variety of customers seeking mobile

communications in maritime, land mobile and aeronautical applications.

Marine. In the marine market, we offer a range of mobile satellite TV and communications products. In
December 2009, we began selling the TracVision HD7, a 24-inch diameter satellite TV antenna capable of
receiving signals from two DIRECTV Ka-band satellites and one DIRECTV Ku-band satellite simultaneously to
offer a high-definition TV experience comparable to what a home DIRECTV HDTV subscriber would enjoy. It
includes an Internet Protocol-enabled antenna control unit as well as optional antenna controls via a free
TracVision application for use on an Apple iPhone. We believe that this is the first marine antenna to offer this
combination of capabilities. Our marine TracVision M-series satellite TV antennas are designed with the full
spectrum of vessel sizes in mind, ranging from recreational vessels as small as 20 to 25 feet to large commercial
vessels. The award-winning family of marine TracVision products vary in size from a lower-profile elliptical
parabolic system similar to those offered for use on recreation vehicles (RV) to the 12.5-inch TracVision M1,
14.5-inch TracVision M3, 18-inch TracVision M5, 24-inch TracVision M7, and 32-inch diameter TracVision
M9, each of which employs a high-efficiency circular antenna. These products are compatible with Ku-band
HDTV programming as well as high-powered regional satellite TV services around the globe, based on available
signal strength and antenna size requirements.

Broadband Internet. In 2007, we introduced our Ku-band airtime service branded as mini-VSAT
Broadband. This service utilizes spread spectrum technology and ArcLight modem technology, both of which
were developed by ViaSat. This spread spectrum approach reduces the broadcast power requirements and the
pointing accuracy necessary to track the high-bandwidth Ku-band satellites that carry the service. The resulting
efficiencies allowed us to develop and bring to market the 24-inch diameter TracPhone V7 antenna, which we
also introduced in 2007. This antenna is 85% smaller by volume and 75% lighter than alternative 1-meter VSAT
antennas. In February 2011, we introduced a new addition to our mini-VSAT Broadband-compatible antenna
family, the 14.5-inch diameter TracPhone V3. We believe that the TracPhone V3 is the smallest maritime VSAT
system currently available. Its small size makes it practical for use on smaller vessels as well as land vehicles.
We currently expect to begin TracPhone V3 shipments during the second quarter of 2011.

4

The high bandwidth offered by the Ku-band satellites also permits faster data rates than those supported by
Inmarsat’s L-band satellites. TracPhone V7 subscribers may select service packages with Internet data
connections offering ship-to-shore satellite data rates as fast as 512 Kbps, or kilobits per second, and
shore-to-ship satellite data rates as fast as 2 Mbps, or megabits per second. The TracPhone V3, due to its smaller
dish diameter, offers ship-to-shore data rates as fast as 128 Kbps and shore-to-ship satellite data rates as fast as 2
Mbps. In addition, subscriptions include Voice over Internet Protocol (VoIP) telephone services optimized for
use over satellite connections. The TracPhone V7 can support two or more simultaneous calls while the
TracPhone V3 can support one call at a time.

We are actively engaged in sales efforts for the TracPhone V7 and mini-VSAT Broadband service to
government agencies for maritime, military, and emergency responder use. In September 2010, the U.S. Coast
Guard awarded us a 10-year, up to $42 million contract to supply TracPhone V7 systems and mini-VSAT
Broadband airtime to as many as 216 U.S. Coast Guard light cutters. We are also taking steps to expand our
ability to support the commercial maritime market. In February 2010, we entered into a distribution agreement
with Japan Radio Co. Ltd. (JRC), under which JRC is reselling our TracPhone V7 through its established
channels. JRC also sells the mini-VSAT Broadband airtime service to non-Japanese vessels and owners. In
October 2010, we entered into an agreement with Furuno Electric Co. Ltd., under which Furuno will sell mini-
VSAT Broadband service through its global distribution network. In March 2011, we signed a contract to provide
TracPhone V7 and mini-VSAT Broadband service to Vroon B.V. and its fleet of more than 125 commercial
vessels.

Service is currently offered in the north Pacific Ocean, the Americas, Caribbean, North Atlantic, Europe, the
Persian Gulf, Asia-Pacific, Africa, Brazil, Australian and New Zealand waters, and the Indian Ocean. We believe
that our mini-VSAT Broadband service represents the only global multi-megabit commercial satellite
communications network for vessels and airplanes. This unified Ku-band Broadband service enables us to offer
commercial,
leisure and government customers an integrated hardware and service solution for mobile
communications and seamless region-to-region roaming. It is our long-term plan to invest in and deploy the
mini-VSAT Broadband network on a global basis in cooperation with ViaSat under the terms of a 10-year
agreement announced in July 2008. As part of the coverage expansion, we have been acquiring satellite capacity
from Ku-band satellite operators as well as purchasing regional satellite hubs from ViaSat. These hubs use
ViaSat’s ArcLight spread spectrum mobile broadband technology and are operated by ViaSat on our behalf. Over
the course of the 10-year agreement, we and ViaSat also expect to implement future enhancements to the mini-
VSAT Broadband spread spectrum maritime services and related products. Under the terms of our revenue
sharing arrangement with ViaSat, this expansion positions us to earn revenue not only from the maritime and
land-based use of the mini-VSAT Broadband service but also from aeronautical applications that roam
throughout our network.

This broadband Internet offering represents a relatively new business model for KVH. We are the source of
the mini-VSAT Broadband service and, as a result, we generate revenue from hardware sales as well as recurring
monthly revenue derived from subscription packages. We offer a selection of airtime subscription plans designed
to provide leisure, commercial, and government customers the flexibility to select packages that best suit their
data and voice usage patterns and their budgets. Airtime options for the TracPhone V7 include fixed-rate
subscription packages ranging from $995 to $8,995 per month, seasonal fixed-rate packages that permit
subscribers to use their system for as little as three months per year, and per-megabyte service plans that we
believe can be significantly more affordable than competing legacy VSAT and Inmarsat offerings in many
instances. Service pricing for TracPhone V3 subscribers will be provided on a per-megabyte basis for data
services and a per-minute basis for voice calls.

In addition to our TracPhone V7, V3 and mini-VSAT Broadband service, we also offer a family of
Inmarsat-compatible TracPhone products that provide in-motion access to global satellite communications. These
products rely on services offered by Inmarsat, a satellite service provider that supports links for phone, fax and
data communications as fast as 432 Kbps. The TracPhone F77 uses the Inmarsat Fleet service; the TracPhone
FB150, FB250, and FB500 antennas use the Inmarsat FleetBroadband service to offer voice as well as high-
speed Internet service. The TracPhone F77, FB150, FB250, and FB500 are manufactured by Thrane & Thrane

5

A/S of Denmark and distributed on an OEM basis by us in North America under the KVH TracPhone brand and
distributed in other markets on a non-exclusive basis. Unlike mini-VSAT Broadband, where we control and sell
the airtime, we purchase Inmarsat airtime from a distributor and resell it to our customers.

In September 2010, we completed our acquisition of Virtek Communication, a Norwegian firm responsible
for developing a ship/shore network management product called CommBox. We believe that the addition of a
network management resource was crucial to the long-term success and competitive position of our satellite
communication product line, especially within the commercial maritime market. CommBox, which comprises
shipboard hardware, a KVH-hosted or privately owned shore-based hub, and a suite of software applications,
offers a range of tools designed to increase communication efficiency, reduce costs, and manage network
operations. Key functions include web and data compression and optimization to increase network capacity;
remote PC management for customer IT departments; integrated e-mail, web compression, firewalls, and
security; least-cost routing; and bandwidth management on multiple communication carriers. CommBox is now
offered as an option for the TracPhone V7, V3 and with our Inmarsat-compatible TracPhone systems. CommBox
sales include both the shipboard hardware and optional private shore-based hub, subscriptions to the selected
software applications, and monthly system maintenance fees.

Land. We design, manufacture, and sell a range of TracVision satellite TV antenna systems for use on a

broad array of vehicles, including recreational vehicles, trucks, conversion vans, and automobiles.

In the RV/truck market, we offer a line-up of our TracVision satellite TV products, including products
intended for both stationary and in-motion use. Our RV product line, known as the TracVision SlimLine series,
offers Ku-band HDTV support, automatic satellite switching, and integrated compatibility with the international
DVB (Digital Video Broadcast) standard. The 12.5-inch high in-motion TracVision R5SL and stationary
automatic TracVision R4SL use an elliptical parabolic antenna to reduce the antenna’s profile to address height
restrictions on the road. The in-motion 12.5-inch high TracVision R6 is the flagship product of our RV-specific
offerings. This system incorporates a number of innovations, including a high-efficiency antenna, integrated
global positioning system (GPS) for faster satellite acquisition, and our patented DewShield electronic dew
elimination technology.

The TracVision A7 uses hybrid phased-array antenna technology to provide in-motion reception of satellite
TV programming in the continental United States using the DIRECTV service. Our TracVision A7 product
includes a mobile satellite television antenna and an integrated 12V mobile DIRECTV receiver/controller
designed specifically for the mobile environment by KVH and DIRECTV. The TracVision A7 stands
approximately five inches high and mounts either to a vehicle’s roof rack or directly to the vehicle’s roof, making
it practical for use aboard minivans, SUVs and other passenger vehicles. The TracVision A7 is also popular for
tall motor coaches and buses. Automotive customers subscribe to DIRECTV’s TOTAL CHOICE MOBILE
satellite TV programming package, which is specifically promoted for automotive applications. Local channels
and network programming are also available as an option for TracVision A7 users as a result of the system’s
integrated GPS and mobile receiver. At this time, we are the only company authorized by DIRECTV to sell,
promote, and activate mobile users for the TOTAL CHOICE MOBILE programming package.

In addition to sales through aftermarket dealers, we sell our TracVision products to original equipment
manufacturers for factory installation on new vehicles. Our TracVision SlimLine systems work with a range of
service providers, including DIRECTV, DISH Network, and other regional service providers. Although initially
designed for automotive applications, the TracVision A7 is now also sold within the RV marketplace to provide
access to DIRECTV programming in in-motion applications and for vehicles with height restrictions that could
prevent them from safely using a satellite TV antenna based on parabolic technology, and/or where the
accumulation of moisture on the outer surface of the antenna’s radome is not a concern.

Aeronautical Applications. In February 2008, we announced that we had been awarded a $20.1 million
contract by LiveTV, a leading in-flight entertainment supplier, which was subsequently increased in 2009 to

6

$20.9 million. Under the terms of the multi-year contract, we design, develop, and manufacture new DIRECTV-
compatible satellite TV antennas for use on narrowbody commercial aircraft, such as Boeing’s 737 and the
Airbus A320, operating in the United States.

Shipments of these antennas began in the second quarter of 2009 and continued into 2010. They are
intended to help fill the growing demand from airlines and passengers for live television in the air. While JetBlue
Airways Corporation is the first and best known of the airlines to add DIRECTV service, Continental Airlines,
Inc. began working in 2009 with LiveTV to field satellite television on its fleet of airliners. In the fourth quarter
of 2010, Continental Airlines, Inc. merged with United Airlines. Both companies are now subsidiaries of United
Continental Holdings. The merger has not had any impact on the original contract or the sales relationship with
LiveTV.

Guidance and Stabilization Products

We offer a portfolio of digital compass and fiber optic gyro-based systems that address the rigorous
requirements of military and commercial customers. Our systems provide reliable, easy-to-use and continuously
available navigation and pointing data. Our guidance and stabilization products include our inertial measurement
unit for precision guidance, fiber optic gyros for tactical navigation and stabilization, and digital compasses that
provide accurate heading information for demanding applications.

Guidance and Stabilization. Our fiber optic gyro products use an all-fiber design that has no moving parts,
resulting in an affordable combination of precision, accuracy and durability. Our fiber optic gyro products
support a broad range of military applications, including stabilization of remote weapons stations, antennas,
radar, optical devices or turrets; image stabilization and synchronization for shoulder-or tripod-mounted weapon
simulators; precision tactical navigation systems for military vehicles, and guidance for weapons and unmanned
autonomous vehicles. Our fiber optic gyro products are also used in commercial and industrial applications, such
as train location control and track geometry measurement systems, robotics, surveying, optical stabilization,
autonomous vehicles, and undersea remotely operated submersibles.

Our TG-6000 Inertial Measurement Unit (IMU) is a guidance system that provides precise measurement of
motion and acceleration in three dimensions. It uses a three-axis configuration of our high-performance
DSP-based (digital signal processing) fiber optic gyros integrated with three accelerometers. We believe that this
configuration provides outstanding performance, high reliability, low maintenance and easy system integration.
The TG-6000 IMU is in full production as a component in the U.S. Navy’s MK54 lightweight torpedo and is
suitable for use in other applications that involve flight control, orientation, instrumentation and navigation, such
as unmanned aerial vehicles. Building on our inertial measurement product offering, in June 2010, we introduced
the CG-5100, our first commercial-grade inertial measurement unit. The CG-5100 is focused on a wide range of
applications such as 3D Augmented Reality, mobile mapping, platform navigation and GPS augmentation for
unmanned vehicle programs, precise mapping and imagery.

In October 2008, we introduced the CNS-5000 continuous navigation system, a self-contained navigation
system that combines our fiber optic gyro-based inertial measurement technology with GPS technology from
NovAtel. This navigation solution provides precise position and orientation of a host platform on a continuous
basis, even during periods where GPS signals are blocked by natural or man-made obstructions or conditions.
The CNS-5000 is designed for demanding commercial applications, such as dynamic surveying, precision
agriculture, container terminal management, and autonomous vehicle navigation, where the ability to determine
the precise position and orientation of a piece of equipment or a mobile platform is critical. The CNS-5000 is a
commercial-off-the-shelf (COTS) product consisting of a FOG-based inertial measurement unit tightly integrated
with GPS within a single enclosure. This design reduces the operational complexities for customers whose
products cross international boundaries.

Our open-loop DSP-1500, DSP-3000 series, and DSP-4000 fiber optic gyros provide precision measurement
of the rate and angle of a platform’s turning motion typically for significantly less cost than competing

7

closed-loop gyros. These DSP-based products deliver performance superior to analog signal processing devices,
which experience greater temperature-sensitive drift and rotation errors. Applications for these products include
inertial measurement units, integrated navigation systems, attitude/heading/reference systems, and stabilization
of antenna, radar and optical equipment.

We believe that our DSP-1500 fiber optic gyro is the world’s smallest precision fiber optic gyro. Its optical
sensor is only 1.5 inches in diameter and 0.8 inches tall, and weighs just 0.09 lbs. Thanks to the tethered design,
the sensor can be installed separately from the power and processing circuit boards. The small size and weight of
the DSP-1500 make it well suited for applications with size and weight restrictions, such as night vision and
thermal imaging systems, aircraft-mounted gimbaled cameras for law enforcement and homeland security, and
shipboard optical systems.

The DSP-3000 series is slightly larger than a deck of playing cards and offers a variety of interface options
to support a range of applications. High-performance 2-axis and 3-axis configurations can be realized by
integrating multiple DSP-3000 units. Currently, the DSP-3000 series is used in an array of pointing and
stabilization applications, including the U.S. Army’s Common Remotely Operated Weapon Station (CROWS) to
provide the image and gun stabilization necessary to ensure that the weapon remains aimed at its target. We
estimate that more than 20 companies have developed or are developing stabilized remote weapons stations that
we believe will require similar fiber optic gyro stabilization capabilities. Our fiber optic products are also used in
commercial and industrial applications, such as train location control and track geometry measurement systems,
robotics, precision surveying, augmented reality systems, optical stabilization, autonomous vehicles, and
undersea remotely operated submersibles. The larger, militarized DSP-4000 is designed for use in high-shock
and highly dynamic environments, such as gun turret stabilization.

Tactical Navigation. Our TACNAV tactical navigation product line employs digital compass sensors and
KVH fiber optic gyros to offer vehicle-based navigation and pointing systems with a range of capabilities,
including GPS backup and enhancement, vehicle position, hull azimuth and navigation displays. Because our
digital compass products measure the earth’s magnetic field rather than detect satellite signals from the GPS,
they are not susceptible to GPS jamming devices.

TACNAV systems vary in size and complexity to suit a wide range of vehicles. The TACNAV Light is a
low-cost, digital compass-based battlefield navigation system specifically designed for non-turreted vehicles,
such as high mobility multi-wheeled vehicles
including
reconnaissance vehicles, armored personnel carriers and light armored vehicles, are supported by the TACNAV
TLS, a digital compass-based tactical navigation and targeting system that offers a fiber optic gyro upgrade for
enhanced accuracy. We also manufacture the TACNAV II Fiber Gyro Navigation system, which offers a
compact design, continuous output of heading and pointing data, and a flexible architecture that allows it to
function as either a stand-alone navigation module or as the central component of an expanded, multifunctional
navigation system.

(HMMWVs) and trucks. Turreted vehicles,

Our navigation systems function as standalone tools and also aggregate, integrate and communicate critical
information from a variety of on-board systems. TACNAV can receive data from systems such as the vehicle’s
odometer, military and commercial GPS devices, laser rangefinders, turret angle indicators and laser warning
systems. TACNAV can also output this data to an on-board computer for retransmission through the vehicle’s
communications systems to a digital battlefield management application.

Our TACNAV digital compass products have been sold for use aboard U.S. Army, Marine Corps, and Navy
vehicles as well as to many allied countries, including Australia, the United Kingdom, Canada, Germany, Italy,
New Zealand, Saudi Arabia, Spain, Sweden, Taiwan, Malaysia and Switzerland. We believe that we are among
the leading manufacturers of such systems. Our standard TACNAV products can be customized to our
customers’ specifications. At customer request, we offer training and other services on a time-and-materials
basis.

8

Sales, Marketing and Support

Our sales, marketing and support efforts target markets that are substantial and require dedicated dealers and
distributors to reach end customers. These channels vary from time to time, but currently include targeted efforts
to reach the leisure and commercial maritime markets, the RV and high-end automotive markets, and the
commercial, industrial and government markets. We believe our brands are well known and well respected by
consumers within their respective niches. These brands include:

TracVision—satellite television systems for vessels and vehicles

TracPhone—two-way satellite communications systems

mini-VSAT Broadband—broadband mobile satellite communications network

CommBox—network management hardware and software for maritime communications

Azimuth—digital compass for powerboats

Sailcomp—digital compass for sailboats

DataScope—handheld digital compass/rangefinder

TACNAV—tactical navigation systems for military vehicles

Our fiber optic gyros and digital compass sensors use an alphanumeric model numbering sequence such as

C-100, DSP-1500, DSP-3000, DSP-4000, CNS-5000, CG-5100, and TG-6000 IMU.

We sell our mobile satellite communications products through an international network of independent

retailers, chain stores and distributors, as well as to manufacturers of vessels and vehicles.

Our European sales subsidiary located in Denmark, KVH Europe A/S (KVH Europe), coordinates our sales,
marketing and support efforts for our mobile satellite communications products in Europe, the Middle East, and
Africa. Asian and South American sales are managed by our Asian subsidiary, KVH Industries Asia Pte Ltd. and
our Brazilian subsidiary, KVH South America Comunicacao Por Satelite Ltda, respectively, under the oversight
of our North American sales and marketing offices. Standalone CommBox sales are managed by Virtek
Communication in cooperation with members of our satellite sales teams in all offices worldwide. See note 12 of
the notes to our consolidated financial statements for information regarding our geographic segments.

We sell our guidance and stabilization products directly to U.S. and allied governments and government
contractors, as well as through an international network of authorized independent sales representatives. This
same network also sells our fiber optic products to commercial/industrial entities.

Backlog

Our backlog for all products and services was approximately $20.8 million on December 31, 2010,
$24.5 million on December 31, 2009 and $12.3 million on December 31, 2008. The decrease in backlog of $3.7
million from December 31, 2009 to December 31, 2010 was primarily a result of a decrease in orders of our
aeronautical antenna system sold to LiveTV. The increase in backlog of $12.2 million from December 31, 2008
to December 31, 2009 was primarily a result of increased orders for fiber optic gyros in support of remotely
operated weapons station programs as well as our aeronautical antenna system sold to LiveTV.

Backlog consists of orders evidenced by written agreements and specified delivery dates for customers who
are acceptable credit risks. Military orders included in backlog are generally subject to cancellation for the
convenience of the customer. When orders are cancelled, we generally recover actual costs incurred through the
date of cancellation and the costs resulting from termination. Individual orders for guidance and stabilization
products are often large and may require procurement of specialized long-lead components and allocation of
manufacturing resources. The complexity of planning and executing larger orders generally requires customers to
order well in advance of the required delivery date, resulting in backlog.

9

Backlog is not a meaningful indicator for predicting revenue in future periods. Commercial resellers for our
mobile satellite communications products and legacy products do not carry extensive inventories and rely on us
to ship products quickly. Generally due to the rapid delivery of our commercial products, our backlog for those
products is not significant.

Intellectual Property

Our ability to compete effectively depends to a significant extent on our ability to protect our proprietary
information. We rely primarily on patents and trade secret laws, confidentiality procedures and licensing
arrangements to protect our intellectual property rights. We own approximately 40 U.S. and foreign patents and
have additional patent applications that are currently pending. We also register our trademarks in the United
States and other key markets where we do business. Our patents will expire at various dates between March 2013
and July 2028. We enter into confidentiality agreements with our consultants, key employees and sales
representatives, and maintain controls over access to and distribution of our technology, software and other
proprietary information. The steps we have taken to protect our technology may be inadequate to prevent others
from using what we regard as our technology to compete with us.

We do not generally conduct exhaustive patent searches to determine whether the technology used in our
products infringes patents held by third parties. In addition, product development is inherently uncertain in a
rapidly evolving technological environment in which there may be numerous patent applications pending, many
of which are confidential when filed, with regard to similar technologies.

From time to time, we have faced claims by third parties that our products or technologies infringe their
patents or other intellectual property rights, and we may face similar claims in the future. Any claim of
infringement could cause us to incur substantial costs defending against the claim, even if the claim is invalid,
and could distract the attention of our management. If any of our products is found to violate third-party
proprietary rights, we may be required to pay substantial damages. In addition, we may be required to re-engineer
our products or seek to obtain licenses from third parties to continue to offer our products. Any efforts to
re-engineer our products or obtain licenses on commercially reasonable terms may not be successful, which
would prevent us from selling our products, and, in any case, could substantially increase our costs and have a
material adverse effect on our business, financial condition and results of operations.

Manufacturing

Manufacturing operations for our mobile satellite communications and navigation products consist of light
manufacture, final assembly and testing. Manufacturing operations for our fiber optic gyro products are more
complex. We produce specialized optical fiber, fiber optic components and sensing coils and combine them with
components purchased from outside vendors for assembly into finished goods. We own optical fiber drawing
towers where we produce the specialized optical fiber that we use in all of our fiber optic products. Excluding the
CommBox product, which we manufacture in Norway, we manufacture our mobile satellite communications
products at our headquarters in Middletown, Rhode Island, and utilize a nearby leased facility for warehousing
and distribution purposes. We manufacture our navigation and fiber optic gyro products in our facility located in
Tinley Park, Illinois.

We contract with third parties for fabrication and assembly of printed circuit boards, injection-molded
plastic parts, machined metal components, connectors and housings. We believe there are a number of acceptable
vendors for the components we purchase. We regularly evaluate both domestic and foreign suppliers for quality,
dependability and cost effectiveness. In some instances we utilize sole-source suppliers to develop strategic
relationships to enhance the quality of materials and save costs. Our manufacturing processes are controlled by
an ISO 9001:2008-certified quality standards program.

10

Competition

We encounter significant competition in all of our markets, and we expect this competition to intensify in
the future. Many of our primary competitors are well-established companies and some have substantially greater
financial, managerial, technical, marketing, operational and other resources than we do.

In the market for mobile satellite communications products, we compete with a variety of companies. We
believe the principal competitive factors in this market are product size, design, performance, reliability, and
price.

In the marine market for satellite TV equipment, we compete primarily with NaviSystem Marine
Electronics Systems Srl, King Controls, Cobham Sea Tel, Inc., Intellian, Thrane & Thrane A/S and Raymarine.
In the marine market for voice, fax, data and Internet communications equipment and services, we compete with
Cobham Sea Tel, Inc., Thrane & Thrane A/S, Furuno Electric Co., Ltd., Globalstar LP, Iridium Satellite LLC,
Intellian, Ship Equip and JRC. We also face competition from providers of marine satellite data services and
maritime VSAT solutions, including MTN/SeaMobile, Speedcast, CapRock, Schlumberger, Ship Equip, Vizada
and Stratos.

Foreign competition for our mobile satellite communications products has continued to intensify, most
notably from companies based in South Korea that seek to compete primarily on price. We anticipate that this
trend of substantial competition from this region will continue.

In the land mobile markets, we compete primarily with King Controls, Cobham TracStar, MotoSAT, and

Winegard Company.

In the guidance and stabilization markets, we compete primarily with Honeywell International Inc., Kearfott
Guidance & Navigation Corporation, Northrop Grumman Corporation, Goodrich Aerospace, IAI and Fizoptica.
We believe the principal competitive factors in these markets are performance, size, reliability, durability and
price.

Research and Development

Focused investments in research and development are critical to our future growth and competitive position
in the marketplace. Our research and development efforts are directly related to timely development of new and
enhanced products that are central to our core business strategy. The industries in which we compete are subject
to rapid technological developments, evolving industry standards, changes in customer requirements, and new
product introductions and enhancements. As a result, our success depends in part upon our ability, on a cost-
effective and timely basis, to continue to enhance our existing products and to develop and introduce new
products that improve performance and meet customers’ operational and cost requirements. Our current research
and development efforts include projects to achieve additional cost reductions in our products and the
development of new products for our existing marine and land mobile communications markets, and navigation,
guidance and stabilization application markets. For example, in February 2011, we introduced a new addition to
our mini-VSAT Broadband-compatible antenna family, the 14.5-inch diameter TracPhone V3, and we are
currently developing a miniaturized gyro intended for integration within stabilized cameras, drones, and other
systems that need very high bandwith, super low noise sensors.

Our research and development activities consist of projects funded by us, projects funded with the assistance
of customer-funded contract research and Small Business Innovative Research (SBIR) grants. Our customer-
funded research efforts are made up of contracts with defense and OEM customers, whose performance
specifications are unique to their product applications. SBIR projects are generally directed towards the
discovery of specific information requested by the government research sponsor. Many of these grants have
enhanced our technologies, resulting in new or improved product offerings. Defense and OEM research often
results in new product offerings. We strive to be the first company to bring a new product to market, and we use
our own funds to accelerate new product development efforts.

11

Government Regulation

Our manufacturing operations are subject to various laws governing the protection of the environment and
our employees. These laws and regulations are subject to change, and any such change may require us to improve
our technologies, incur expenditures, or both, in order to comply with such laws and regulations.

We are subject to compliance with the U.S. Export Administration Regulations. Some of our products have
military or strategic applications, and are on the Munitions List of the U.S. International Traffic in Arms
Regulations. These products require an individual validated license to be exported to certain jurisdictions. The
length of time involved in the licensing process varies and can result in delays of the shipping of the products.
Sales of our products to either the U.S. government or its prime contractors are subject to the U.S. Federal
Acquisition Regulations.

We are also subject to the laws and regulations of the various foreign jurisdictions in which we offer and

sell our products and services, including those of the European Union, Brazil, Norway and Singapore.

Employees

On December 31, 2010, we employed 390 full-time employees. We also employ temporary or contract
personnel, when necessary, to provide short-term and/or specialized support for production and other functional
projects.

We believe our future success will depend upon the continued service of our key technical and senior
management personnel and upon our continued ability to attract and retain highly qualified technical and
managerial personnel. None of our employees is represented by a labor union. We have never experienced a
work stoppage and consider our relationship with our employees to be good.

ITEM 1A. Risk Factors

An investment in our common stock involves a high degree of risk. You should carefully consider the
following risk factors in evaluating our business. If any of these risks, or other risks not presently known to us or
that we currently believe are not significant, develops into an actual event, then our business, financial condition
and results of operations could be adversely affected. If that happens, the market price of our common stock
could decline.

Our revenues and results of operations have been and may continue to be adversely impacted by
worldwide economic turmoil, credit tightening and associated declines in consumer spending.

tightened credit markets,

Worldwide economic conditions have experienced a significant downturn over the last two to three years,
inflation and deflation concerns, decreased
including slower economic activity,
consumer confidence, reduced corporate profits, reduced or canceled capital spending, adverse business
conditions and liquidity concerns. These conditions make it difficult for businesses, governments and consumers
to accurately forecast and plan future activities. Although net sales of our FOG products increased $11.4 million,
or 39%, from 2009 to 2010, driven largely by increased sales for commercial applications, such as surveying and
optical stabilization, and a range of government and defense applications, including weapons stabilization, there
can be no assurance that such an increase will continue in the future. Governments are experiencing significant
declines in tax receipts, which may cause them to curtail spending significantly or reallocate funds away from
defense programs. There can be no assurances that government responses to the disruptions in the economy will
remedy these problems. As a result of these and other factors, customers could slow or suspend spending on our
products and services. We may also incur increased credit losses and need to increase our allowance for doubtful
accounts, which would have a negative impact on our earnings and financial condition. We cannot predict the
timing, duration or ultimate impact of this downturn. We expect our business to continue to be adversely
impacted by this downturn.

12

Net sales of our mobile communications products are largely generated by discretionary consumer spending,
and demand for these products may demonstrate slower growth or decline as a result of continuing weak regional
and global economic conditions. Consumer spending tends to decline during recessionary periods and may
decline at other times. For example, although sales of our mobile satellite communications products have
recently increased, sales of those products declined approximately 27% from 2008 to 2009. These recent
increases in sales may not be sustained in future periods. Consumers may choose not to purchase our mobile
communications products due to a perception that they are luxury items. As global and regional economic
conditions change, including the general level of interest rates, fluctuating oil prices and demand for durable
consumer products, demand for our products could be materially and adversely affected.

Our results of operations could be adversely affected if unseasonably cold weather, prolonged winter
conditions, disasters or similar events occur.

Our marine leisure business is highly seasonal and seasonality can also impact our commercial marine
business. We historically have generated the majority of our marine leisure product revenues during the first and
second quarters of each year, and these revenues typically decline in the third and fourth quarters of each year,
compared to the first two quarters. Our marine leisure business is also significantly affected by the weather.
Unseasonably cool weather, prolonged winter conditions, hurricanes, unusual amounts of rain, and natural and
other disasters may decrease boating, which could reduce our revenues. Specifically, we may encounter a
decrease in new airtime activations as well as an increase in the number of cancellations or temporary
suspensions of our airtime service.

We expect that we could derive an increasing portion of our revenues from commercial leases of mobile
communications equipment, rather than sales, which could increase our credit and collection risk.

We are actively seeking to increase revenues from the commercial markets for our mini-VSAT Broadband
service, particularly shipping companies and other companies that deploy a fleet of vessels. In marketing this
service, we offer leasing arrangements for the TracPhone antennas to both commercial and leisure customers. If
commercial leases become increasingly popular with our customers, we could face increased risks of default
under those leases. Defaults could increase our costs of collection (including costs of retrieving leased
equipment) and reduce the amount we collect from customers, which could harm our results of operations.

Our inventory levels could require an inventory write-down if our inventory reduction and rebalancing
efforts are ineffective.

During 2009, we recorded an additional $1.3 million in inventory charges in order to account for the risk of
excess inventory due, in part, to weak consumer demand and during 2010, we wrote off approximately $0.6
million of fully reserved inventory. However, if our future inventory reduction and rebalancing efforts are
unsuccessful or take an extended period of time, we may have to consider additional, more sizeable inventory
reserves or write-downs to address potential excess and obsolete inventory, and our gross margins may fall below
historical levels, which would adversely affect our financial results.

Adverse economic conditions could result in financial difficulties or bankruptcy for any of our suppliers,
which could adversely affect our business and results of operations.

The significant downturn in worldwide economic conditions and credit tightening could present challenges
to our suppliers, which could result in disruptions to our business, increase our costs, delay shipment of our
products and impair our ability to generate and recognize revenue. To address their own business challenges, our
suppliers may increase prices, reduce the availability of credit, require deposits or advance payments or take
other actions that may impose a burden on us.

13

They may also reduce production capacity, slow or delay delivery of products, face challenges meeting our
specifications or otherwise fail to meet our requirements. In some cases, our suppliers may face bankruptcy. We
may be required to identify, qualify and engage new suppliers, which would require time and the attention of
management. Any of these events could impair our ability to deliver our products to customers in a timely and
cost-effective manner, cause us to breach our contractual commitments or result in the loss of customers.

Shifts in our product sales mix toward our mobile communications products may reduce our overall gross
margins.

Our mobile communications products historically have had lower product gross margins than our guidance
and stabilization products. During the first three quarters of 2008, sales of our guidance and stabilization products
either declined or grew at a substantially lower rate than our overall sales growth. During the fourth quarter of
2008 and the years ended December 31, 2009 and 2010, we experienced a significant increase in sales of our
guidance and stabilization products, primarily due to an increase in our FOG product sales. A shift in our product
sales mix toward mobile communications products would likely cause lower gross margins in the future,
especially if driven by reduced demand.

We must generate a certain level of sales of the TracPhone V7, TracPhone V3 and our mini-VSAT
Broadband service in order to improve our service gross margins.

As a result of our continued build-out of the mini-VSAT Broadband network infrastructure, our cost of
service sales includes certain fixed costs that do not vary with the volume of service sales. These fixed costs are
increasing as we expand our network across the globe and we have an extremely limited ability to reduce these
fixed costs in the short term. If sales of our TracPhone V7, TracPhone V3 and the mini-VSAT Broadband service
do not generate the level of revenue that we expect or decline, our service gross margins may remain below
historical levels or decline. For example, our overall service gross margin, which also includes product repair
sales, Inmarsat airtime sales, and contracted engineering sales, declined from 26% for the year ended
December 31, 2009 to 20% for the year ended December 31, 2010. The failure to improve our mini-VSAT
Broadband service gross margins would have a material adverse effect on our overall profitability.

Competition may limit our ability to sell our mobile communications products and guidance and
stabilization products.

The mobile communications markets and defense navigation, guidance and stabilization markets in which
we participate are very competitive, and we expect this competition to persist and intensify in the future. We may
not be able to compete successfully against current and future competitors, which could impair our ability to sell
our products. For example,
improvements in the performance of lower cost gyros by competitors could
potentially jeopardize sales of our fiber optic gyros. Foreign competition for our mobile satellite communications
products has continued to intensify, most notably from companies that seek to compete primarily on price. We
anticipate that this trend of substantial competition will continue.

In the market for marine satellite TV equipment, we compete with NaviSystem Marine Electronic Systems

Srl, King Controls, Cobham Sea Tel, Inc., Raymarine, Thrane & Thrane A/S and Intellian.

In the market for maritime broadband service we compete with Speedcast, MTN/SeaMobile, CapRock,

Schlumberger, Ship Equip, Vizada and Stratos.

In the marine market for satellite communications equipment, we compete with Cobham Sea Tel, Inc.,
Furuno Electric Co., Ltd., Globalstar LP, Thrane & Thrane A/S, Intellian, Ship Equip, JRC and Iridium Satellite
LLC.

In the market for land mobile satellite TV equipment, we compete with MotoSAT, King Controls, Cobham

TracStar and Winegard Company.

14

In the guidance and stabilization markets, we compete primarily with Honeywell International Inc., Kearfott

Guidance & Navigation Corporation, Northrop Grumman Corporation, Goodrich Aerospace, IAI, and Fizoptica.

Among the factors that may affect our ability to compete in our markets are the following:

• many of our primary competitors are well-established companies that could have substantially greater

financial, managerial, technical, marketing, personnel and other resources than we do;

•

•

•

product improvements, new product developments or price reductions by competitors may weaken
customer acceptance of, and reduce demand for, our products;

new technology or market trends may disrupt or displace a need for our products; and

our competitors may have lower production costs than we do, which may enable them to compete more
aggressively in offering discounts and other promotions.

The emergence of a competing small maritime VSAT antenna and complementary service or other similar
service could reduce the competitive advantage we believe we currently enjoy with our 24-inch diameter
TracPhone V7 and 14.5-inch diameter TracPhone V3 antennas along with our integrated mini-VSAT
Broadband service.

Our TracPhone V7 and TracPhone V3 systems offer customers a range of benefits due to their integrated
design, hardware costs that are lower than existing maritime VSAT systems, and spread spectrum technology.
We currently compete against companies that offer established maritime VSAT service using, in some cases,
antennas 1-meter in diameter or larger. While we are unaware of any company offering a 14.5-inch VSAT
solution comparable to our TracPhone V3, we are encountering regional competition from companies offering
24-inch VSAT systems and services. In addition, other companies could replicate some of the distinguishing
features of our TracPhone V7 or TracPhone V3, which could potentially reduce the appeal of our solution,
increase price competition and adversely affect sales. Moreover, consumers may choose other services such as
FleetBroadband or Iridium OpenPort for their service coverage and potentially lower hardware costs despite
higher service costs and slower data rates.

Our ability to compete in the maritime airtime services market may be impaired if we are unable to
complete or expand coverage of our mini-VSAT Broadband service around the globe to provide sufficient
service capacity to meet customer demand.

The TracPhone V7 and V3 and mini-VSAT Broadband service offer a range of benefits to mariners,
especially in commercial markets, due to the smaller size antenna and faster, more affordable airtime. However,
to support these customers globally, we may need to continue the expansion of the coverage areas of the mini-
VSAT Broadband service, which is currently offered in the north Pacific Ocean, the Americas, Caribbean, North
Atlantic, Europe, the Persian Gulf, Asia-Pacific, Africa, Brazil, Australian and New Zealand waters, and the
Indian Ocean. If we are unable to reach agreement with third-party satellite providers to support the mini-VSAT
Broadband service and its spread spectrum technology or transponder capacity is unavailable should we need to
increase our capacity to meet growing demand in a given region, our ability to support vessels and aeronautical
applications globally will be at risk and could reduce the attractiveness of the product and service to these
customers.

The purchasing and delivery schedules and priorities of the U.S. military and foreign governments are
often unpredictable.

We sell our fiber optic gyro systems as well as vehicle navigation products to U.S. and foreign military and
government customers, either directly or as a subcontractor to other contractors. These customers often use a
competitive bidding process and have unique purchasing and delivery requirements, which often makes the timing
of sales to these customers unpredictable. Factors that affect their purchasing and delivery decisions include:

•

changes in modernization plans for military equipment;

15

•

•

•

•

•

•

•

•

•

changes in tactical navigation requirements;

global conflicts impacting troop deployment;

priorities for current battlefield operations;

allocation of funding for military programs;

new military and operational doctrines that affect military equipment needs;

sales cycles that are long and difficult to predict;

shifting response time and/or delays in the approval process associated with the export licenses we
must obtain prior to the international shipment of certain of our military products;

delays in military procurement schedules; and

delays in the testing and acceptance of our products, including delays resulting from changes in
customer specifications.

These factors can cause substantial fluctuations in sales of our FOG and TACNAV products from period to
period. For example, sales of our FOG products increased $11.4 million, or 39%, from 2009 to 2010 driven
largely by increased sales for commercial applications, such as surveying and optical stabilization, and a range of
government and defense applications, including weapons stabilization. The Obama administration and Congress
may change defense spending priorities, either in conjunction with the decision to commence troop withdrawals
from Iraq and Afghanistan or for other reasons. Moreover, government customers and their contractors can
generally cancel orders for our products for convenience or decline to exercise previously disclosed contract
options. Even under firm orders with government customers, funding must often be appropriated in the budget
process in order for the government to complete the contract. The cancellation of or failure to fund orders for our
products could substantially reduce our net sales and results of operations. For example, our contract award from
the U.S. Coast Guard for our mini-VSAT Broadband service does not impose any minimum order quantity, and
the U.S. Coast Guard could order substantially fewer products and services than we anticipate.

Sales of our fiber optic gyro systems and TACNAV products generally consist of a few large orders, and
the delay or cancellation of a single order could substantially reduce our net sales.

KVH products sold to customers in the defense industry are purchased through orders that can generally
range in size from several hundred thousand dollars to more than one million dollars. For example, in July 2010,
we received a $13.0 million TACNAV products order and in October 2010, we also received a $1.1 million fiber
optic gyro contract. As a result, the delay or cancellation of a single order could materially reduce our net sales
and results of operations. We periodically experience repeated and unanticipated delays in defense orders, which
make our revenues and operating results less predictable. Because our guidance and stabilization products
typically have relatively higher product gross margins than our mobile communications products, the loss of an
order for guidance and stabilization products could have a disproportionately adverse effect on our results of
operations.

Only a few customers account for a substantial portion of our guidance and stabilization revenues, and the
loss of any of these customers could substantially reduce our net sales.

We derive a significant portion of our guidance and stabilization revenues from a small number of
customers, most of whom are contractors for the U.S. Government. Our top four guidance and stabilization
customers in 2010 accounted for approximately 29% of our net sales during 2010. The loss of business from any
of these customers could substantially reduce our net sales and results of operations and could seriously harm our
business. Since we are often awarded a contract as a subcontractor to a major defense supplier that is engaged in
a competitive bidding process as prime contractor for a major weapons procurement program, our revenues
depend significantly on the success of the prime contractors with which we align ourselves. For example, our

16

largest remote weapon systems customer accounted for approximately 14% and 15% of our net sales in 2010 and
2009, respectively. In addition, a subcontractor to this customer accounted for approximately 5% and 7% of our
net sales in 2010 and 2009, respectively. We anticipate a sequential decline in net sales related to our largest
remote weapon systems customer during the first half of 2011.

We only have one customer for our aviation antenna, and the customer may cancel this agreement at any
time subject to a termination charge.

In February 2008, we entered into a $20.1 million long-term antenna development and production
agreement with LiveTV that was subsequently increased in 2009 to $20.9 million. Under the terms of the
agreement with LiveTV, we manufacture a DIRECTV-compatible satellite television antenna for use on
narrowbody commercial aircraft operating in the United States. We began shipment of the antennas in the second
quarter of 2009. LiveTV may terminate the agreement including any outstanding purchase orders at any time
in units shipped under the
subject
agreement. As of December 31, 2010, the termination fee would be approximately $3.0 million, which would be
offset by an approximate total charge of $3.2 million related to capitalized aviation research and development
costs and inventory specific to the aviation antenna that would be required to be expensed if termination was
invoked. As a result, if the aviation contract was terminated as of December 31, 2010, we would have recorded
an approximate net charge to our income statement of $0.2 million.

to a sliding scale termination charge driven by the quantity shortfall

The cancellation of or failure to fund orders under this agreement could reduce our future net sales and
negatively impact our results of operations, as we currently do not have another customer in the aviation market .

Our mobile satellite products currently depend on satellite services and facilities provided by third parties,
and a disruption in those services could adversely affect sales.

Our satellite products include only the equipment necessary to utilize satellite services; we do not broadcast
satellite television programming or own the satellites to directly provide two-way satellite communications. We
currently offer satellite television products compatible with the DIRECTV and DISH Network services in the
United States, the Bell TV service in Canada, the Sky Mexico service and various other regional services in other
parts of the world.

SES World Skies, Eutelsat, Sky Perfect-JSAT, GE Satellite, Telesat, EchoStar and Star One currently
provide the satellite capacity to support the mini-VSAT Broadband service and our TracPhone V7 and V3. In
addition, we have agreements with various teleports and Internet Service Providers (ISPs) around the globe to
support the mini-VSAT Broadband service. We rely on Inmarsat for satellite communications services for our
mini-M, Fleet and FleetBroadband compatible TracPhone products.

If customers become dissatisfied with the programming, pricing, service, availability or other aspects of any
of these satellite services, or if any one or more of these services becomes unavailable for any reason, we could
suffer a substantial decline in sales of our satellite products. There may be no alternative service provider
available in a particular geographic area, and our modem or other technology may not be compatible with the
technology of any alternative service provider that may be available. In addition, the unexpected failure of a
satellite could disrupt the availability of programming and services, which could reduce the demand for, or
customer satisfaction with, our products.

We rely upon spread spectrum communications technology developed by ViaSat and transmitted by third-
party satellite providers to permit two-way broadband Internet via our 24-inch diameter TracPhone V7
antenna and our 14.5-inch diameter TracPhone V3 antenna, to be released during the second quarter of
2011, and any disruption in the availability of this technology could adversely affect sales.

Our mini-VSAT Broadband service relies on spread spectrum technology developed with ViaSat, Inc., for
use with satellite capacity controlled by SES World Skies, Eutelsat, Sky Perfect-JSAT, GE Satellite, Telesat,
Echostar, Star One and Optus. Our TracPhone V7 and V3 two-way broadband satellite terminal combines our
stabilized antenna technology with ViaSat’s ArcLight spread spectrum mobile broadband technology, along with
a new maritime version of ViaSat’s ArcLight spread spectrum modem. The ArcLight technology is also

17

integrated within the satellite hubs that support this service. Sales of the TracPhone V7 and V3 and our mini-
VSAT Broadband service could be disrupted if we fail to receive approval from regulatory authorities to provide
our spread spectrum service in the waters of various countries where our customers operate or if there are issues
with the availability of the ArcLight maritime modems.

Investment in the initial global deployment of the mini-VSAT Broadband service has required significant
capital investment and initial network costs of service, as well as operating expenses that may not be
recouped if we fail to meet the subscriber levels necessary to cover those costs on an ongoing basis.

It is our intent to continue to invest in and deploy the mini-VSAT Broadband network on a global basis in
cooperation with ViaSat under the terms of a 10-year agreement announced in July 2008. As part of the coverage
expansion, we agreed to acquire satellite capacity from Ku-band satellite operators and are in the process of
purchasing new regional satellite hubs from ViaSat. Each satellite hub represents a substantial capital investment.
During the initial deployment period, we have incurred a substantial increase in costs associated with the build
out of the mini-VSAT Broadband global infrastructure and support capability and may continue to incur an
increase in costs if we pursue expanded coverage in the future. In the short term, KVH and ViaSat will be
covering the operational cost per transponder access until sufficient subscribers join the network and allow us to
reach acceptable gross margin levels relating to our transponder and other network service costs, which may not
occur. We currently estimate that, on average, it will require at least nine months to reach the breakeven point for
a discrete region, i.e., offsetting these incremental network costs, once the service is turned on for a new
coverage region. However, certain regions that are essential for our global coverage may exceed this time period
before being profitable or may not be profitable. In addition, should an insufficient number of subscribers
activate within a region, our operations may continue below the breakeven level for a longer duration and
adversely affect our operating results and cash levels.

High fuel prices, tight credit availability and environmental concerns are adversely affecting sales of our
mobile communications products.

Factors such as historically high fuel prices, tight credit and environmental protection laws are continuing to
materially and adversely affect sales of larger vehicles and vessels for which our mobile satellite communications
products are designed. Many customers finance their purchases of these vehicles and vessels, and tightened credit
availability has reduced demand for both these vehicles and vessels and our mobile communications products.
Moreover, in the current credit markets, financing for these purchases has been unavailable or more difficult to
obtain. The increased cost of operating these vehicles and vessels is adversely affecting and may continue to
adversely affect demand for our mobile satellite communications products.

We may continue to increase the use of international suppliers to source components for our
manufacturing operations, which could disrupt our business.

Although we have historically manufactured and sourced raw materials for the majority of our products in
the U.S.,
in order for us to compete with lower priced competitive products while also improving our
profitability, we have found it desirable to source raw materials and manufactured components from foreign
countries such as China and Mexico. Our increased reliance on foreign manufacturing and/or raw material supply
has lengthened our supply chain and increased the risk that a disruption in that supply chain could have a
material adverse affect on our operations and financial performance.

We have single dedicated manufacturing facilities for each of our mobile communications and guidance
and stabilization product categories, and any significant disruption to a facility could impair our ability to
deliver our products.

Excluding the CommBox product, which we manufacture in Norway, we currently manufacture all of our
mobile communications products at our headquarters in Middletown, Rhode Island, and the majority of our
guidance and stabilization products at our facility in Tinley Park, Illinois. Some of our production processes are

18

complex, and we may be unable to respond rapidly to the loss of the use of either production facility. For
example, our production facilities use some specialized equipment that may take time to replace if they are
damaged or become unusable for any reason. In that event, shipments would be delayed, which could result in
customer or dealer dissatisfaction, loss of sales and damage to our reputation. Finally, we have only a limited
capability to increase our manufacturing capacity in the short term. If short-term demand for our products
exceeds our manufacturing capacity, our inability to fulfill orders in a timely manner could also lead to customer
or dealer dissatisfaction, loss of sales and damage to our reputation.

We depend on sole or limited source suppliers, and any disruption in supply could impair our ability to
deliver our products on time or at expected cost.

We obtain many key components for our products from third-party suppliers, and in some cases we use a
single or a limited number of suppliers. Any interruption in supply could impair our ability to deliver our
products until we identify and qualify a new source of supply, which could take several weeks, months or longer
and could increase our costs significantly. Suppliers might change or discontinue key components, which could
require us to modify our product designs. For example, in the past, we have experienced changes in the chemicals
used to coat our optical fiber, which changed its characteristics and thereby necessitated design modifications. In
general, we do not have written long-term supply agreements with our suppliers but instead purchase components
through purchase orders, which expose us to potential price increases and termination of supply without notice or
recourse. It is generally not our practice to carry significant inventories of product components, and this could
magnify the impact of the loss of a supplier. If we are required to use a new source of materials or components, it
could also result in unexpected manufacturing difficulties and could affect product performance and reliability.
In addition, from time to time, lead times for certain components can increase significantly due to imbalances in
overall market supply and demand. This, in turn, could limit our ability to satisfy the demand for certain of our
products on a timely basis, and could result in some customer orders being rescheduled or cancelled.

Any failure to maintain and expand our third-party distribution relationships may limit our ability to
penetrate markets for mobile communications products.

We market and sell our mobile communications products through an international network of independent
retailers, chain stores and distributors, as well as to manufacturers of marine vessels and recreational vehicles. If
we are unable to maintain or improve our distribution relationships, it could significantly limit our sales. In
addition, our distribution partners may sell products of other companies, including competing products, and are
generally not required to purchase minimum quantities of our products.

If we are unable to improve our existing mobile communications and guidance and stabilization products
and develop new, innovative products, our sales and market share may decline.

The markets for mobile communications products and guidance and stabilization products are each
characterized by rapid technological change,
innovations, changes in customer
requirements and expectations and evolving industry standards. If we fail to make innovations in our existing
products and reduce the costs of our products, our market share may decline. Products using new technologies, or
emerging industry standards, could render our products obsolete. If our competitors successfully introduce new
or enhanced products that eliminate technological advantages our products may have in a market or otherwise
outperform our products, or are perceived by consumers as doing so, we may be unable to compete successfully
in the markets affected by these changes.

frequent new product

If we cannot effectively manage changes in our rate of growth, our business may suffer.

We have previously expanded our operations to pursue existing and potential market opportunities, and we
are continuing to expand our international operations in connection with the build-out of our mini-VSAT
network. This growth placed a strain on our personnel, management, financial and other resources. Although

19

both our guidance and stabilization revenue and our mobile communications revenue have increased dramatically
in 2010, they have both declined dramatically in earlier periods in response to economic conditions, weak
consumer demand and other factors. If, in the future, any portion of our business grows more rapidly than we
anticipate and we fail to manage that growth properly, we may incur unnecessary expenses, and the efficiency of
our operations may decline. If we are unable to adjust our operating expenses on a timely basis in response to
changes in revenue cycles, our results of operations may be harmed. To manage changes in our rate of growth
effectively, we must, among other things:

• match our manufacturing facilities and capacity to demand for our products in a timely manner;

•

•

•

successfully attract, train, motivate and manage appropriate numbers of employees for manufacturing,
sales and customer support activities;

effectively manage our inventory and working capital; and

improve the efficiencies within our operating, administrative, financial and accounting systems, and
our procedures and controls.

We may be unable to hire and retain the skilled personnel we need to expand our operations.

To meet our growth objectives, we must attract and retain highly skilled technical, operational, managerial
and sales and marketing personnel. If we fail to attract and retain the necessary personnel, we may be unable to
achieve our business objectives and may lose our competitive position, which could lead to a significant decline
in net sales. We face significant competition for these skilled professionals from other companies, research and
academic institutions, government entities and other organizations.

Our success depends on the services of our executive officers.

Our future success depends to a significant degree on the skills and efforts of Martin Kits van Heyningen,
our co-founder, President, Chief Executive Officer, and Chairman of the Board. If we lost the services of
Mr. Kits van Heyningen, our business and operating results could be seriously harmed. We also depend on the
ability of our other executive officers to work effectively as a team. The loss of one or more of our executive
officers could impair our ability to manage our business effectively.

Our international business operations expose us to a number of difficulties in coordinating our activities
abroad and in dealing with multiple regulatory environments.

Historically, sales to customers outside the United States and Canada have accounted for a significant
portion of our net sales. We have foreign sales offices in Denmark, Singapore and Norway and we otherwise
support our international sales from our operations in the United States. Our limited operations in foreign
countries may impair our ability to compete successfully in international markets and to meet the service and
support needs of our customers in countries where we have no infrastructure. We are subject to a number of risks
associated with our international business activities, which may increase our costs and require significant
management attention. These risks include:

•

•

•

•

technical challenges we may face in adapting our mobile communications products to function with
different satellite services and technology in use in various regions around the world;

satisfaction of international regulatory requirements and delays and costs associated with procurement
of any necessary licenses or permits;

restrictions on the sale of certain guidance and stabilization products to foreign military and
government customers;

increased costs of providing customer support in multiple languages;

20

•

•

•

•

•

•

•

potentially adverse tax consequences, including restrictions on the repatriation of earnings;

protectionist laws and business practices that favor local competitors, which could slow our growth in
international markets;

potentially longer sales cycles, which could slow our revenue growth from international sales;

potentially longer accounts receivable payment cycles and difficulties in collecting accounts
receivable;

losses arising from impairment charges associated with goodwill or intangible assets;

losses arising from foreign currency exchange rate fluctuations; and

economic and political instability in some international markets.

Exports of certain guidance and stabilization products are subject to the International Traffic in Arms
Regulations and require a license from the U.S. Department of State prior to shipment.

We must comply with the United States Export Administration Regulations and the International Traffic in
Arms Regulations, or ITAR. Certain of our products have military or strategic applications and are on the
munitions list of the ITAR and require an individual validated license in order to be exported to certain
jurisdictions. Any changes in export regulations may further restrict the export of our products, and we may
cease to be able to procure export licenses for our products under existing regulations. The length of time
required by the licensing process can vary, potentially delaying the shipment of products and the recognition of
the corresponding revenue. Any restriction on the export of a product line or any amount of our products could
cause a significant reduction in net sales.

Our business may suffer if we cannot protect our proprietary technology.

Our ability to compete depends significantly upon our patents, our source code and our other proprietary
technology. The steps we have taken to protect our technology may be inadequate to prevent others from using
what we regard as our technology to compete with us. Our patents could be challenged, invalidated or
circumvented, and the rights we have under our patents could provide no competitive advantages. Existing trade
secrets, copyright and trademark laws offer only limited protection. In addition, the laws of some foreign
countries do not protect our proprietary technology to the same extent as the laws of the United States, which
could increase the likelihood of misappropriation. Furthermore, other companies could independently develop
similar or superior technology without violating our intellectual property rights. Any misappropriation of our
technology or the development of competing technology could seriously harm our competitive position, which
could lead to a substantial reduction in net sales.

If we resort to legal proceedings to enforce our intellectual property rights, the proceedings could be
burdensome, disruptive and expensive, distract the attention of management, and there can be no assurance that
we would prevail.

Also, we have delivered certain technical data and information to the U.S. government under procurement
contracts, and it may have unlimited rights to use that technical data and information. There can be no assurance
that the U.S. government will not authorize others to use that data and information to compete with us.

Claims by others that we infringe their intellectual property rights could harm our business and financial
condition.

Our industries are characterized by the existence of a large number of patents and frequent claims and
related litigation regarding patent and other intellectual property rights. We cannot be certain that our products do
not and will not infringe issued patents, patents that may be issued in the future, or other intellectual property
rights of others.

21

We do not generally conduct exhaustive patent searches to determine whether the technology used in our
products infringes patents held by third parties. In addition, product development is inherently uncertain in a
rapidly evolving technological environment in which there may be numerous patent applications pending, many
of which are confidential when filed, with regard to similar technologies.

From time to time we have faced claims by third parties that our products or technology infringe their
patents or other intellectual property rights, and we may face similar claims in the future. Any claim of
infringement could cause us to incur substantial costs defending against the claim, even if the claim is invalid,
and could distract the attention of our management. If any of our products are found to violate third-party
proprietary rights, we may be required to pay substantial damages. In addition, we may be required to re-engineer
our products or obtain licenses from third parties to continue to offer our products. Any efforts to re-engineer our
products or obtain licenses on commercially reasonable terms may not be successful, which would prevent us
from selling our products, and, in any case, could substantially increase our costs and have a material adverse
effect on our business, financial condition and results of operations.

Fluctuations in our quarterly net sales and results of operations could depress the market price of our
common stock.

We have at times experienced significant fluctuations in our net sales and results of operations from one
quarter to the next. Our future net sales and results of operations could vary significantly from quarter to quarter
due to a number of factors, many of which are outside our control. Accordingly, you should not rely on
quarter-to-quarter comparisons of our results of operations as an indication of future performance. It is possible
that our net sales or results of operations in a quarter will fall below the expectations of securities analysts or
investors. If this occurs, the market price of our common stock could fall significantly. Our results of operations
in any quarter can fluctuate for many reasons, including:

•

•

•

•

•

•

•

changes in demand for our mobile communications products and services and guidance and
stabilization products and services;

the timing and size of individual orders from military customers;

the mix of products we sell;

our ability to manufacture, test and deliver products in a timely and cost-effective manner, including
the availability and timely delivery of components and subassemblies from our suppliers;

our success in winning competitions for orders;

the timing of new product introductions by us or our competitors;

expense incurred in pursuing acquisitions;

• market and competitive pricing pressures;

•

•

general economic climate; and

seasonality of pleasure boat and recreational vehicle usage.

A large portion of our expenses, including expenses for network infrastructure, facilities, equipment, and
personnel, are relatively fixed. Accordingly, if our net sales decline or do not grow as much as we anticipate, we
might be unable to maintain or improve our operating margins. Any failure to achieve anticipated net sales could
therefore significantly harm our operating results for a particular fiscal period.

We may have exposure to additional tax liabilities, which could negatively impact our income tax expense,
net income and cash flow.

We are subject to income taxes and other taxes in both the U.S. and the foreign jurisdictions in which we
currently operate. The determination of our worldwide provision for income taxes and current and deferred tax
assets and liabilities requires judgment and estimation. In the ordinary course of our business, there are many

22

transactions and calculations where the ultimate tax determination is uncertain. We are subject to regular review
and audit by both domestic and foreign tax authorities and to the prospective and retrospective effects of
changing tax regulations and legislation. Although we believe our tax estimates are reasonable, the ultimate tax
outcome may materially differ from the tax amounts recorded in our consolidated financial statements and may
materially affect our income tax (benefit) expense, net income (loss), and cash flows in the period in which such
determination is made.

Deferred tax assets are recognized for the expected future tax consequences of temporary differences
between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit
carryforwards. A valuation allowance reduces deferred tax assets to estimated realizable value, which assumes
that it is more likely than not that we will be able to generate sufficient future taxable income to realize the net
carrying value. We review our deferred tax assets and valuation allowance on a quarterly basis. As part of our
review, we consider positive and negative evidence, including cumulative results in recent years.

If, during our quarterly reviews of our deferred tax assets, we determine that it is more likely than not that
we will not be able to generate sufficient future taxable income to realize the net carrying value of our deferred
tax assets, we will record a valuation allowance to reduce the tax assets to estimated realizable value. This could
result in a material income tax charge.

The market price of our common stock may be volatile.

Our stock price has historically been volatile. During the period from November 1, 2008 to December 31,
2010, the trading price of our common stock ranged from $2.81 to $16.66. Many factors may cause the market
price of our common stock to fluctuate, including:

•

•

•

•

•

•

variations in our quarterly results of operations;

the introduction of new products and services by us or our competitors;

changing needs of military customers;

changes in estimates of our performance or recommendations by securities analysts;

the hiring or departure of key personnel;

acquisitions or strategic alliances involving us or our competitors;

• market conditions in our industries; and

•

the global macroeconomic and geopolitical environment.

In addition, the stock market can experience extreme price and volume fluctuations. Major stock market
indices experienced dramatic declines in 2008 and in the first quarter of 2009. These fluctuations are often
unrelated to the operating performance of particular companies. These broad market fluctuations may adversely
affect the market price of our common stock. When the market price of a company’s stock drops significantly,
stockholders often institute securities litigation against that company. Any such litigation could cause us to incur
significant expenses defending against the claim, divert the time and attention of our management and result in
significant damages.

Acquisitions may disrupt our operations or adversely affect our results.

We evaluate strategic acquisition opportunities to acquire other businesses as they arise, such as our recent
acquisition of Virtek Communication. The expenses we incur evaluating and pursuing this and other such
acquisitions could have a material adverse effect on our results of operations. For example, we incurred $0.6
million of transaction expenses in 2010 in connection with the Virtek Communication acquisition. If we acquire
a business, we may be unable to manage it profitably or successfully integrate its operations with our own.

23

Moreover, we may be unable to realize the financial, operational and other benefits we anticipate from any
acquisition. Competition for acquisition opportunities could increase the price we pay for businesses we acquire
and could reduce the number of potential acquisition targets. Further, our approach to acquisitions may involve a
number of special financial and business risks, such as:

•

•

•

•

•

•

•

charges related to any potential acquisition from which we may withdraw;

diversion of our management’s time, attention, and resources;

loss of key acquired personnel;

increased costs to improve or coordinate managerial, operational, financial, and administrative systems,
including compliance with the Sarbanes-Oxley Act of 2002;

dilutive issuances of equity securities;

the assumption of legal liabilities; and

losses arising from impairment charges associated with goodwill or intangible assets.

Our charter and by-laws and Delaware law may deter takeovers.

Our certificate of incorporation, by-laws and Delaware law contain provisions that could have an anti-
takeover effect and discourage, delay or prevent a change in control or an acquisition that many stockholders
may find attractive. These provisions may also discourage proxy contests and make it more difficult for our
stockholders to take some corporate actions, including the election of directors. These provisions relate to:

•

•

•

•

•

•

the ability of our Board of Directors to issue preferred stock, and determine its terms, without a
stockholder vote;

the classification of our Board of Directors, which effectively prevents stockholders from electing a
majority of the directors at any one annual meeting of stockholders;

the limitation that directors may be removed only for cause by the affirmative vote of the holders of
two-thirds of our shares of capital stock entitled to vote;

the prohibition against stockholder actions by written consent;

the inability of stockholders to call a special meeting of stockholders; and

advance notice requirements for stockholder proposals and director nominations.

ITEM 1B. Unresolved Staff Comments

None.

24

ITEM 2. Properties

The following table provides information about our facilities as of December 31, 2010.

Location

Middletown, Rhode Island

Type

Office,
plant and
warehouse

Principal Uses

Corporate headquarters, research and
development, sales and service,
manufacturing (mobile
communications products), marketing
and administration

Approximate
Square
Footage

Ownership

Lease
Expiration

75,000

Owned

—

Middletown, Rhode Island Warehouse Warehousing (mobile communications

39,000

Leased

Tinley Park, Illinois

Kokkedal, Denmark

products)

Plant and
warehouse

Manufacturing, research and
development (guidance and
stabilization products)

Office and
warehouse

European headquarters, sales,
marketing and support

December
2011

101,000

Owned

—

11,000

Leased

May 2014

Singapore

Horten, Norway

Office

Office

Sales office

Research and development, sales,
marketing and support

300

4,400

Leased

April 2011

Leased

December
2013

We anticipate that any substantial increase in demand for our products would require us to expand our
production capacity. Although we can expand production by adding additional shifts to our operations, we may
need to identify and acquire or lease additional manufacturing facilities. We believe that suitable additional or
substitute facilities will be available as required.

ITEM 3. Legal Proceedings

From time to time, we are involved in litigation incidental to the conduct of our business. In the ordinary
course of business, we are a party to inquiries, legal proceedings and claims including, from time to time,
disagreements with vendors and customers. We are not a party to any lawsuit or proceeding that,
in
management’s opinion, is likely to materially harm our business, results of operations, financial condition or cash
flows.

25

PART II

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of

Equity Securities

Market Information. Our common stock trades on the NASDAQ Global Market under the symbol “KVHI”.
The following table provides, for the periods indicated, the high and low sale prices for our common stock as
reported on the NASDAQ Global Market.

Year Ended December 31, 2010:

First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year Ended December 31, 2009:

First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

High

Low

$15.28
16.66
15.13
16.24

$ 6.07
7.55
10.25
15.75

$11.63
10.76
11.28
11.44

$ 4.06
4.75
6.33
9.64

Stockholders. As of March 4, 2011, we had 94 holders of record of our common stock. This number does

not include stockholders for whom shares were held in a nominee or “street” name.

Dividends. We have never declared or paid cash dividends on our capital stock, and we have no plan to pay
any cash dividends in the foreseeable future. We currently intend to retain any future earnings to finance our
operations and future growth. In addition, the terms of our bank line of credit place restrictions on our ability to
pay cash dividends on our common stock.

Issuer Purchases of Equity Securities. During the three months ended December 31, 2010, we repurchased

our shares as described below:

Period

October 1, 2010—October 31,

2010 . . . . . . . . . . . . . . . . . . . . . .
November 1, 2010—November 30,
2010 . . . . . . . . . . . . . . . . . . . . . .
December 1, 2010—December 31,
2010 . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . .

Total Number of
Shares Purchased

Average Price Paid
per Share

Total Number of
Shares Purchased as
Part of Publicly
Announced
Programs

Maximum Number of
Shares that May Yet
be Purchased Under
the Programs

—

—

—

—

—

—

—

—

—

—

—

—

798,676

798,676

798,676

798,676

On November 26, 2008, our Board of Directors authorized a program to repurchase up to one million shares
of our common stock. The repurchase program is funded using our existing cash, cash equivalents, marketable
securities and future cash flows. Under the repurchase program, at management’s discretion, we may repurchase
shares on the open market from time to time, in privately negotiated transactions or block transactions, or
through an accelerated repurchase agreement. The timing of such repurchases depends on availability of shares,
price, market conditions, alternative uses of capital, and applicable regulatory requirements. The program may be
modified, suspended or terminated at any time without prior notice. The repurchase program has no expiration

26

date. There were no other repurchase programs outstanding during the three months ended December 31, 2010,
and no repurchase programs expired during the period.

During the year ended December 31, 2010, 37,726 vested restricted shares were surrendered in satisfaction

of tax withholding obligations at an average price of $12.73 per share.

During the year ended December 31, 2010, we did not repurchase any shares of our common stock in open

market transactions.

STOCK PERFORMANCE GRAPH

The following graph compares the performance of our cumulative stockholder return with that of the
NASDAQ Composite Index, a broad equity market index, and the NASDAQ Telecommunications Index, a
published industry index. The cumulative stockholder returns for shares of our common stock and for the market
indices are calculated assuming $100 was invested on December 31, 2005. We paid no cash dividends during the
periods shown. The performance of the market indices is shown on a total return (dividends reinvested) basis.
Measurement points are the last trading days of the years ended December 2005, 2006, 2007, 2008, 2009 and
2010.

t
n
e
m

t
s
e
v
n
I

0
0
1
$

f
o

e
u
l
a
V

160

140

120

100

80

60

40

20

0

12/31/05

12/31/06

12/31/07

12/31/08

12/31/09

12/31/10

Five-Year Cumulative Total Return

KVHI

NASDAQ Composite (IXIC)

NASDAQ Telecommunications (IXUT)

KVH Industries, Inc. . . . . . . . . . . . . . . . . . . . . .
NASDAQ Composite . . . . . . . . . . . . . . . . . . . .
NASDAQ Telecommunications . . . . . . . . . . . .

$100
100
100

$108
110
128

$ 82
120
139

$53
72
80

2005

2006

2007

2008

2009

$151
103
118

2010

$122
120
123

Value of investments as of December 31,

27

 
 
 
ITEM 6. Selected Financial Data

We have derived the following selected financial data from our audited consolidated financial statements.
You should read this data in conjunction with “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data.”

In September 2010, we acquired Virtek Communication for approximately $6.5 million. See note 1 to our
consolidated financial statements for a summary of significant accounting policies and the effects on the
year-to-year comparability of the selected financial data.

Year Ended December 31,

2010

2009

2008

2007

2006

(in thousands, except per share data)

Consolidated Statement of Operations Data:
Sales:

Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 92,059 $75,191 $69,941 $73,533 $70,748
8,225
Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

13,869

20,184

12,463

7,382

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

112,243

89,060

82,404

80,915

78,973

Costs and expenses:

Costs of product sales . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs of service sales . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . .
Sales, marketing and support . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . .

51,348
16,086
10,715
18,469
10,084

46,552
10,198
8,805
16,316
7,832

42,552
6,130
7,655
16,162
7,035

44,892
3,557
9,265
15,402
7,538

42,494
4,674
7,720
14,387
7,842

Total costs and expenses . . . . . . . . . . . . . . . . . . . . .

106,702

89,703

79,534

80,654

77,117

Income (loss) from operations . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense) . . . . . . . . . . . . . . . . . . . . . . . . . .

5,541
301
204
23

Income (loss) before income taxes . . . . . . . . . . . . . .
Income tax (benefit) expense . . . . . . . . . . . . . . . . . . . . . .

5,661
(2,612)

(643)
358
89
(20)

(394)
(261)

2,870
1,220
153
(231)

3,706
648

261
2,715
156
(77)

2,743
244

1,856
2,387
193
(26)

4,024
350

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . $

8,273 $ (133) $ 3,058 $ 2,499 $ 3,674

Per share information:
Net income (loss) per common share, basic . . . . . . . . . . . . . $

0.57 $ (0.01) $

0.21 $

0.17 $

0.25

Net income (loss) per common share, diluted . . . . . . . . . . . $

0.56 $ (0.01) $

0.21 $

0.17 $

0.25

Number of shares used in per share calculation:

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14,420

13,996

14,373

14,964

14,787

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14,850

13,996

14,377

14,983

14,915

December 31,

2010

2009

2008

2007

2006

(in thousands)

Consolidated Balance Sheet Data:
Cash, cash equivalents and marketable securities . . . . . . . . . . $ 37,307 $41,304 $42,660 $53,305 $54,739
67,122
Working capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
88,424
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,158
Long-term debt, excluding current portion . . . . . . . . . . . . . . .
77,795
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . .

60,571
115,198
3,684
96,303

60,690
97,746
3,807
81,600

67,696
91,570
2,026
80,770

58,222
93,758
—
79,069

28

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the other financial information
and consolidated financial statements and related notes appearing elsewhere in this annual report. This
discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could
differ materially from those anticipated in the forward-looking statements as a result of a variety of factors,
including those discussed under the heading “Item 1A. Risk Factors” and elsewhere in this annual report.

Overview

We develop, manufacture and market mobile communications products for the marine, land mobile and
aeronautical markets, and navigation, guidance and stabilization products for both the defense and commercial
markets.

Our mobile communications products enable customers to receive voice and Internet services and live
digital television via satellite services in marine vessels, recreational vehicles and automobiles as well as live
digital television on commercial airplanes while in motion. We sell our mobile communications products through
an extensive international network of retailers, distributors and dealers. We also lease products directly to end
users.

We offer precision fiber optic gyro-based (FOG) systems that enable platform and optical stabilization,
navigation, pointing and guidance. Our guidance and stabilization products also include tactical navigation
systems that provide uninterrupted access to navigation and pointing information in a variety of military vehicles,
including tactical trucks and light armored vehicles. Our guidance and stabilization products are sold directly to
U.S. and allied governments and government contractors, as well as through an international network of
authorized independent sales representatives. In addition, our guidance and stabilization products have numerous
commercial applications such as precision mapping, dynamic surveying, autonomous vehicles, train location
control and track geometry measurement systems, industrial robotics and optical stabilization.

Our mobile communications service sales include sales earned from satellite voice and Internet airtime
services, engineering services provided under development contracts, sales from product repairs, certain
DIRECTV and DISH Network account subsidies and referral fees earned in conjunction with the sale of our
products and extended warranty sales. We provide, for monthly fixed and usage fees, satellite connectivity sales
from broadband Internet, data and Voice over Internet Protocol (VoIP) service to our TracPhone V7 customers.
We also earn monthly usage fees for third-party satellite connectivity for voice, data and Internet services to our
Inmarsat TracPhone customers who choose to activate their subscriptions with us. Under current DIRECTV and
DISH Network programs, we are eligible to receive a one-time subsidy for each DIRECTV receiver activated for
service and a new mobile account activation fee from DIRECTV and DISH Network for each customer who
activates their DIRECTV or DISH Network service directly through us.

Our guidance and stabilization service sales include engineering services provided under development

contracts, product repairs and extended warranty sales.

We generate sales primarily from the sale of our mobile satellite systems and services and our guidance and
stabilization products and services. The following table provides, for the periods indicated, our sales by industry
category:

Mobile communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Guidance and stabilization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 62,473
49,770

(in thousands)
$49,587
39,473

$59,690
22,714

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$112,243

$89,060

$82,404

Year Ended December 31,

2010

2009

2008

29

Net sales to Kongsberg accounted for approximately 14%, 15% and 5% of our net sales for the years ended
December 31 2010, 2009 and 2008, respectively. In addition, net sales to a subcontractor to Kongsberg
accounted for approximately 5%, 7% and 0% of our net sales for the years ended December 31, 2010, 2009 and
2008, respectively. The terms and conditions of sales to Kongsberg and the subcontractor to Kongsberg are
consistent with our standard terms and conditions of product sales as discussed in note 1 of our consolidated
financial statements. As of December 31, 2010, Kongsberg had no outstanding accounts receivable balances with
us and the subcontractor to Kongsberg was current with all outstanding receivable balances. We anticipate a
sequential decline in net sales to Kongsberg during the first half of 2011. No other individual customer accounted
for more than 10% of our net sales for the years ended December 31, 2010, 2009 and 2008, respectively.

We have historically derived a substantial portion of our revenue from sales to customers located outside the
United States and Canada. The following table provides, for the periods indicated, sales to specified geographic
regions:

Year Ended December 31,

2010

2009

2008

(in thousands)

Originating from the Americas locations

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 70,620
5,923
17,892
3,950

$49,941
3,465
19,644
4,623

$49,761
3,107
8,656
3,201

Total North America . . . . . . . . . . . . . . . . . . . . . . . . . . . .

98,385

77,673

64,725

Originating from European and Asian locations

Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10,398
3,460

13,858

8,637
2,750

11,387

12,787
4,892

17,679

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$112,243

$89,060

$82,404

See note 12 to our consolidated financial statements for more information on our geographic segments.

In addition to our internally funded research and development efforts, we also conduct research and
development activities that are funded by our customers. These activities relate primarily to engineering activities
including the research and development associated with our aviation antenna, engineering studies, surveys,
prototype development, program management and standard product customization.
In accordance with
accounting principles generally accepted in the United States of America, we account for customer-funded
research as service revenue, and we account for the associated research and development costs as costs of service
and product sales. As a result, customer-funded research and development are not included in the research and
development expense that we present in our statement of operations. The following table presents our total
annual research and development effort, representing the sum of research costs of service and product sales and
the operating expense of research and development as described in our statement of operations. Our management
believes this information is useful because it provides a better understanding of our total expenditures on research
and development activities.

30

Year ended December 31,

2010

2009

2008

(in thousands)

Research and development expense presented on statement of

operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$10,715

$ 8,805

$7,655

Costs of customer-funded research and development included in

costs of service sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

953

475

1,011

Costs of customer-funded research and development included in

costs of product sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,001

801

—

Total consolidated statements of operations expenditures on

research and development activities . . . . . . . . . . . . . . . . . . . . .

$12,669

$10,081

$8,666

In addition to the research and development expenses listed above, we have a total of approximately $2.9
million, $3.9 million and $3.2 million in research and development costs related to a long-term aviation antenna
development and production agreement capitalized as of December 31, 2010, 2009 and 2008, respectively. These
research and development costs are reflected in other non-current assets, as we have a contractual right to recover
these costs. See note 14 to our consolidated financial statements for further discussion.

As of December 31, 2010, we had approximately $37.3 million in cash, cash equivalents and marketable

securities and accumulated earnings of approximately $2.9 million.

Critical Accounting Policies and Significant Estimates

The discussion and analysis of our financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure
at the date of our financial statements. Our significant accounting policies are summarized in note 1 to our
consolidated financial statements. The significant accounting policies that we believe are the most critical in
understanding and evaluating our reported financial results include the following:

Revenue Recognition

Product sales. Product sales are recognized when persuasive evidence of an arrangement exists, goods are

shipped, title has passed and collectability is reasonably assured. Our standard sales terms require that:

• All sales are final;

• Terms are generally either Net 30 or Net 45;

•

Shipments are tendered and shipped FOB (or as may be applicable, FCA, or EXW) our plant or
warehouse; and

• Title and risk of loss or damage passes to the dealer or distributor at the point of shipment when

delivery is made to the possession of the carrier.

For certain guidance and stabilization product sales, customer acceptance or inspection may be required
before title and risk of loss transfers to the customer. For those sales, revenue is recognized after transfer of title
and risk of loss and after notification of customer acceptance.

Under certain limited conditions, we, at our sole discretion, provide for the return of goods. No product is
accepted for return and no credit is allowed on any returned product unless we have granted and confirmed prior
written permission by means of appropriate authorization. We establish reserves for potential sales returns, credit
and allowances, and evaluate, on a monthly basis, the adequacy of those reserves based upon historical
experience and our expectations for the future.

31

Satellite connectivity sales. Directly sold and re-sold satellite connectivity service for voice, data and
Internet is recognized monthly based upon minutes or megabytes of traffic processed or contracted fixed fee
schedules. Typically, all subscribers enter into a contracted one-year minimum service agreement. We record all
satellite connectivity service sales to subscribers as gross sales, as we are the primary obligor in the contracted
service arrangement. All associated regulatory service fees and costs are recorded net in our consolidated
financial statements. The accounting estimates related to the recognition of satellite connectivity service sales in
our results of operations require us to make assumptions about future billing adjustments for disputes with
subscribers as well as unauthorized usage.

See note 11 to our consolidated financial statements for disclosures associated with our significant

customers.

Accounts Receivable Allowance

Our estimate of allowance for doubtful accounts related to trade receivables is primarily based on specific
and historical criteria. We evaluate specific accounts where we have information that the customer may have an
inability to meet its financial obligations. We make judgments, based on facts and circumstances, regarding the
need to record a specific reserve for that customer against amounts owed to reduce the receivable to the amount
that we expect to collect. We also provide for a reserve based on an aging analysis of our accounts receivable.
We evaluate these reserves on a monthly basis and adjust them as we receive additional information that impacts
the amount reserved. If circumstances change, we could change our estimates of the recoverability of amounts
owed to us by a material amount.

In 2010, we wrote off approximately $0.5 million of our allowance for doubtful accounts. The write-off was
driven largely by the financial deterioration of a couple of our mobile communications product distributors as
well as a few of our airtime customers. The current economic downturn could continue to adversely impact the
financial condition of our customers, which could result in additional write-offs and increases in our allowance
for doubtful accounts and have a negative impact on our results of operations.

Inventories

Inventory is valued at the lower of cost or market. We generally must order components for our products
and build inventory in advance of product shipments. We regularly review current quantities on hand, actual and
projected sales volumes and anticipated selling prices on products and write down, as appropriate, slow-moving
and/or obsolete inventory to its net realizable value. For example, in 2009, we recorded an additional $1.3
million in inventory reserves due in part to weak consumer demand. In 2010, we wrote off approximately $0.6
million of fully reserved inventory. Generally, our inventory does not become obsolete because the materials we
use are typically interchangeable among various product offerings. However, if we overestimate projected sales
or anticipated selling prices, our inventory might be overstocked, and we would have to reduce our inventory
valuation accordingly.

Accounting for Income Taxes

Our provision for income taxes is comprised of a current and a deferred portion. The current income tax
provision is calculated as the estimated taxes payable or refundable on tax returns for the current year. We
provide for deferred income taxes resulting from temporary differences between financial and taxable income.
Such differences arise primarily from tax credit and net operating loss carry-forwards , depreciation, stock-based
compensation expense, accruals and reserves.

At December 31, 2010, we had valuation allowances of $2.3 million to offset gross deferred tax assets of
$10.2 million. This valuation allowance represents a reduction in our valuation allowance from December 31,
2009. At December 31, 2009, we had gross deferred tax assets of $11.1 million and a valuation allowance of $6.9
million. During 2010, based upon an evaluation of the positive and negative evidence, we concluded that $3.3
million of the deferred tax asset valuation allowance was no longer required. As part of our analysis, we

32

considered all available positive and negative evidence including our past operating results, the existence of
cumulative income in the most recent fiscal years, changes in the business in which we operate and our forecast
of future taxable income. In determining future taxable income, we necessarily made certain assumptions about
our expected future plans and operations,
the amount of state, federal and
international pre-tax operating income, the reversal of temporary differences and the implementation of feasible
and prudent tax planning strategies. After considering these factors, we concluded that a $3.3 million reversal of
the valuation allowance was appropriate. These assumptions required significant judgment about the forecasts of
future taxable income and were consistent with the plans and estimates we were using to manage the underlying
businesses.

including assumptions about

We provide for income taxes during interim periods based on the estimated effective tax rate for the full
fiscal year. We record a cumulative adjustment to the tax provision in an interim period in which a change in the
estimated annual effective tax rate is determined.

We assess all material positions taken in any income tax return, including all significant uncertain positions,
in all tax years that are still subject to assessment or challenge by relevant taxing authorities. Assessing an
uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the
largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. As of each
balance sheet date, unresolved uncertain tax positions must be reassessed, and we will determine whether (i) the
factors underlying the sustainability assertion have changed and (ii) the amount of recognized tax benefit is still
appropriate. The recognition and measurement of tax benefits require significant
judgment. Judgments
concerning the recognition and measurement of a tax benefit might change as new information becomes
available.

Warranty Provision

We typically offer a one to two year warranty for all of our base products. We provide for the estimated cost
of product warranties at the time product revenue is recognized. Factors that affect our warranty reserves include
the number of units sold, historical and anticipated rates of warranty repairs and the cost per repair. While we
engage in extensive product quality programs and processes, including actively monitoring and evaluating the
quality of our component suppliers, our estimated warranty obligation is affected by ongoing product failure
rates, specific product class failures outside our baseline experience, material usage and service delivery costs
incurred in correcting a product failure. If actual product failure rates, material usage or service delivery costs
differ from our estimates, revisions to the estimated warranty liability would be required. Assumptions and
historical warranty experience are evaluated to determine the appropriateness of such assumptions. We assess the
adequacy of the warranty provision on a quarterly basis and we adjust this provision when necessary.

Stock-Based Compensation

Our stock-based compensation cost is measured at the grant date based on the fair value of the award and is

recognized as expense over the requisite service period, which is generally the vesting period.

We use the Black-Scholes valuation model for estimating the fair value on the date of grant of
compensatory stock options. Determining the fair value of stock option awards at the grant date requires
judgment regarding certain valuation assumptions, including the volatility of our stock price, expected term of
the option, risk-free interest rate and expected dividends. Changes in these assumptions and estimates could
result in different fair values and could therefore impact our earnings. These changes would not impact our cash
flows. The fair value of restricted stock and performance-based stock awards is based upon our stock price on the
grant date.

The amount of stock-based compensation expense recorded in any period for unvested awards requires
estimates of the amount of stock-based awards that are expected to be forfeited prior to vesting, as well as
assumptions regarding the probability that performance-based awards will be earned.

33

Compensation cost for awards subject only to service conditions that vest ratably are recognized on a

straight-line basis over the requisite service period for the entire award.

Goodwill and Intangible Assets

Goodwill and intangible assets with indefinite lives are tested at least annually for impairment. Intangible
assets with estimated lives and other long-lived assets are reviewed for impairment when events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of intangible
assets with estimated lives and other long-lived assets is measured by comparing the carrying amount of the asset
to future net undiscounted cash flows expected to be generated by the asset. If these comparisons indicate that an
asset is not recoverable, we will recognize an impairment loss for the amount by which the carrying value of the
asset exceeds the related estimated fair value. Estimated fair value is based on either discounted future operating
cash flows or appraised values, depending on the nature of the asset. Considerable judgment is required to
estimate discounted future operating cash flows. Judgment is also required in determining whether an event has
occurred that may impair the value of goodwill or identifiable intangible or other long-lived assets. Factors that
could indicate an impairment may exist include significant underperformance relative to plan or long-term
projections, changes in business strategy, significant negative industry or economic trends, a significant change
in circumstances relative to a large customer, a significant decline in our stock price for a sustained period and a
decline in our market capitalization to below net book value. We must make assumptions about future cash
flows, future operating plans, discount rates and other factors in our models and valuation reports. To the extent
these future projections and estimates change, the estimated amounts of impairment could differ from current
estimates. Our annual testing for impairment of goodwill is expected to be completed as of August 31 of each
year. As of December 31, 2010 all goodwill and intangible assets are associated with the purchase of Virtek
Communication in September 2010.

Contingencies

We are subject to ongoing business risks arising in the ordinary course of business. An estimated loss
contingency is accrued when it is probable that a liability has been incurred or an asset has been impaired and the
amount of loss can be reasonably estimated. We regularly evaluate current information available to determine
whether such amounts should be adjusted and record changes in estimates in the period they become known. We
reserve for legal contingencies and legal fees when the amounts are probable and reasonably estimable. At
December 31, 2010, we have not recorded any material loss contingencies.

34

Results of Operations

The following table provides, for the periods indicated, certain financial data expressed as a percentage of

net sales:

Sales:

Year Ended December 31,

2010

2009

2008

Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

82.0% 84.4% 84.9%
15.6
18.0

15.1

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

100.0

100.0

100.0

Costs and expenses:

Costs of product sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs of service sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales, marketing and support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income (loss) from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

45.8
14.3
9.5
16.5
9.0

95.1

4.9
0.3
0.2
0.0

Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax (benefit) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5.0
(2.4)

52.3
11.5
9.8
18.3
8.8

100.7

(0.7)
0.4
0.1
0.0

(0.4)
(0.3)

51.6
7.5
9.3
19.6
8.5

96.5

3.5
1.5
0.2
0.3

4.5
0.8

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7.4% (0.1)% 3.7%

Years ended December 31, 2010 and 2009

Net Sales

Product sales increased in 2010 by $16.9 million, or 22%, to $92.1 million from $75.2 million in 2009. The
primary reason for the increase was a $10.4 million, or 28%, increase in sales of our guidance and stabilization
products. Specifically, sales of our FOG products increased $11.4 million, or 39%, driven largely by increased
sales for commercial applications, such as surveying and optical stabilization, and a range of government and
defense applications, including weapons stabilization. Partially offsetting this increase was a decrease of $1.2
million, or 16%, in sales of our TACNAV defense products. Although we expect that FOG sales will continue to
grow over the long term, sales on a quarter to quarter basis could be very uneven. Largely as a result of
uncertainty regarding future remotely operated weapons stations programs, we expect our FOG sales to decline
in 2011 from 2010.

Mobile communications product sales in 2010 increased $6.4 million, or 17%, to $43.9 million from $37.5
million in 2009. The primary reason for the increase was a $4.0 million, or 14% increase in sales of our marine
products, driven primarily by demand for our TracPhone V7 product, and to a lesser extent sales of our
TracVision HD7 satellite television product that we launched in the fourth quarter of 2009. Also contributing to
the increase in marine product sales was $0.9 million in sales from Virtek Communication, which was acquired
in September 2010. In addition, sales of our land mobile products increased $1.6 million, or 32%, driven
primarily by increased sales to original equipment manufacturers in the recreational vehicle market. Further
contributing to the increase in mobile communications product sales was a $0.9 million increase in sales of our
satellite television antenna used on narrowbody commercial aircraft. We began shipping this antenna to LiveTV
in the second quarter of 2009. Future sales to LiveTV are expected to be uneven on a quarter to quarter basis and
future fiscal year delivery schedules are undetermined at this time. For example, we do not expect any shipments
to LiveTV during the first half of 2011. Mobile communications product sales originating from our European and
Asian subsidiaries increased $2.5 million, or 22%, from 2009 to 2010. Mobile communications product sales
originating from the Americas increased $3.9 million, or 15%, from 2009 to 2010.

35

Service sales increased in 2010 by $6.3 million, or 46%, to $20.2 million from $13.9 million in 2009. The
primary reason for the increase was a $6.6 million increase in airtime sales for our mini-VSAT Broadband
service. Also contributing to the increase was an increase in contracted engineering revenue of $0.6 million
primarily related to FOG and TACNAV products. Offsetting this increase was a decline of $0.9 million in service
repair sales, primarily related to a decline in guidance and stabilization TACNAV product refurbishment and
repair programs.

Costs of Sales

Our costs of product sales consist primarily of direct labor, materials and manufacturing overhead used to
produce our products. Costs of product sales in 2010 increased by $4.8 million, or 10%, to $51.3 million from
$46.6 million in 2009. The primary reason for the increase was the increase in unit sales of FOG products. Also
contributing to the increase was an increase in unit sales of marine and land mobile communications products,
and to a lesser extent, an increase in unit sales of our satellite television antenna used on narrowbody commercial
aircraft. Partially offsetting this increase was a $1.1 million decrease in our inventory reserve costs as a result of
a 2009 charge in the amount of $1.3 million primarily related to certain military components and product
obsolescence due to the introduction of new mobile communications products during 2009.

Our costs of service sales consist primarily of satellite service capacity, direct network service labor, service
network overhead and depreciation expense associated with our mini-VSAT Broadband network infrastructure,
Inmarsat service costs, service material and direct labor associated with non-warranty product repairs, as well as
engineering and related direct costs associated with customer-funded research and development. Costs of service
sales increased by $5.9 million, or 58%, to $16.1 million in 2010 from $10.2 million in 2009. The primary reason
for the increase was a $5.4 million increase in airtime costs of sales for our mini-VSAT Broadband service. Also
contributing to the increase was a $0.5 million increase in costs related to contracted engineering service sales.

Gross margin from product sales increased in 2010 to 44% from 38% in 2009. The primary reason for the
increase in gross margin was a 28% increase in our relatively higher margin guidance and stabilization product
sales and a 17% increase in our mobile communications product sales, resulting in improved utilization of
production capacity for fiber optic gyros and mobile communications products. Also contributing to the gross
margin improvement was a $1.1 million decrease in our inventory reserve costs.

Gross margin from service sales decreased in 2010 to 20% from 26% in 2009. The deterioration in our gross
margin from service sales was primarily attributable to increased costs related to the build out and operations of
the network and support infrastructure for our mini-VSAT Broadband service. Although we are near completion
of the deployment of our mini-VSAT Broadband service, we expect to continue to see cost increases as some
new coverage regions come online.

Operating Expenses

Sales, marketing and support expense consists primarily of salaries and related expenses for sales and
marketing personnel, commissions for both in-house and third-party representatives, other sales and marketing
support costs such as advertising, literature and promotional materials, product service personnel and support
costs, warranty-related costs and bad debt expense. Sales, marketing and support expense also includes the
operating expenses of our wholly owned subsidiaries in Denmark and Singapore. Sales, marketing and support
expense in 2010 increased by $2.2 million, or 13%, to $18.5 million from $16.3 million in 2009. The primary
reason for the increase in 2010 was a $1.0 million increase in U.S. based employee compensation for sales,
marketing and support, primarily in connection with the global expansion of our mini-VSAT Broadband satellite
communication service as well as an increase in stock compensation expense and accrued performance based
incentive compensation. Also contributing to the increase was a $0.5 million increase in facility expenditures
allocated to the sales and marketing department, a $0.4 million increase in commission expense primarily as a

36

result of the increase in mini-VSAT Broadband service sales discussed above and a $0.8 million increase in sales,
marketing and support expense of our foreign subsidiaries, of which $0.4 million relates to our Singaporean and
Norwegian subsidiaries, that were incorporated or acquired during 2010. Partially offsetting the increase was a
$0.5 million decrease in bad debt expense, as well as a decrease in warranty expense of $0.2 million. As a
percentage of sales, sales, marketing and support expense decreased in 2010 to 17% from 18% in 2009.

Research and development expense consists of direct labor, materials, external consultants and related
overhead costs that support our internally funded product development and product sustaining engineering
activities. All research and development costs are expensed as incurred, excluding the aviation antenna
development costs related to the development project for LiveTV, which are capitalized, as we have a contractual
right to recover such costs (see note 14 to the consolidated financial statements). Research and development
expense in 2010 increased by $1.9 million, or 22%, to $10.7 million from $8.8 million in 2009. The primary
reason for the increase in 2010 expense was the core completion of the development project for the satellite
television antenna to be used on narrowbody commercial aircraft. The project was substantially complete in the
second quarter of 2009 and resulted in a $1.4 million decrease in the capitalization of aviation antenna
development costs during 2010 versus 2009 and a corresponding increase in research and development expense.
Also contributing to the increase was an increase in engineering related employee compensation, material costs
and consulting, primarily in connection with the general increase in development of products for all markets, as
well as a $0.2 million increase in research and development expense associated with the acquisition of Virtek
Communication in September 2010. As a percentage of sales, research and development expense was 10% in
2010, which was consistent with 2009.

General and administrative expense consists of costs attributable to management, finance and accounting,
information technology, human resources, certain outside professional services and other administrative costs.
General and administrative expense in 2010 increased by $2.3 million, or 29%, to $10.1 million from $7.8
million in 2009. The primary reason for the expense increase in 2010 was a $1.2 million increase in general and
administrative U.S. based employee compensation, primarily as a result of an increase in general and
administrative staffing as well as an increase in stock compensation expense and accrued performance based
incentive compensation. Also contributing to the increase was $0.6 million in transaction costs associated with
the September 2010 acquisition of Virtek Communication, as well as $0.3 million in general and administrative
expense incurred by Virtek Communication. In addition, legal and insurance expense increased by $0.2 million
in connection with the global expansion of our mini-VSAT Broadband satellite communication service, and
property taxes increased by $0.1 million primarily due to the purchase of our facility in Tinley Park, Illinois in
September 2010. As a percentage of sales, general and administrative expense was 9% in 2010, which was
consistent with 2009.

Interest Income and Other Expense

Interest income and other expense decreased by $0.1 million to $0.1 million in 2010 from $0.2 million in
2009. The primary reason for the decrease was a $0.1 million increase in interest expense associated with two
interest rate swap agreements entered into in April 2010.

Income Tax Benefit

The income tax benefit increased by $2.4 million to $2.6 million in 2010 from $0.3 million in 2009. The
primary reason for the increase in 2010 was a tax benefit in the amount of $3.3 million recognized as a result of
the reversal of a substantial portion of the U.S. deferred tax asset valuation allowance during 2010. During 2010,
based upon an evaluation of the positive and negative evidence, we concluded that $3.3 million of the deferred
tax asset valuation allowance was no longer required. As part of our analysis, we considered all available positive
and negative evidence, including our past operating results, the existence of cumulative income in the most
recent fiscal years, changes in the business in which we operate and our forecast of future taxable income. After
considering these factors, we concluded that it is more likely than not that we will be able to realize a $3.3
million reversal of the valuation allowance. Partially offsetting the income tax benefit was income tax expense
associated with our $5.7 million pre-tax income in 2010 versus a $0.4 million pre-tax loss in 2009.

37

Years ended December 31, 2009 and 2008

Net Sales

Product sales increased in 2009 by $5.3 million, or 8%, to $75.2 million from $69.9 million in 2008. The
primary reason for the increase was a $19.1 million, or 103%, increase in sales of our guidance and stabilization
products. Specifically, sales of our FOG products increased $19.9 million, or 215%, driven largely by increased
sales in support of remotely operated weapons station programs. Partially offsetting the guidance and
stabilization product sales increase was a $0.8 million decrease in sales related to our legacy navigation and
TACNAV products. Further offsetting the increase in total product sales was a decrease in sales of our marine
products of $12.1 million, or 29%. This decrease was primarily the result of decreases in the sales of our marine
consumer products, including the TracVision M-series satellite television products and Inmarsat-compatible
TracPhone products. This was partially offset by a modest increase in our TracPhone V7 product sales from
increased sales to commercial customers, with decreased sales to leisure customers due primarily to weak
consumer economic conditions. In addition, sales of our land mobile products decreased by $5.4 million, or 52%.
The decline in mobile communications product sales was greater in North America, where sales decreased
$11.4 million, or 34%, whereas mobile communications product sales originating from our Danish subsidiary
decreased only $2.5 million, or 14%.

The weakening of consumer demand, especially in the recreational vehicle market commencing in the
second quarter of 2008, due in part to increased fuel prices, and the crisis of consumer confidence in the general
economy during the second half of 2008 and throughout 2009 caused declines in demand for our land mobile
products and our marine consumer products.

Service sales increased in 2009 by $1.4 million, or 11%, to $13.9 million from $12.5 million in 2008. The
primary reason for the increase was a $4.7 million increase in airtime sales for our mini-VSAT Broadband
service that we launched in the fourth quarter of 2007, which was partially offset by a decline in service repair
sales, contracted engineering service sales, and Inmarsat airtime sales of $3.1 million. The decrease in service
repair sales was driven by a reduction in guidance and stabilization repair service of navigation products for
military vehicles. The decrease in contracted engineering service sales is attributed to our decision to concentrate
our engineering efforts on initiatives associated with our global roll-out of the mini-VSAT network and our FOG
products and de-emphasize non-strategic engineering services requested by customers. The decrease in Inmarsat
service sales is primarily related to our success in transitioning Inmarsat customers to our mini-VSAT Broadband
service in 2009 and to the overall decline in consumer demand.

Costs of Sales

Costs of product sales in 2009 increased by $4.0 million, or 9%, to $46.6 million from $42.6 million in
2008. On a percentage basis, the 9% increase in our cost of product sales was largely consistent with the 8%
increase in net product sales in 2009 from 2008. The primary reason for the increase was the increase in unit
sales of higher priced FOG products, which was partially offset by a decline in unit sales of mobile
communications products and a shift in the sales mix of mobile communications products towards lower priced
marine products.

Costs of service sales increased by $4.1 million, or 66%, to $10.2 million in 2009 from $6.1 million in 2008.
The primary reason for the increase was a $5.1 million increase in airtime costs of sales for our mini-VSAT
Broadband service that we launched in the fourth quarter of 2007, which was partially offset by a $0.9 million
decline in costs related to service repair sales and contracted engineering service sales. The decrease in costs
related to service repair sales was driven by a reduction in guidance and stabilization repair service of navigation
products for military vehicles. The decrease in contracted engineering service costs is attributed to our decision
to concentrate our engineering efforts on initiatives associated with our global roll-out of the mini-VSAT
network and our FOG products.

38

Gross margin from product sales decreased in 2009 to 38% from 39% in 2008. The deterioration in our
gross margin from product sales was attributable to under-utilization of our production capacity earlier in 2009
due to reduced unit sales of mobile communications products, a higher level of price discounts to maintain our
competitive position in the mobile communications marketplace and a $1.2 million increase in our inventory
reserves primarily related to certain military components and the introduction of new mobile communications
products. Partially offsetting the decrease was a $19.9 million, or 215%, increase in FOG product sales, which
typically have a relatively higher gross margin than sales of our mobile communications products.

Gross margin from service sales decreased in 2009 to 26% from 51% in 2008. The deterioration in our gross
margin from service sales was primarily attributable to increased costs related to the build out and operations of
the network and support infrastructure for our mini-VSAT Broadband service.

Operating Expenses

Sales, marketing and support expense in 2009 increased by $0.2 million, or 1%, to $16.3 million from $16.2
million in 2008. As a percentage of sales, sales, marketing and support expense decreased in 2009 to 18% from
20% in 2008. The primary reason for the expense increase in 2009 was a $0.6 million increase in commission
expense as a result of the increase in mini-VSAT Broadband service sales discussed above. Also contributing to
the increase was a $0.6 million increase in bad debt expense. Partially offsetting the increase was a $0.8 million
decrease in warranty and service-related expenses and a $0.3 million decrease in sales, marketing and support
expense related to our Danish subsidiary. Contributing to the decrease in sales, marketing and support expense of
our Danish subsidiary was a 5% decrease in the average valuation of the Danish Krone versus the U.S. dollar
year-over-year.

Research and development expense in 2009 increased by $1.2 million, or 15%, to $8.8 million from $7.7
million in 2008. As a percentage of sales, research and development expense increased in 2009 to 10% from 9%
in 2008. The primary reason for the increase in 2009 expense was the core completion of the development project
for the DIRECTV-compatible satellite television antenna sold to LiveTV to be used on narrowbody commercial
aircraft. The project was substantially complete in the second quarter of 2009 and resulted in a $1.4 million
decrease in the capitalization of aviation antenna development costs associated with engineering labor and
overhead (see note 14 to the consolidated financial statements) year-over-year and a corresponding increase in
research and development expense.

General and administrative expense in 2009 increased by $0.8 million, or 11%, to $7.8 million from $7.0
million in 2008. The primary reason for the expense increase in 2009 was a $0.3 million increase in legal and
consulting fees associated with licensing arrangements in connection with the global expansion of our mini-
VSAT Broadband satellite communication service and information technology initiatives. Also contributing to
the increase was an increase in general and administrative related employee compensation of $0.3 million for
performance based incentive compensation. As a percentage of sales, general and administrative expense
remained fairly consistent on a year-over-year basis at 9%.

Interest Income and Other Expense

Interest income and other expense decreased by $0.6 million to $0.2 million in 2009 from $0.8 million in
2008. The primary reason for the decrease was a $0.9 million decrease in interest income in the 2009 period
resulting from lower interest rates and a lower average amount of cash, cash equivalents and marketable
securities invested in 2009. Partially offsetting the decrease was a $0.2 million decrease in losses related to
foreign currency exchange contracts.

Income Tax (Benefit) Expense

Income tax expense decreased by $0.9 million to a benefit of $0.3 million in 2009 from a provision of $0.6
million in 2008. Our effective tax rate was (66.2%) in 2009 compared to 17.5% in 2008. The primary reason for

39

the decrease in 2009 was our $0.4 million pre-tax loss versus a net profit in 2008. Also contributing to the
decrease was a decrease of $0.2 million in federal income tax expense resulting from an adjustment recorded to
reconcile our previously recorded estimates of federal income tax expense to our 2008 federal income tax return
that was completed and filed in June 2009 and a $0.2 million federal income tax benefit recorded in 2009 from
the monetization of research and development tax credits.

Liquidity and Capital Resources

We have historically funded our operations primarily from cash flows from operations, net proceeds from
public and private equity offerings, bank financings and proceeds received from exercises of stock options. As of
December 31, 2010, we had $37.3 million in cash, cash equivalents and marketable securities and $60.6 million
in working capital.

Net cash provided by operations for 2010 was $9.6 million as compared to net cash provided by operations
of $0.9 million for 2009. The increase is primarily due to an $8.4 million increase in net income as well as a $3.6
million reduction in cash outflows related to accounts payable and accrued expenses and a $2.9 million reduction
in cash outflows for other non-current assets. Partially offsetting this increase was an increase in cash outflows of
$3.3 million due to increased inventory levels, a $0.5 decrease in cash inflows related to other long-term
liabilities and a $0.6 million increase in cash outflows related to deferred revenue.

Net cash used in investing activities for 2010 was $12.1 million as compared to net cash used in investing
activities of $3.0 million for 2009. The increase is primarily due to the $6.4 million in net cash paid for the
acquisition of Virtek Communication. Also contributing to the increase in cash outflows was a $5.8 million
increase in our capital expenditures, primarily due to the purchase of the land and building in our Tinley Park,
Illinois location for approximately $4.3 million as well as the global expansion of our mini-VSAT Broadband
satellite communication products and service. This increase in cash outflows was partially offset by a $3.2
million decrease in our net investment in marketable securities.

Net cash provided by financing activities for 2010 was $3.8 million as compared to net cash provided by
financing activities of $2.9 million for 2009. The increase is primarily due to a $2.8 million increase in proceeds
from exercises of stock options and purchases of shares under our employee stock purchase plan. Also
contributing to the increase in net cash provided by financing activities was a $0.6 million decrease in
repurchases of common stock. Partially offsetting the increase in cash provided by financing activities was a
decrease of $2.0 million in net cash provided by our mortgage refinancing activities in the first two quarters of
2009, when we made a $2.0 million balloon repayment on our former mortgage loan and took out a new $4.0
million mortgage loan on our headquarters facility. Further offsetting the increase in cash provided by financing
activities was a $0.4 million increase in payments of employee restricted stock tax withholdings.

On April 6, 2009, we entered into a mortgage loan in the amount of $4.0 million related to our headquarters
facility in Middletown, Rhode Island. The loan term is 10 years, with a principal amortization of 20 years, and
the interest rate will be a rate per year adjusted periodically based on a defined interest period equal to the BBA
LIBOR Rate plus 2.25 percentage points. Land, building and improvements with a carrying value of $5.0 million
as of December 31, 2010 secure the mortgage loan. The monthly mortgage payment is approximately $9,400 plus
interest and increases in increments of approximately $600 each year throughout the life of the mortgage. Due to
the difference in the term of the loan and amortization of the principal, a balloon payment of $2.6 million is due
on April 1, 2019. The loan contains one financial covenant, a Fixed Charge Coverage Ratio, which applies in the
event that our consolidated cash, cash equivalents and marketable securities balance falls below $25.0 million at
any time. As our consolidated cash, cash equivalents and marketable securities balance was above $25.0 million
throughout 2010, the Fixed Charge Coverage Ratio did not apply. Under the mortgage loan we may prepay our

40

outstanding loan balance subject to certain early termination charges as defined in the mortgage loan agreement.
If we were to default on our mortgage loan, the land, building and improvements would be used as collateral. As
discussed in note 17 to the consolidated financial statements, effective April 1, 2010, in order to reduce the
volatility of cash outflows that arise from changes in interest rates, we entered into two interest rate swap
agreements that are intended to hedge our mortgage interest obligations by fixing the interest rates specified in
the mortgage loan to 5.91% for half of the principal amount outstanding and 6.07% for the remaining half of the
principal amount outstanding as of April 1, 2010 until the mortgage loan expires on April 16, 2019.

On September 13, 2010, our Danish subsidiary, KVH Europe A/S, completed the purchase of Virtek
Communication for approximately $6.5 million. The purchase was made using existing cash, cash equivalents
and marketable securities.

On September 15, 2010, we purchased a facility located in Tinley Park, Illinois, which we had previously
leased, for approximately $4.3 million. The property was purchased using existing cash, cash equivalents and
marketable securities.

Currently, we have a revolving loan agreement with a bank that provides for a maximum available credit of
$15.0 million and will expire on December 31, 2011. We pay interest on any outstanding amounts at a rate equal
to, at our option, BBA LIBOR Daily Floating Rate plus 1.75%, or the Eurodollar Rate plus 1.75%. The line of
credit contains two financial covenants, a Leverage Ratio and a Fixed Charge Coverage Ratio, that apply in the
event that our consolidated cash, cash equivalents and marketable securities balance falls below $25.0 million at
any time. As our consolidated cash, cash equivalents and marketable securities balance was above $25.0 million
throughout 2010, the Leverage Ratio and Fixed Charge Coverage Ratio did not apply. We may terminate the loan
agreement prior to its full term without penalty, provided we give 30 days advance written notice to the bank. As
of December 31, 2010, no borrowings were outstanding under the facility.

On November 26, 2008, our Board of Directors authorized a program to repurchase up to one million shares
of our common stock. The share repurchase program is funded using our existing cash, cash equivalents,
marketable securities and future cash flows. As of December 31, 2010, there were 798,676 shares that may yet be
purchased under this program. We did not repurchase any shares of our common stock during 2010 under the
program.

It is our intent to continue to invest in the mini-VSAT Broadband network on a global basis in cooperation
with ViaSat under the terms of a 10-year agreement announced in July 2008. As part of this investment, we
expect that we will purchase additional hubs from ViaSat over time for capacity and/or regional expansion. Each
satellite hub represents a substantial capital investment. In 2008, we entered into an agreement to lease satellite
capacity in order to provide coverage in the Pacific Ocean. In 2009, we entered into several agreements with
various satellite owners in order to provide satellite coverage to North American, Caribbean, African, Asia-
Pacific, Indian Ocean, Australian and New Zealand waters. During the third quarter of 2010, we entered into an
agreement to lease satellite capacity to provide coverage in offshore Brazilian waters. In addition to these
agreements, as part of future potential capacity and coverage expansion, we would plan to seek to acquire
additional satellite capacity from satellite operators, expend funds to seek regulatory approvals and permits,
develop product enhancements in anticipation of the expansion, and hire additional personnel. We anticipate
these costs will be funded by cash, cash equivalents and marketable securities on hand, as well as cash flows
from operations.

We believe that the $37.3 million we hold in cash, cash equivalents and marketable securities, together with
our other existing working capital and cash flows from operations, will be adequate to meet planned operating
and capital requirements through at least the next twelve months. However, as the need or opportunity arises, we
may seek to raise additional capital through public or private sales of securities or through additional debt
financing. There are no assurances that we will be able to obtain any additional funding or that such funding will
be available on terms acceptable to us.

41

Contractual Obligations and Other Commercial Commitments

As of December 31, 2010, our contractual commitments consisted of satellite service capacity, equipment
and facility leases, near-term purchase commitments, and a mortgage note payable. Our purchase commitments
include unconditional purchase orders for inventory, manufacturing materials and fixed assets extending out over
various periods throughout 2011. We are also obligated under multi-year facility leases and satellite service
capacity leases that terminate at various times between 2011 and 2016.

The following table summarizes our obligations under

these commitments, excluding interest, at

December 31, 2010:

Contractual Obligations

Payment Due by Period

Total

Less than
1 Year

1-3 Years

3-5 Years

(in thousands)

More than
5 Years

Satellite service capacity and equipment lease

obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory purchase commitments . . . . . . . . . . . . . . . . . . . . .
Mortgage note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Facility lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . .

$29,852
23,015
3,807
873

$ 7,579
23,015
124
449

$14,482
—
269
371

$7,634
—
300
53

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$57,547

$31,167

$15,122

$7,987

$ 157
—
3,114
—

$3,271

We did not have any off-balance sheet commitments, guarantees or standby repurchase obligations as of

December 31, 2010.

Recent Accounting Pronouncements

See note 1 of our accompanying audited consolidated financial statements for a description of recent
accounting pronouncements including the dates (or expected dates) of adoption and effects (or expected effects)
on our results of operations.

ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk

Our primary market risk exposure is in the area of foreign currency exchange risk. We are exposed to
currency exchange rate fluctuations related to our subsidiary operations in Brazil, Denmark, Norway and
Singapore. Certain transactions in these locations are made in the local currency, yet are reported in the U.S.
dollar,
the functional currency. For foreign currency exposures existing at December 31, 2010, a 10%
unfavorable movement in the foreign exchange rates for our subsidiary locations would not expose us to material
losses in earnings or cash flows.

From time to time, we purchase foreign currency forward contracts generally having durations of no more
than five months. These forward contracts are intended to offset the impact of exchange rate fluctuations on cash
flows of our foreign subsidiaries. Foreign exchange contracts are accounted for as cash flow hedges and are
recorded on the balance sheet at fair value until executed. Changes in the fair value are recognized in earnings.
We did not enter into any such contracts during 2010.

The primary objective of our investment activities is to preserve principal and maintain liquidity, while at
the same time maximize income. We have not entered into any instruments for trading purposes. Some of the
securities that we invest in may have market risk. To minimize this risk, we maintain our portfolio of cash
equivalents and short-term investments in a variety of securities that can include United States treasuries,
certificates of deposit, investment grade asset-backed corporate securities, money market mutual funds and
government agency and non-government debt securities. As of December 31, 2010, a hypothetical 100 basis-

42

point increase in interest rates would result in an immaterial decrease in the fair value of our investments that
have maturities of greater than one year. Due to the conservative nature of our investments and the relatively
short duration of their maturities, we believe interest rate risk is substantially mitigated. As of December 31
2010, 65% of the $30.1 million classified as available-for-sale marketable securities will mature or reset within
one year. Accordingly, long-term interest rate risk is not considered material. We do not invest in any financial
instruments denominated in foreign currencies as of December 31, 2010.

To the extent that we borrow against our variable-rate credit facility, we will be subject to interest rate risk.

There were no borrowings outstanding at December 31, 2010.

As previously discussed in note 17 to the consolidated financial statements, effective April 1, 2010, in order
to reduce the volatility of cash outflows that arise from changes in interest rates, we entered into two interest rate
swap agreements. These interest rate swap agreements are intended to hedge our mortgage loan related to our
headquarters facility in Middletown, Rhode Island by fixing the interest rates specified in the mortgage loan to
5.91% for half of the principal amount outstanding and 6.07% for the remaining half of the principal amount
outstanding as of April 1, 2010 until the mortgage loan expires on April 16, 2019.

ITEM 8. Financial Statements and Supplementary Data

Our consolidated financial statements and supplementary data, together with the report of KPMG LLP, our

independent registered public accounting firm, are included in Part IV of this annual report on Form 10-K.

ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

ITEM 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended, or the Exchange Act, which are designed to ensure that
information required to be disclosed in the reports we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms, and that such information is accumulated and communicated to our management,
including our President, Chief Executive Officer and Chairman of the Board, or CEO, and Chief Financial and
Accounting Officer, or CFO, as appropriate to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our CEO and CFO, our management has evaluated the
effectiveness of our disclosure controls and procedures as of the end of the period covered by this annual report.
Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were
effective as of December 31, 2010.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial
reporting. Our internal control over financial reporting is the process designed by and under the supervision of
our CEO and CFO to provide reasonable assurance regarding the reliability of our financial reporting and the
preparation of our financial statements for external reporting in accordance with accounting principles generally
accepted in the United States of America. Management has evaluated the effectiveness of our internal control
over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control—Integrated Framework.

43

Under the supervision and with the participation of our CEO and CFO, our management has assessed the
effectiveness of our internal control over financial reporting as of December 31, 2010 and concluded that it is
effective.

Our independent registered public accounting firm, KPMG LLP, has issued an audit report regarding the
effectiveness of our internal control over financial reporting as of December 31, 2010, and that report is included
below.

Evaluation of Changes in Internal Control over Financial Reporting

Under the supervision and with the participation of our CEO and CFO, our management has evaluated
changes in our internal control over financial reporting that occurred during the fourth quarter of 2010. Based on
that evaluation, our CEO and CFO did not identify any change in our internal control over financial reporting that
has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Important Considerations

limitations,

including cost

to various inherent

The effectiveness of our disclosure controls and procedures and our internal control over financial reporting
is subject
judgments used in decision making,
assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error,
and the risk of fraud. Moreover, projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions and the risk that the degree of
compliance with policies or procedures may deteriorate over time. Because of these limitations, there can be no
assurance that any system of disclosure controls and procedures or internal control over financial reporting will
be successful in preventing all errors or fraud or in making all material information known in a timely manner to
the appropriate levels of management.

limitations,

ITEM 9B. Other Information

None.

44

PART III

We have omitted the information required in Part III of this annual report because we intend to include that
information in our definitive proxy statement for our 2011 annual meeting of stockholders, which we expect to
file before 120 days after the end of fiscal 2010. We incorporate the information required in Part III of this
annual report by reference to our 2011 proxy statement.

ITEM 10. Directors, Executive Officers and Corporate Governance

Except as set forth below, the information required by this item is incorporated by reference to our 2011

proxy statement.

Our Board of Directors has adopted a Code of Business Conduct and Ethics that applies to our directors,
executives, officers and employees. Our Code of Business Conduct and Ethics can be found on our website,
which is located at www.kvh.com. We intend to make all required disclosures concerning any amendments to or
waivers from, our Code of Business Conduct and Ethics on our website. Any person may request a copy of the
Code of Business Conduct and Ethics, at no cost, by writing to us at the following address: KVH Industries, Inc.,
50 Enterprise Center, Middletown, Rhode Island, 02842, Attention: Investor Relations.

ITEM 11. Executive Compensation

The information required by this item is incorporated by reference to our 2011 proxy statement.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder

Matters

The information required by this item is incorporated by reference to our 2011 proxy statement.

ITEM 13. Certain Relationships and Related Transactions and Director Independence

The information required by this item is incorporated by reference to our 2011 proxy statement.

ITEM 14. Principal Accountant Fees and Services

The information required by this item is incorporated by reference to our 2011 proxy statement.

45

ITEM 15. Exhibits and Financial Statement Schedules

PART IV

(a) 1. Financial Statements

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2010 and 2009

Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008

Consolidated Statements of Stockholders’ Equity and Accumulated Other Comprehensive Income
(Loss) for the years ended December 31, 2010, 2009 and 2008

Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008

Notes to Consolidated Financial Statements

(a) 2. Financial Statement Schedules

None.

Page

50

51

52

53

54

55

46

3.

Exhibits

Exhibit No.

Description

Filed with
this Form
10-K

Incorporated by Reference

Form

Filing Date

Exhibit No.

3.1

3.2

4.1

*10.1

*10.2

*10.3

*10.4

*10.5

*10.6

*10.7

*10.8

*10.9

*10.10

10.11

10.12

10.13

Amended and Restated Certificate of Incorporation,
as amended
Amended, Restated and Corrected Bylaws of KVH
Industries, Inc.
Specimen certificate for the common stock

Amended and Restated 1996 Incentive and
Nonqualified Stock Option Plan
Amended and Restated 1996 Employee Stock
Purchase Plan
Second Amended and Restated 2003 Incentive and
Nonqualified Stock Option Plan
Third Amended and Restated 2006 Stock Incentive
Plan
Form of Nonqualified Stock Option agreement
granted under the Second Amended and Restated
2003 Incentive and Nonqualified Stock Option Plan
Form of Incentive Stock Option agreement granted
under the Second Amended and Restated 2003
Incentive and Nonqualified Stock Option Plan
Form of Incentive Stock Option agreement granted
under the Third Amended and Restated 2006 Stock
Incentive Plan
Form of Non-Statutory Stock Option agreement
granted under the Third Amended and Restated 2006
Stock Incentive Plan
Form of Restricted Stock Agreement granted under
the Third Amended and Restated 2006 Stock
Incentive Plan
Policy Regarding Automatic Grants to Non-
Employee Directors
Amended and Restated Credit and Security
Agreement dated July 17, 2003 with Fleet Capital
Corporation
Assignment and Assumption and Amendment and
Note Modification Agreement, dated July 17, 2006
by and among KVH Industries, Inc., Banc of
America Leasing & Capital, LLC (successor-by-
merger to Fleet Capital Corporation) (“assignor”),
and Bank of America, N.A. (successor-by-merger to
Fleet National Bank) (“assignee”)
Second Amendment and Note Modification
Agreement, dated December 28, 2006 by and among
KVH Industries, Inc., and Bank of America, N.A.

47

10-Q

August 6,
2010

8-K July 31, 2007

S-1/A March 22,

1996

3.1

3

4.1

8-K July 31, 2007

10.3

8-K

June 2, 2010

10.2

10-Q May 6, 2009

10.21

8-K

June 2, 2010

10.1

10-K

10-K

8-K

8-K

8-K

March 15,
2005

March 15,
2005

August 28,
2006

August 28,
2006

August 16,
2007

10.14

10.15

10.1

10.2

10.1

10-Q May 6, 2009

10.23

8-K July 18, 2003

99.1

8-K July 20, 2006

10.1

8-K

January 3,
2007

10.1

Exhibit No.

10.14

10.15

10.16

10.17

21.1
23.1
31.1

31.2

32.1

Description

Filed with
this Form
10-K

Incorporated by Reference

Form Filing Date

Exhibit No.

Third Amendment and Note Modification Agreement,
dated August 20, 2007 by and among KVH Industries,
Inc., and Bank of America, N.A.
Fourth Amendment and Note Modification Agreement,
dated December 31, 2008 by and among KVH
Industries, Inc., and Bank of America, N.A.
Loan Agreement dated April 6, 2009 by and among
KVH Industries, Inc., and Bank of America, N.A.
Purchase and Sale Agreement by and between Jefferson-
Pilot Investments, Inc., and KVH Industries, Inc.
List of Subsidiaries
Consent of KPMG LLP
Rule 13a-14(a)/15d-14(a) certification of principal
executive officer
Rule 13a-14(a)/15d-14(a) certification of principal
financial officer
Rule 1350 certification

X
X
X

X

X

10-K March 8,

2010

8-K January 2,

10.1

2009

8-K

April 8,
2009

10.1

10-Q August 6,

10.3

2010

* Management contract or compensatory plan.

48

Pursuant to the requirements of Section 13 or Section 15(d) 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.

SIGNATURES

Date: March 14, 2011

KVH Industries, Inc.

By: /S/ MARTIN A. KITS VAN HEYNINGEN

Martin A. Kits van Heyningen
President, Chief Executive Officer and Chairman
of the Board

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by

the following persons in the capacities and on the dates indicated.

Name

Title

Date

/S/ MARTIN A. KITS VAN HEYNINGEN
Martin A. Kits van Heyningen

/S/ PATRICK J. SPRATT
Patrick J. Spratt

/S/ ROBERT W.B. KITS VAN HEYNINGEN
Robert W.B. Kits van Heyningen

/S/ MARK S. AIN
Mark S. Ain

/S/ STANLEY K. HONEY
Stanley K. Honey

/S/ BRUCE J. RYAN
Bruce J. Ryan

/S/ CHARLES R. TRIMBLE
Charles R. Trimble

March 14, 2011

March 14, 2011

March 14, 2011

March 14, 2011

March 14, 2011

March 14, 2011

March 14, 2011

President, Chief Executive Officer and
Chairman of the Board (Principal
Executive Officer)

Chief Financial and Accounting
Officer (Principal Financial and
Accounting Officer)

Director

Director

Director

Director

Director

49

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
KVH Industries, Inc.:

We have audited the accompanying consolidated balance sheets of KVH Industries, Inc. and subsidiaries (the
“Company”) as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’
equity and accumulated other comprehensive income (loss), and cash flows for each of the years in the three-year period
ended December 31, 2010. We also have audited the Company’s internal control over financial reporting as of
December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these
consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment
of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on
Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial
statements and an opinion on the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement and whether effective internal control over financial
reporting was maintained in all material respects. Our audits of the consolidated financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.

Because of its inherent

internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

limitations,

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of the Company as of December 31, 2010 and 2009, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 2010, in conformity with U.S. generally
accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

/S/ KPMG LLP
Providence, Rhode Island
March 14, 2011

50

KVH INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31,

2010

2009

Current assets:

ASSETS

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net of allowance for doubtful accounts of $592,458 as

of December 31, 2010 and $843,852 as of December 31, 2009 . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

7,241,188
30,065,581

$ 5,870,771
35,433,491

18,769,709
14,765,210
2,734,058
944,489

15,802,796
13,386,981
1,615,022
17,356

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

74,520,235

72,126,417

Property and equipment, less accumulated depreciation of $23,518,164 as of

December 31, 2010 and $21,502,669 as of December 31, 2009 . . . . . . . . . . . . . .

23,044,116

15,777,154

Intangible assets, less accumulated amortization of $101,222 as of December 31,

2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,271,458
4,517,103
5,863,093
4,981,949
$115,197,954

—
—
6,508,767
3,333,794
$97,746,132

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued compensation and employee-related expenses . . . . . . . . . . . . . . . . . .
Accrued other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued product warranty costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

3,922,089
4,414,911
3,278,456
886,558
312,081
1,011,265
123,870

$ 3,611,037
3,576,475
1,667,415
1,084,302
418,822
960,996
117,256

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

13,949,230

11,436,303

Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt excluding current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,262,524
3,683,536
18,895,290

902,113
3,807,406
16,145,822

Commitments and contingencies (notes 1, 5, 6 and 18)
Stockholders’ equity:

Preferred stock, $0.01 par value. Authorized 1,000,000 shares; none issued . . .
Common stock, $0.01 par value. Authorized 30,000,000 shares, 15,890,083

and 15,355,602 shares issued; 14,688,759 and 14,154,278 shares
outstanding at December 31, 2010 and December 31, 2009, respectively . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital
Accumulated earnings (deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

158,989
102,727,761
2,867,216
19,817

153,644
96,274,199
(5,405,996)
49,582

105,773,783

91,071,429

Less: treasury stock at cost, common stock, 1,201,324 shares as of

December 31, 2010 and December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . .

(9,471,119)
96,302,664
$115,197,954

(9,471,119)
81,600,310
$97,746,132

See accompanying Notes to Consolidated Financial Statements.

51

KVH INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Year Ended December 31,

2010

2009

2008

Sales:

Product
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 92,058,745
20,184,049

$75,191,081
13,868,768

$69,940,726
12,462,991

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

112,242,794

89,059,849

82,403,717

Costs and expenses:

Costs of product sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs of service sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development
Sales, marketing and support
. . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . .

51,347,555
16,086,394
10,714,889
18,470,019
10,083,851

46,551,735
10,198,161
8,805,350
16,316,115
7,832,124

42,552,375
6,130,049
7,654,610
16,161,515
7,034,964

Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . .

106,702,708

89,703,485

79,533,513

Income (loss) from operations . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense)

5,540,086
301,352
204,076
23,448

Income (loss) before income taxes . . . . . . . . . . . . . . . . . .
Income tax (benefit) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5,660,810
(2,612,402)

(643,636)
358,135
88,485
(19,764)

(393,750)
(260,575)

2,870,204
1,220,455
153,426
(231,185)

3,706,048
647,721

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

8,273,212

$ (133,175) $ 3,058,327

Per share information:

Net income (loss) per share, basic . . . . . . . . . . . . . . . . . . . . .

Net income (loss) per share, diluted . . . . . . . . . . . . . . . . . . . .

$

$

0.57

0.56

$

$

(0.01) $

(0.01) $

0.21

0.21

Number of shares used in per share calculation:

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14,419,599

13,996,363

14,372,626

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14,850,325

13,996,363

14,376,537

See accompanying Notes to Consolidated Financial Statements.

52

KVH INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Common Stock

Shares

Amount

Additional
Paid-in
Capital

Accumulated
(Deficit)
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Treasury
Stock

Total
Stockholders’
Equity

Balances at January 1, 2008 . . . . . . . . . . . 14,829,528 $150,705 $ 91,124,130 $(8,331,148)

$

(366)

$(2,172,903) $80,770,418

Comprehensive income:

Net income . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain on marketable

securities . . . . . . . . . . . . . . . . . . . . . .

—

—

Comprehensive income . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . .
Common stock issued under benefit plan . .
Acquisition of treasury stock . . . . . . . . . . . .
Exercise of stock options, vesting of

—
—
40,511
(837,280)

restricted stock awards . . . . . . . . . . . . . . .

16,288

—

—

—
—
405
—

163

—

—

—
1,540,268
251,130
—

16,168

3,058,327

—

—

—
—
—
—

—

129,658

—
—
—
—

—

—

—

—
—
—

(6,697,345)

3,058,327

129,658

3,187,985
1,540,268
251,535
(6,697,345)

—

16,331

Balances at December 31, 2008 . . . . . . . . . 14,049,047 $151,273 $ 92,931,696 $(5,272,821)

$ 129,292

$(8,870,248) $79,069,192

Comprehensive income:

Net loss . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on marketable

securities . . . . . . . . . . . . . . . . . . . . . .

—

—

Comprehensive loss . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . .
Registration fees . . . . . . . . . . . . . . . . . . . . . .
Common stock issued under benefit plan . .
Acquisition of treasury stock . . . . . . . . . . . .
Payment of restricted stock withholdings . .
Exercise of stock options, vesting of

—
—
—
37,011
(123,044)
(8,790)

—

—

—
—
—
370
—
—

—

—

—
1,734,042
(4,356)
238,204
—
(46,938)

restricted stock awards . . . . . . . . . . . . . . .

200,054

2,001

1,421,551

(133,175)

—

—

—
—
—
—
—
—

—

(79,710)

—
—
—
—
—
—

—

—

—

—
—
—
—

(600,871)

—

—

(133,175)

(79,710)

(212,885)
1,734,042
(4,356)
238,574
(600,871)
(46,938)

1,423,552

Balances at December 31, 2009 . . . . . . . . . 14,154,278 $153,644 $ 96,274,199 $(5,405,996)

$ 49,582

$(9,471,119) $81,600,310

Comprehensive income:

Net income . . . . . . . . . . . . . . . . . . . . . .
Currency translation adjustment
. . . . .
Unrealized loss on interest rate

swaps . . . . . . . . . . . . . . . . . . . . . . . .

Unrealized loss on marketable

securities . . . . . . . . . . . . . . . . . . . . . .

Comprehensive income . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . .
Registration fees . . . . . . . . . . . . . . . . . . . . . .
Tax benefit from exercise of stock

options . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock issued under benefit plan . .
Payment of restricted stock withholdings . .
Exercise of stock options, vesting of

—
—

—

—

—
—
—

—
—

—

—

—
—
—

—
—

—

—

—
2,522,737
(6,962)

—
21,654
(37,726)

—
217
(377)

478,947
259,767
(480,409)

restricted stock awards . . . . . . . . . . . . . . .

550,553

5,505

3,679,482

8,273,212
—

—
260,256

—

—

—
—
—

—
—
—

—

(242,880)

(47,141)

—
—
—

—
—
—

—

—
—

—

—

—
—
—

—
—
—

—

8,273,212
260,256

(242,880)

(47,141)

8,243,447
2,522,737
(6,962)

478,947
259,984
(480,786)

3,684,987

Balances at December 31, 2010 . . . . . . . . . 14,688,759 $158,989 $102,727,761 $ 2,867,216

$ 19,817

$(9,471,119) $96,302,664

See accompanying Notes to Consolidated Financial Statements.

53

KVH INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,

2010

2009

2008

Cash flows from operating activities:

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income (loss) to net cash provided by (used

$ 8,273,212

$

(133,175) $ 3,058,327

in) operating activities:

Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on foreign currency forward exchange contracts . . . . . . . . . . . .
Loss on interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation expense related to awards and employee stock

3,845,016
(3,133,858)
280,578

—
—
102,572

2,653,578
14,773
831,334
(10,278)
—
—

2,215,436
(14,864)
260,029
(3,051)
231,162

—

purchase plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,523,799

1,734,042

1,546,296

Changes in operating assets and liabilities, excluding the effects of

acquisition:

Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(2,660,238)
(1,215,185)
(1,078,556)
645,674
178,539
(43,713)
1,499,612
360,411

(2,674,255)
2,097,230
(840,191)
(2,282,269)
(1,876,618)
595,303
(61,837)
902,113

(1,393,459)
(6,170,829)
224,941
(4,190,242)
1,903,662
67,821
1,237,380

—

Net cash provided by (used in) operating activities . . . . . . . . . . .

9,577,863

949,750

(1,027,391)

Cash flows from investing activities:

Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from the sale of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash paid for business acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturities and sales of marketable securities . . . . . . . . . . . . . . . . . . . . . . .

(11,010,756)

—

(6,365,518)
(87,886,677)
93,207,446

(5,163,026)
29,025
—

(35,026,808)
37,194,077

(3,219,888)
27,446
—

(30,190,048)
33,659,852

Net cash (used in) provided by investing activities . . . . . . . . . . . .

(12,055,505)

(2,966,732)

277,362

Cash flows from financing activities:

Repayments of mortgage loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings from mortgage loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from stock options exercised and employee stock purchase

plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of employee restricted stock withholdings . . . . . . . . . . . . . . . . .
Payment of stock registration fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net cash provided by (used in) financing activities . . . . . . . . . . . .

Effect on exchange rate changes on cash and cash equivalents . . . . . . . . .
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . .

(117,256)

—

(2,101,494)
4,000,000

(132,210)

—

4,423,918
(480,786)
(6,962)
—

3,818,914

29,145
1,370,417

1,662,126
(46,938)
(4,356)
(600,871)

274,563

—
—

(6,697,345)

2,908,467

(6,554,992)

—
891,485

—

(7,305,021)

Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . .

5,870,771

4,979,286

12,284,307

Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 7,241,188

$ 5,870,771

$ 4,979,286

Supplemental disclosure of cash flow information:

Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Supplemental disclosure of noncash investing activity:

Write-off of fully depreciated fixed assets . . . . . . . . . . . . . . . . . . . . . . . . .

Supplemental disclosure of noncash financing activity:

Employee stock purchase plan activity . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

$

$

189,931

881,025

48,972

1,062

$

$

$

$

81,767

480,957

5,369

6,230

$

$

$

$

146,897

415,892

128,325

6,028

See accompanying Notes to Consolidated Financial Statements.

54

KVH INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009 and 2008
(in thousands except share and per share amounts)

(1) Summary of Significant Accounting Policies

(a) Description of Business

KVH Industries, Inc. (the Company or KVH) develops, manufactures and markets mobile communications
products for the marine, land mobile and aeronautical markets, and navigation, guidance and stabilization
products for both the defense and commercial markets.

KVH’s mobile communications products enable customers to receive voice and Internet services, and live
digital television via satellite services in marine vessels, recreational vehicles and automobiles as well as live
digital television on commercial airplanes while in motion. KVH sells its mobile communications products
through an extensive international network of retailers, distributors and dealers. KVH also leases products
directly to end users.

KVH offers precision fiber optic gyro-based (FOG) systems that enable platform and optical stabilization,
navigation, pointing and guidance. KVH’s guidance and stabilization products also include tactical navigation
systems that provide uninterrupted access to navigation and pointing information in a variety of military vehicles,
including tactical trucks and light armored vehicles. KVH’s guidance and stabilization products are sold directly
to U.S. and allied governments and government contractors, as well as through an international network of
authorized independent sales representatives. In addition, KVH’s guidance and stabilization products have
numerous commercial applications such as precision mapping, dynamic surveying, autonomous vehicles, train
location control and track geometry measurement systems, industrial robotics and optical stabilization.

KVH’s mobile communications service sales include sales earned from satellite voice and Internet airtime
services, engineering services provided under development contracts, sales from product repairs, certain
DIRECTV and DISH Network account subsidies and referral fees earned in conjunction with the sale of its
products and extended warranty sales. KVH provides, for monthly fixed and usage fees, satellite connectivity
sales from broadband Internet, data and Voice over Internet Protocol (VoIP) service to its TracPhone V7
customers. KVH also earns monthly usage fees for third-party satellite connectivity for voice, data and Internet
services to its Inmarsat TracPhone customers who choose to activate their subscriptions with KVH. Under
current DIRECTV and DISH Network programs, KVH is eligible to receive a one-time subsidy for each
DIRECTV receiver activated for service and a new mobile account activation fee from DIRECTV and DISH
Network for each customer who activates their DIRECTV or DISH Network service directly through KVH.

KVH’s guidance and stabilization service sales include product repairs, engineering services provided under

development contracts and extended warranty sales.

(b) Principles of Consolidation

The accompanying consolidated financial statements of KVH Industries, Inc. and its wholly owned
subsidiaries, KVH Europe A/S, KVH Industries Asia Pte. Ltd., KVH South America Comunicacao Por Satelite
Ltda. and Virtek Communication (collectively, KVH or the Company), have been prepared in accordance with
accounting principles generally accepted in the United States of America. The Company has evaluated all
subsequent events through the date of this filing. Given that KVH Europe A/S, KVH Industries Asia Pte. Ltd. and
KVH South America Comunicacao Por Satelite Ltda. operate as the Company’s European, Asian and Brazilian
international distributors, all of their operating expenses are reflected within sales, marketing and support within
the accompanying consolidated statements of operations. Virtek Communication AS, a subsidiary of KVH
Europe A/S that was purchased in September 2010, develops and distributes middleware software solutions
known as CommBox™ technology, which will be integrated into the Company’s satellite communications

55

KVH INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2010, 2009 and 2008
(in thousands except share and per share amounts)

(1) Summary of Significant Accounting Policies—(continued)

products and services. All significant
consolidation. Certain prior year amounts have been reclassified to conform with the current year presentation.

intercompany accounts and transactions have been eliminated in

(c) Significant Estimates and Assumptions

The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of sales and expenses during the reporting periods. Significant estimates and
assumptions by management affect the Company’s revenue recognition, valuation of accounts receivable,
valuation of inventory, assumptions used to determine fair value of goodwill and intangible assets, deferred tax
assets and related valuation allowance, stock-based compensation, certain accrued expenses and accounting for
contingencies.

Although the Company regularly assesses these estimates, actual results could differ materially from these
estimates. Changes in estimates are recorded in the period in which they become known. The Company bases its
estimates on historical experience and various other assumptions that it believes to be reasonable under the
circumstances.

(d) Concentration of Credit Risk and Single Source Suppliers

Cash, cash equivalents and marketable securities. The Company is potentially subject

to financial
instrument concentration of credit risk through its cash, cash equivalent and marketable securities investments.
To mitigate these risks the Company maintains cash, cash equivalents and marketable securities with reputable
and nationally recognized financial institutions. As of December 31, 2010, $30,066 classified as marketable
securities was held by Wells Fargo and substantially all of the cash and cash equivalents were held by Bank of
America, N.A. See note 2 for a description of marketable securities.

Trade accounts receivable. Concentrations of risk with respect to trade accounts receivable are generally
limited due to the large number of customers and their dispersion across several geographic areas. Although the
Company does not foresee credit risk associated with these receivables to deviate from historical experience,
repayment is dependent upon the financial stability of those individual customers. The Company establishes
allowances for potential bad debts and evaluates, on a monthly basis, the adequacy of those reserves based upon
historical experience and its expectations for future collectability concerns. Activity within the Company’s
allowance for doubtful accounts for the periods presented is as follows:

Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions charged to expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deductions (write-offs/recoveries) from reserve . . . . . . . . . . . . . . . . . . . . .

$ 844
281
(533)

$ 333
831
(320)

$ 256
260
(183)

Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 592

$ 844

$ 333

2010

2009

2008

56

KVH INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2010, 2009 and 2008
(in thousands except share and per share amounts)

(1) Summary of Significant Accounting Policies—(continued)

Certain components from third parties used in the Company’s products are procured from single sources of
supply. The failure of a supplier, including a subcontractor, to deliver on schedule could delay or interrupt the
Company’s delivery of products and thereby materially adversely affect the Company’s revenues and operating
results.

(e) Revenue Recognition

Product sales. Product sales are recognized when persuasive evidence of an arrangement exists, goods are
shipped, title has passed and collectability is reasonably assured. The Company’s standard sales terms require
that:

• All sales are final;

• Terms are generally either Net 30 or Net 45;

•

Shipments are tendered and shipped FOB (or as may be applicable, FCA, or EXW) the Company’s
plant or warehouse; and

• Title and risk of loss or damage passes to the dealer or distributor at the point of shipment when

delivery is made to the possession of the carrier.

For certain guidance and stabilization product sales, customer acceptance or inspection may be required
before title and risk of loss transfers. For those sales, revenue is recognized after transfer of title and risk of loss
and after notification of customer acceptance.

Under certain limited conditions, the Company, at its sole discretion, provides for the return of goods. No
product is accepted for return and no credit is allowed on any returned product unless the Company has granted
and confirmed prior written permission by means of appropriate authorization. The Company establishes reserves
for potential sales returns, credits, and allowances, and evaluates, on a monthly basis, the adequacy of those
reserves based upon historical experience and expectations for the future.

Satellite connectivity sales. Directly sold and re-sold satellite connectivity service for voice, data and
Internet is recognized monthly based upon minutes or megabytes of traffic processed or contracted fixed fee
schedules. All subscribers typically enter into a contracted one year minimum service agreement. The Company
records all satellite connectivity service sales to subscribers as gross sales, as the Company is the primary obligor
in the contracted service arrangement. All associated regulatory service fees and costs are recorded net in the
consolidated financial statements. The accounting estimates related to the recognition of satellite connectivity
service sales in the results of operations require the Company to make assumptions about future billing
adjustments for disputes with subscribers as well as unauthorized usage.

Lease financing. Lease financing consists of sales-type leases primarily of the TracPhone V7. The Company
records the leases at a price typically equivalent to normal selling price and in excess of the cost or carrying
amount. Upon delivery, the Company records the present value of all payments under these leases as revenues,
and the related costs of the product are charged to cost of sales. Interest income is recognized throughout the
lease term (typically 3 years) using an implicit interest rate. Through December 31, 2010, lease sales have not
been a significant portion of the Company’s total sales.

57

KVH INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2010, 2009 and 2008
(in thousands except share and per share amounts)

(1) Summary of Significant Accounting Policies—(continued)

Contracted service sales. Customer and government-agency contracted engineering service and grant sales
under development contracts are recognized during the period in which the Company performs the service or
development efforts in accordance with the agreement. Services performed under these types of contracts include
engineering studies, surveys, prototype development and program management. Performance is determined
principally by comparing the accumulated costs incurred to date with management’s estimate of the total cost to
complete the contracted work. Costs and recognized proportionate income not yet billed are recognized within
the accompanying consolidated balance sheets in the caption “prepaid expenses and other assets.”

Sales related to customer contracts that call for standard product modification or enhancement are
recognized upon the complete delivery and title transfer of all customer-approved products. Costs of contracts in
progress are accumulated within the accompanying consolidated balance sheets in the caption “prepaid expenses
and other assets” and relieved upon product delivery or when billed.

Revisions to costs and income estimates are reflected in the period in which the facts that require revision
become known. Any advance payments arising from such extended-term development contracts are recorded as
deposits. If, in any period, estimated total costs under a contract indicate an expected loss, then such loss is
provided for in that period. Through December 31, 2010, contracted service revenue has not been a significant
portion of the Company’s total sales.

Product service sales. Product service sales other than under development contracts are recognized when
completed services are provided to the customer and collectability is reasonably assured. The Company
establishes reserves for potential sales returns, credit and allowances, and evaluates, on a monthly basis, the
adequacy of those reserves based upon historical experience and its expectations for the future. Through
December 31, 2010, product service sales have not been a significant portion of the Company’s total sales.

DIRECTV and DISH Network subsidies and commissions. One-time subsidies and new mobile account
activation fees from DIRECTV or DISH Network for customers who activate their DIRECTV or DISH Network
service directly through KVH are recognized in the month of activation. The Company establishes reserves for
potential credits for early customer cancellations, on a quarterly basis. The adequacy of those reserves is based
upon historical experience. Through December 31, 2010, such payments from DIRECTV and DISH Network
have not been a significant portion of the Company’s total sales.

Extended warranty sales. The Company sells extended warranty contracts on mobile communications and
guidance and stabilization products. Sales under these contracts are recognized ratably over the contract term.
Through December 31, 2010, warranty sales have not been a significant portion of the Company’s total sales.

(f) Fair Value of Financial Instruments

The carrying amounts of the Company’s financial instruments, which include cash equivalents, marketable
securities, investments, accounts receivable, accounts payable and accrued expenses approximate their fair values
due to the short maturity of these instruments. The carrying amount of the Company’s mortgage loan
approximates fair value based on currently available quoted rates of similarly structured mortgage facilities. See
note 2 for more information on the fair value of the Company’s marketable securities.

58

KVH INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2010, 2009 and 2008
(in thousands except share and per share amounts)

(1) Summary of Significant Accounting Policies—(continued)

(g) Cash, Cash Equivalents and Marketable Securities

In accordance with the Company’s investment policy, cash in excess of operational needs is invested in
money market funds, United States treasuries, investment grade asset-backed corporate securities, certificates of
deposit and government and non-government debt securities, which are reflected within marketable securities in
the accompanying consolidated balance sheets. The Company considers all highly liquid investments, not
included within marketable securities, with an original maturity of ninety days or less, as of the date of purchase,
to be cash equivalents. The Company determines the appropriate classification of marketable securities at each
balance sheet date. As of December 31, 2010 and 2009, all of the Company’s marketable securities have been
designated as available-for-sale and are carried at their fair value with unrealized gains and losses included in
accumulated other comprehensive income in the accompanying consolidated balance sheets.

The Company reviews investments in debt securities for other than temporary impairment whenever the fair
value of an investment is less than amortized cost and evidence indicates that an investment’s carrying amount is
not recoverable within a reasonable period of time. To determine whether an impairment is other-than-temporary,
the Company considers whether it intends to sell the security, whether it expects to recover the credit loss, and if
it is more likely than not that the Company will be required to sell the security prior to recovery. Evidence
considered in this assessment
includes the reasons for the impairment, compliance with the Company’s
investment policy, the severity and duration of the impairment, changes in value subsequent to year-end and
forecasted performance of the investee. The Company has reviewed its securities with unrealized losses as of
December 31, 2010 and 2009, and has concluded that no other-than-temporary impairments exist.

(h)

Inventories

Inventories are stated at the lower of cost or market using the first-in first-out costing method. The Company
provides inventory reserves based on excess and obsolete inventory determined primarily by future demand
forecasts. The Company records inventory charges to costs of product sales.

(i) Property and Equipment

Property and equipment are stated at cost. Depreciation and amortization are computed on the straight-line
method over the estimated useful lives of the respective assets. The principal lives used in determining the
depreciation rates of various assets are: buildings and improvements, 5-40 years; leasehold improvements, over
the shorter of the asset’s useful life or the term of the lease; machinery, satellite hubs and equipment, 5-10 years;
office and computer equipment, 3-7 years; and motor vehicles, 5 years.

(j) Goodwill and Long-lived Assets

All of the Company’s goodwill and intangible assets are associated with the purchase of Virtek

Communication in September 2010.

Goodwill is recorded when the consideration for an acquisition exceeds the fair value of net tangible and
identifiable intangible assets acquired. Goodwill is not amortized, but instead is tested for impairment at least
annually, or if indicators of potential impairment exist by comparing the fair value of the Company’s reporting
unit to its carrying value. The Company estimates the fair value of the Virtek Communication reporting unit

59

KVH INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2010, 2009 and 2008
(in thousands except share and per share amounts)

(1) Summary of Significant Accounting Policies—(continued)

using a discounted cash flow model or other valuation models, such as comparative transactions and market
multiples. The Company expects to perform an annual impairment test on August 31 of each year. No indicators
of potential goodwill impairment were identified during 2010.

Intangible assets are comprised of intellectual property, which is amortized over its estimated useful life of
seven years. Intangible assets are reviewed for impairment when events or changes in circumstances indicate that
their carrying amounts may not be recoverable based upon the estimated undiscounted cash flows. No events or
changes in circumstances indicated that any of the carrying amounts of the Company’s intangible assets may not
be recoverable during 2010.

Intangible assets with estimated lives and other long-lived assets are reviewed for impairment when events
or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability
of intangible assets with estimated lives and other long-lived assets is measured by a comparison of the carrying
amount of an asset or asset group to future net undiscounted cash flows expected to be generated by the asset or
asset group. If these comparisons indicate that an asset is not recoverable, the Company will recognize an
impairment loss for the amount by which the carrying value of the asset or asset group exceeds the related
estimated fair value. Estimated fair value is based on either discounted future operating cash flows or appraised
values, depending on the nature of the asset. See note 9 for further discussion of goodwill and intangible assets.

(k) Other Non-Current Assets

Other non-current assets are primarily comprised of the long-term portion of deferred research and
development costs associated with an aviation antenna development and production agreement, long-term lease
receivable, prepaid expenses and deposits. See note 14 for more information on the Company’s long-term
aviation antenna development and production agreement.

(l) Product Warranty

The Company’s products carry limited warranties that range from one to four years and vary by product.
The warranty period begins on the date of retail purchase or lease by the original purchaser. The Company
accrues estimated product warranty costs at the time of sale and any additional amounts are recorded when such
costs are probable and can be reasonably estimated. Factors that affect the Company’s warranty liability include
the number of units sold or leased, historical and anticipated rates of warranty repairs and the cost per repair.
Warranty and related costs are reflected within sales, marketing and support in the accompanying statements of
operations. As of December 31, 2010 and 2009, the Company had accrued product warranty costs of $887 and
$1,084, respectively. The following table summarizes product warranty activity during 2010 and 2009:

Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charges to expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs incurred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,084
512
(709)

$1,139
701
(756)

Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 887

$1,084

2010

2009

60

KVH INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2010, 2009 and 2008
(in thousands except share and per share amounts)

(1) Summary of Significant Accounting Policies—(continued)

(m) Shipping and Handling Costs

Shipping and handling costs are expensed as incurred and included in cost of sales. Billings for shipping and

handling are reflected within net sales in the accompanying statements of operations.

(n) Research and Development

Expenditures for research and development, including customer-funded research and development, are
expensed as incurred. Revenue from customer-funded research and development is included in service revenue
and the related product development costs are included in costs of service and product sales. Revenue and related
development costs from customer-funded research and development are as follows:

Customer-funded service sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer-funded costs included in costs of service sales . . . . . . . . . . . . .
Customer-funded costs included in costs of product sales . . . . . . . . . . . . .

Year ended December 31,

2010

$1,062
953
1,001

2009

$440
475
801

2008

$1,286
1,011
—

In addition to the customer-funded research and development expenses listed above, the Company incurred
a total of $0, $619 and $3,249 in research and development costs related to a long-term aviation antenna
development and production agreement for the years ended December 31, 2010, 2009 and 2008, respectively.
These research and development costs are reflected in other non-current assets, as the Company has a contractual
right to recover these costs. See note 14 for further discussion.

(o) Advertising Costs

Costs related to advertising are expensed as incurred. Advertising expense was $2,171, $2,261, and $2,072
for the years ended December 31, 2010, 2009 and 2008, respectively, and is included in sales, marketing, and
support expense in the accompanying consolidated statements of operations.

(p) Foreign Currency Translation

The financial statements of the Company’s foreign subsidiaries located in Denmark and Singapore are
maintained using the United States dollar as the functional currency. Exchange rates in effect on the date of the
transaction are used to record monetary assets and liabilities. Revenue and other expense elements are recorded
at rates that approximate the rates in effect on the transaction dates. Realized foreign currency remeasurement
gains and losses are recognized within “other income (expense)” in the accompanying consolidated statements of
operations. For the years ended December 31, 2010, 2009 and 2008, the Company experienced foreign currency
losses of $22, $58 and $6, respectively.

The financial statements of the Company’s Brazilian and Norwegian subsidiaries use the foreign
subsidiaries’ respective local currencies as the functional currency. The Company translates the assets and
liabilities of these foreign subsidiaries at the exchange rates in effect at year-end. Net sales, costs and expenses
are translated using average exchange rates in effect during the year. Gains and losses from foreign currency
translation are credited or charged to accumulated other comprehensive income included in stockholder’s equity
in the accompanying consolidated balance sheets.

61

KVH INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2010, 2009 and 2008
(in thousands except share and per share amounts)

(1) Summary of Significant Accounting Policies—(continued)

(q)

Income Taxes

Income taxes are accounted for under the asset and liability method. 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.

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. The Company records valuation allowances to reduce deferred income tax assets to the amount that is more
likely than not to be realized. The Company determines whether it is more likely than not that a tax position will
be sustained upon examination. If it is not more likely than not that a position will be sustained, no amount of the
benefit attributable to the position is recognized. The tax benefit to be recognized of any tax position that meets
the more likely than not recognition threshold is calculated as the largest amount that is more than 50% likely of
being realized upon resolution of the contingency. See note 8 for further discussion of income taxes.

(r) Net Income (Loss) per Common Share

Basic net income (loss) per share is calculated based on the weighted average number of common shares
outstanding during the period. Diluted net income (loss) per share incorporates the dilutive effect of common
stock equivalent options, warrants and other convertible securities, if any, as determined in accordance with the
treasury stock accounting method. Common stock equivalents related to options and restricted stock awards for
196,076, 899,492, and 1,399,131 shares of common stock for the years ended December 31, 2010, 2009, and
2008, respectively, have been excluded from the fully diluted calculation of net income (loss) per share, as
inclusion would be anti-dilutive.

A reconciliation of the basic and diluted weighted average common shares outstanding is as follows:

Weighted average common shares outstanding—basic . . .
Dilutive common shares issuable in connection with stock
plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Weighted average common shares

2010

2009

2008

14,419,599

13,996,363

14,372,626

430,726

—

3,911

outstanding—diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14,850,325

13,996,363

14,376,537

(s) Contingent Liabilities

The Company estimates the amount of potential exposure it may have with respect to claims, assessments
and litigation in accordance with ASC 450, Contingencies. The Company is not party to any lawsuit or
proceeding that, in management’s opinion, is likely to materially harm the Company’s business, results of
operations, financial condition or cash flows, as described in note 18. It is not always possible to predict the
outcome of litigation, as it
is not always possible for
management to make a meaningful estimate of the potential loss or range of loss associated with such litigation.
As of December 31, 2010, no losses have been accrued with respect to pending litigation.

to many uncertainties. Additionally,

is subject

it

62

KVH INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2010, 2009 and 2008
(in thousands except share and per share amounts)

(1) Summary of Significant Accounting Policies—(continued)

(t) Operating Segments

The Company operates in a single segment. Operating segments are identified as components of an
enterprise about which separate discrete financial information is available for evaluation by the chief operating
decision maker in making decisions regarding resource allocation and assessing performance. To date, the chief
operating decision maker has made such decisions and assessed performance at the company level, as one
segment. The Company’s chief operating decision maker is its President, Chief Executive Officer and Chairman
of the Board.

(u) Recent Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board, or FASB, issued new accounting guidance
related to revenue recognition for arrangements with multiple deliverables. This guidance eliminates the residual
method of allocation and requires the relative selling price method when allocating deliverables of a multiple
deliverable revenue arrangement. The determination of the selling price for each deliverable requires the use of a
hierarchy designed to maximize the use of available objective evidence, including vendor specific objective
evidence, third party evidence of selling price, or estimated selling price. The guidance is effective prospectively
for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010,
and must be adopted in the same period using the same transition method. If adoption is elected in a period other
than the beginning of a fiscal year, the amendments in these standards must be applied retrospectively to the
beginning of the fiscal year. Full retrospective application of these amendments to prior fiscal years is optional.
Early adoption of these standards may be elected. The Company adopted these standards effective January 1,
2010. The adoption of this guidance did not have a material impact on the Company’s financial position or
results of operations.

In October 2009, the FASB issued new accounting guidance related to certain revenue arrangements that
include software elements. Previously, companies that sold tangible products with “more than incidental”
software were required to apply software revenue recognition guidance. This guidance often delayed revenue
recognition for the delivery of the tangible product. Under the new guidance, tangible products that have
software components that are “essential to the functionality” of the tangible product will be excluded from the
software revenue recognition guidance. The new guidance will include factors to help companies determine what
is “essential to the functionality.” Software-enabled products will now be subject to other revenue guidance and
will likely follow the guidance for multiple element arrangements issued by the FASB in October 2009. The new
guidance is to be applied on a prospective basis for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010, with earlier application permitted. If a vendor elects earlier
application and the first reporting period of adoption is not the first reporting period in the vendor’s fiscal year,
the guidance must be applied through retrospective application from the beginning of the vendor’s fiscal year and
the vendor must disclose the effect of the change to those previously reported periods. The Company adopted this
guidance effective January 1, 2010. The adoption of this guidance did not have a material impact on the
Company’s financial position or results of operations.

In January 2010,

the FASB issued ASU No. 2010-06,

Improving Disclosures about Fair Value
Measurements, which amended the disclosure requirements related to recurring and non-recurring fair value
measurements. The guidance requires new disclosures on the transfers of assets and liabilities between those
whose fair value is measured using Level 1 inputs (quoted prices in an active market for identical assets or

63

KVH INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2010, 2009 and 2008
(in thousands except share and per share amounts)

(1) Summary of Significant Accounting Policies—(continued)

liabilities) and using Level 2 inputs (significant other observable inputs) of the fair value measurement hierarchy,
including the reasons and the timing of the transfers. Additionally, the guidance requires separate disclosure of
purchases, sales, issuances and settlements of assets and liabilities measured using significant unobservable
inputs (Level 3 fair value measurements). This standard is effective for all interim and year-end financial
statements issued after January 1, 2010, except for the disclosure on the activities for Level 3 fair value
measurements, which is effective for all interim and year-end financial statements issued after January 1, 2011.
The Company does not currently expect the adoption of this guidance to have a material impact on its
consolidated financial statements.

(2) Marketable Securities

Included in marketable securities as of December 31, 2010 and 2009 are the following:

December 31, 2010

Money market mutual funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Government agency bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit
Corporate notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Amortized
Cost

$14,607
11,020
2,572
1,865

Total marketable securities designated as available for sale . . . . . .

$30,064

$

2

Gross
Unrealized
Gains

Gross
Unrealized
Losses

December 31, 2009

Government agency bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
United States treasuries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market mutual funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Government agency discount notes . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit

Amortized
Cost

$12,038
11,594
5,977
3,499
2,276

Total marketable securities designated as available for sale . . . . . .

$35,384

$ 55

$

The amortized costs and fair value of debt securities as of December 31, 2010 and 2009 are shown below by
effective maturity. Effective maturities may differ from contractual maturities because the issuers of the
securities may have the right to prepay obligations without prepayment penalties.

December 31, 2010

Due in less than one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after one year and within two years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Amortized
Cost

$19,432
10,632

Fair
Value

$19,432
10,634

$30,064

$30,066

64

$ —
1

—
1

$ 26
29

—
—
—

Fair
Value

$14,607
11,021
2,572
1,866

$30,066

Fair
Value

$12,064
11,623
5,977
3,499
2,270

$35,433

$ —
—
—
—

$ —

$ —
—
—
—

(6)

(6)

Gross
Unrealized
Gains

Gross
Unrealized
Losses

KVH INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2010, 2009 and 2008
(in thousands except share and per share amounts)

(2) Marketable Securities—(continued)

December 31, 2009

Due in less than one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after one year and within two years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Amortized
Cost

$25,352
10,032

Fair
Value

$25,379
10,054

$35,384

$35,433

No realized gains or losses were recognized on the Company’s marketable securities during the year ended

December 31, 2010 and 2009.

(3)

Inventories

Inventories as of December 31, 2010 and 2009 include the costs of material, labor, and factory overhead.

Inventories consist of the following:

Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,

2010

2009

$10,191
1,369
3,205

$ 9,121
1,118
3,148

$14,765

$13,387

(4) Property and Equipment

Property and equipment, net, as of December 31, 2010 and 2009 consist of the following:

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Building and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office and computer equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Motor vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,

2010

$ 1,802
9,417
206
25,914
9,157
66

$

2009

807
5,761
2,237
21,069
7,340
66

46,562
(23,518)

37,280
(21,503)

$ 23,044

$ 15,777

Depreciation for the years ended December 31, 2010, 2009 and 2008 amounted to $3,744, $2,654, and

$2,512, respectively.

65

KVH INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2010, 2009 and 2008
(in thousands except share and per share amounts)

(5) Debt and Line of Credit

On April 6, 2009, the Company entered into a mortgage loan in the amount of $4,000 related to its
headquarters facility in Middletown, Rhode Island. The loan term is 10 years, with a principal amortization of 20
years, and the interest rate will be a rate per year adjusted periodically based on a defined interest period equal to
the BBA LIBOR Rate plus 2.25 percentage points. Land, building and improvements with a carrying value of
$4,963 as of December 31, 2010 secure the mortgage loan. The monthly mortgage payment is approximately $9
plus interest and increases in increments of approximately $1 each year throughout the life of the mortgage. Due
to the difference in the term of the loan and amortization of the principal, a balloon payment of $2,551 is due on
April 1, 2019. The loan contains one financial covenant, a Fixed Charge Coverage Ratio, which applies in the
event that the Company’s consolidated cash, cash equivalents and marketable securities balance falls below
$25,000 at any time. As the Company’s consolidated cash, cash equivalents and marketable securities balance
was above $25,000 throughout 2010, the Fixed Charge Coverage Ratio did not apply. Under the mortgage loan
the Company may prepay its outstanding loan balance subject to certain early termination charges as defined in
the mortgage loan agreement. If the Company were to default on its mortgage loan, the land, building and
improvements would be used as collateral.

The following is a summary of future principal payments under the mortgage:

Year ending December 31,

2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Principal
Payment

124
131
138
146
154
3,114

Total outstanding at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,807

Currently, the Company has a revolving loan agreement with a bank that provides for a maximum available
credit of $15,000 and will expire on December 31, 2011. The Company pays interest on any outstanding amounts
at a rate equal to, at the Company’s option, BBA LIBOR Daily Floating Rate plus 1.75%, or the Eurodollar Rate
plus 1.75%. The line of credit contains two financial covenants, a Leverage Ratio and a Fixed Charge Coverage
Ratio, that apply in the event that the Company’s consolidated cash, cash equivalents and marketable securities
balance falls below $25,000 at any time. As the Company’s consolidated cash, cash equivalents and marketable
securities balance was above $25,000 throughout 2010, the Fixed Charge Coverage Ratio did not apply. The
Company may terminate the loan agreement prior to its full term without penalty, provided it gives 30 days
advance written notice to the bank. As of December 31, 2010 and December 31, 2009, no borrowings were
outstanding under the facility.

Total commitment fees related to the line of credit were $61, $49, and $16 for the years ended December 31,

2010, 2009 and 2008, respectively.

66

KVH INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2010, 2009 and 2008
(in thousands except share and per share amounts)

(6) Commitments and Contingencies

The Company has certain operating leases for satellite capacity, various equipment, and facilities. The
following reflects future minimum payments under operating leases that have initial or remaining non-cancelable
lease terms at December 31, 2010:

Years ending December 31,

2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter

Operating
Leases

$ 8,028
7,571
7,282
5,338
2,349
157

Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$30,725

Total rent expense incurred under facility operating leases for the years ended December 31, 2010, 2009 and

2008 amounted to $754, $903, and $929, respectively.

In the normal course of business, the Company enters into unconditional purchase order obligations with its
suppliers for inventory and other operational purchases. Outstanding and unconditional purchase order
obligations, which generally are for a period of less than one year, were $23,015 as of December 31, 2010.

The Company did not enter into any off-balance sheet commitments, guarantees, or standby repurchase

obligations as of December 31, 2010.

(7) Stockholders’ Equity

(a) Employee Stock Options

Options are granted with an exercise price equal to the fair market value of the common stock on the date of
grant and generally vest in equal annual amounts over four years beginning on the first anniversary of the date of
the grant. No options are exercisable for periods of more than 5 years after date of grant. Under the Company’s
Amended and Restated 2006 Stock Incentive Plan, each share issued under awards other than options will reduce
the number of shares reserved for issuance by two shares. Shares issued under options will reduce the shares
reserved for issuance on a share-for-share basis. All plans were approved by the Company’s shareholders,
pursuant to which 7,165,000 shares of the Company’s common stock were reserved for issuance. As of
December 31, 2010, 5,122,622 options and awards to purchase shares of common stock had been issued or
expired and 2,042,378 were available for future grants. The Compensation Committee of the Board of Directors
administers the plans, approves the individuals to whom options will be granted and determines the number of
shares and exercise price of each option. Outstanding options under the plans at December 31, 2010 expire from
February 2011 through December 2015. None of the Company’s outstanding options includes performance-based
or market-based vesting conditions as of December 31, 2010.

The Company has estimated the fair value of each option grant on the date of grant using the Black-Scholes
option-pricing model. The expected volatility assumption is based on the historical daily price data of the
Company’s common stock over a period equivalent to the weighted average expected life of the Company’s

67

KVH INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2010, 2009 and 2008
(in thousands except share and per share amounts)

(7) Stockholders’ Equity—(continued)

options. The expected term of options granted is derived using assumed exercise rates based on historical
exercise patterns and represents the period of time the options granted are expected to be outstanding. The risk-
free interest rate is based on the actual U.S. Treasury zero-coupon rates for bonds matching the expected term of
the option as of the option grant date. The dividend yield of zero is based upon the fact that the Company has not
historically declared or paid cash dividends, and does not expect to declare or pay dividends in the foreseeable
future.

The per share weighted-average fair values of stock options granted during 2010, 2009 and 2008 were
$6.54, $3.34, and $2.61, respectively. The weighted-average assumptions used to value options as of their grant
date were as follows:

Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected life (in years)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year Ended
December 31,

2010

2009

2008

0.95% 2.18% 2.75%
60.0% 44.7% 36.0%
4.08
4.18

4.08

0%

0%

0%

The changes in outstanding stock options for the year ended December 31, 2010, is as follows:

Number of Options

Weighted Average
Exercise Price

Weighted Average
Remaining
Contractual Life
(in Years)

Aggregate Intrinsic
Value

Outstanding at December 31, 2009 . . .
Granted . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . .
Expired, canceled or forfeited . . .

Outstanding at December 31, 2010 . . .

Exercisable at December 31, 2010 . . .

925,242
141,275
(357,241)
(12,475)

696,801

416,710

$10.02
13.86
10.32
9.71

$10.65

$10.06

2.28

1.44

$1,254

$ 851

The total

intrinsic value of options exercised was $1,157, $382, and $2 in 2010, 2009, and 2008,
respectively. The total aggregate intrinsic value of options exercisable at December 31, 2009 and 2008 was $3
and $19, respectively. The total aggregate intrinsic value of options outstanding at December 31, 2009 and 2008
was $4 and $20, respectively.

As of December 31, 2009 and 2008, the number of options exercisable was 623,019 and 762,198,
respectively and the weighted average exercise price of those options was $10.15 and $10.78 per share,
respectively. The weighted average remaining contractual term for options exercisable at December 31, 2009 and
2008 was 1.57 and 1.75 years, respectively. The weighted average remaining contractual term for options
outstanding at December 31, 2009 and 2008 was 1.99 and 2.21 years, respectively.

As of December 31, 2010, there was $947 of total unrecognized compensation expense related to stock
options, which is expected to be recognized over a weighted-average period of 2.54 years. In 2010, 2009 and

68

KVH INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2010, 2009 and 2008
(in thousands except share and per share amounts)

(7) Stockholders’ Equity—(continued)

2008, the Company recorded compensation charges of $514, $823 and $1,149, respectively, related to stock
options. Compensation cost for options subject only to service conditions that vest ratably are recognized on a
straight-line basis over the requisite service period for the entire award. During 2010, 2009 and 2008, cash
received under stock option plans for exercises was $3,685, $1,424 and $16, respectively.

(b) Restricted Stock

The Company granted 324,321, 567,008 and 298,709 restricted stock awards to employees under the terms
of the Amended and Restated 2006 Stock Incentive Plan for the years ended December 31, 2010, 2009 and 2008,
respectively. The restricted stock awards vest annually over four years from the date of grant subject to the
recipient remaining an employee through the applicable vesting dates. Compensation expense for restricted stock
awards is measured at fair value on the date of grant based on the number of shares granted and the quoted
market closing price of the Company’s common stock. Such value is recognized as expense over the vesting
period of the award, net of estimated forfeitures. The weighted-average grant-date fair value of restricted stock
granted during 2010, 2009 and 2008 was $13.12, $5.11 and $8.61 per share, respectively.

A total of 75,000 of the restricted stock awards granted during the year ended December 31, 2010 were
performance-based awards granted to executives. These awards will vest ratably over four years from date of
grant, as the Company achieved the necessary objectives as of December 31, 2010. As a result, the Company
recorded expense for the year ended December 31, 2010 related to the performance-based restricted stock
awards, the amount of which was not material.

As of December 31, 2010, there was $4,443 of total unrecognized compensation expense related to
restricted stock awards, which is expected to be recognized over a weighted-average period of 2.48 years.
Compensation cost for awards subject only to service conditions that vest ratably are recognized on a straight-
line basis over the requisite service period for the entire award. In 2010, 2009 and 2008, the Company recorded
compensation charges of $1,942, $853 and $317, respectively, related to restricted stock awards.

Restricted stock activity under the Amended and Restated 2006 Stock Incentive Plan for 2010 is as follows:

Outstanding at December 31, 2009, nonvested . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Number of
Shares

599,502
324,321
(193,312)
(1,975)

Weighted-
average
grant date
fair value

$ 6.02
13.12
6.77
8.08

Outstanding at December 31, 2010, nonvested . . . . . . . . . . . . . . . . . . . . . . . . .

728,536

$ 8.97

(c) Employee Stock Purchase Plan

Under the Company’s Amended and Restated Employee Stock Purchase Plan (ESPP), the Company is
authorized to issue up to 600,000 shares of common stock, of which 102,026 shares remain available as of
December 31, 2010.

69

KVH INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2010, 2009 and 2008
(in thousands except share and per share amounts)

(7) Stockholders’ Equity—(continued)

The ESPP covers all of the Company’s employees. Under the terms of the ESPP, eligible employees can
elect to have up to six percent of their pre-tax compensation withheld to purchase shares of the Company’s
common stock on a semi-annual basis. The ESPP allows eligible employees the right to purchase the Company’s
common stock on a semi-annual basis at 85% of the market price at the end of each purchase period. During
2010, 2009 and 2008, 21,654, 37,011, and 40,511 shares, respectively, were issued under this plan. The Company
utilizes the Black-Scholes option-pricing model to calculate the fair value of these discounted purchases. The fair
value of the 15% discount is recognized as compensation expense over the purchase period. The Company
applies a graded vesting approach because the ESPP provides for multiple purchase periods and is, in substance,
a series of linked awards. In 2010, 2009 and 2008, the Company recorded compensation charges of $68, $58 and
$80, respectively, related to the ESPP. During 2010, 2009 and 2008, cash received under the ESPP was $260,
$238 and $258, respectively.

(8)

Income Taxes

Income tax (benefit) expense for the years ended December 31, 2010, 2009 and 2008 attributable to income

(loss) from operations is presented below.

Year ended December 31, 2010

Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Current

Deferred

Total

$ 217
136
154

$ 507

$(2,142)
(998)
21

$(1,925)
(862)
175

$(3,119)

$(2,612)

Year ended December 31, 2009

Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(317)
(65)
106

$ —
—

15

15

$ (317)
(65)
121

$ (261)

$(276)

$

Year ended December 31, 2008

Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 38
126
499

$ 663

$

$ —
—
(15)

$

(15)

$

38
126
484

648

70

KVH INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2010, 2009 and 2008
(in thousands except share and per share amounts)

(8) Income Taxes—(continued)

The actual income tax (benefit) expense differs from the “expected” income tax (benefit) expense computed
by applying the United States Federal corporate income tax rate of 35% to income (loss) before (benefit) expense
as follows:

Year Ended December 31,

2010

2009

2008

Computed “expected” tax expense (benefit) . . . . . . . . . . . . . . . . . . . . .

$ 1,981

$ (134)

$1,261

(Decrease) increase in income taxes resulting from:
State income tax expense, net of federal benefit . . . . . . . . . . . . . .
State research and development credits . . . . . . . . . . . . . . . . . . . . .
Non-deductible expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign tax rate differential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal research and development credits . . . . . . . . . . . . . . . . . . .
Adjustments to operating loss carry-forwards and other deferred
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . .

taxes, net

636
(342)
268
(28)
(378)

(346)
146
(4,549)

82
(953)
60
(25)
(2,634)

614
—
2,729

144
(456)
91
(27)
(350)

(115)
—
100

Net income tax (benefit) expense . . . . . . . . . . . . . . . . . . . . . . . . .

$(2,612)

$ (261)

$ 648

The components of results of income (loss) from operations before income tax (benefit) provision,

determined by tax jurisdiction, are as follows:

Year Ended December 31,

2010

2009

2008

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Denmark . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Norway . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brazil
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Singapore . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$5,458
390
61
(260)
12

$(871)
477
—
—
—

$1,952
1,754
—
—
—

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$5,661

$(394)

$3,706

71

KVH INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2010, 2009 and 2008
(in thousands except share and per share amounts)

(8)

Income Taxes—(continued)

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and

liabilities for the periods presented are as follows:

December 31,

2010

2009

Deferred tax assets:

Accounts receivable, due to allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating loss carry-forwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets due to differences in amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development, alternative minimum tax credit carry-forwards . . . . . . . . . .
Foreign tax credit carry-forwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State tax credit carry-forwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

348
226
1,443
1,186
81
3,428
1,146
1,671
682

$

442
554
2,045
1,252
77
3,176
995
1,742
770

Gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10,211
(2,304)

11,053
(6,853)

Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7,907

4,200

Deferred tax liabilities:

Purchased intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, due to differences in depreciation . . . . . . . . . . . . . . . . . . . . . . .

(614)
(1,367)

Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1,981)

—
(849)

(849)

Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 5,926

$ 3,351

Net deferred tax asset—current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax asset—noncurrent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$
944
$ 4,982

$
17
$ 3,334

As of December 31, 2010, the Company had federal net operating loss carry-forwards available to offset
future taxable income of $4,777. The Company also had foreign net operating loss carry-forwards available to
offset future foreign income of $420 with no expiration date. The federal net operating loss carry-forwards expire
in years 2024 through 2030. The foreign net operating loss carry-forwards have no expiration. The tax benefit
related to $4,777 of federal net operating loss carry-forwards would occur upon utilization of these deferred tax
assets to reduce taxes payable and would result in a credit to additional paid-in capital within stockholders’
equity rather than the provision for income taxes.

As of December 31, 2010, the Company had federal research and development tax credit carry-forwards in
the amount of $3,487 that expire in years 2021 through 2030, and foreign tax credit carry-forwards in the amount
of $1,314 that expire in years 2015 through 2020. The Company also had alternative minimum tax credits of $73
that have no expiration date. As of December 31, 2010, the Company had state research and development tax
credit carry-forwards in the amount of $2,440 that expire in years 2011 through 2017. The Company also had
other state tax credit carry-forwards of $280 available to reduce future state tax expense that expire in years 2011
through 2017. The tax benefit related to $805 of federal and state tax credits would occur upon utilization of
these deferred tax assets to reduce taxes payable and would result in a credit to additional paid-in capital within
stockholders’ equity rather than the provision for income taxes.

72

KVH INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2010, 2009 and 2008
(in thousands except share and per share amounts)

(8)

Income Taxes—(continued)

The Company’s ability to utilize these net operating loss carry-forwards and tax credit carry-forwards may
be limited in the future if the Company experiences an ownership change pursuant to Internal Revenue Code
Section 382. An ownership change occurs when the ownership percentages of 5% or greater stockholders change
by more than 50% over a three-year period.

For the years ended December 31, 2010, 2009 and 2008, the Company generated income (loss) before
income taxes of $5,661, $(394) and $2,870, respectively. In assessing the realizability of its net deferred tax
assets, the Company considered whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets depends upon the generation of future
taxable income during the periods in which those temporary differences become deductible. As of December 31,
2010, based upon an evaluation of the positive and negative evidence, the Company concluded that $3,286 of the
deferred tax asset valuation allowance was no longer required, resulting in a remaining valuation allowance of
$2,304 as of December 31, 2010. As part of the Company’s analysis, the Company evaluated, among other
factors, its recent history of generating taxable income and its near-term forecasts of future taxable income and
determined that it is more likely than not that it will be able to realize an additional $3,286 of the Company’s
deferred tax assets over the next several years. After considering these factors, the Company concluded that a
reversal of the valuation allowance was appropriate. For the year ended December 31, 2010, the Company has
recorded valuation allowances of approximately $508 against certain state tax credits and foreign net operating
loss carry-forwards, and intends to maintain the valuation allowance until sufficient evidence exists to support
the reversal of the valuation allowance.

In addition, the Company continues to maintain a $1,796 valuation allowance against net operating losses
and credits carryforwards attributed to tax deduction in excess of recognized compensation cost from employee
stock compensation awards that existed as of the adoption of ASC 718, Compensation – Stock Compensation.
The Company will recognize the net deferred tax asset and corresponding benefit to additional paid-in capital for
these windfall tax benefits once such amounts reduce income taxes payable, in accordance with the requirements
of ASC 718.

The Company’s income taxes currently payable for federal and state purposes have been reduced by the
benefit of the tax deduction in excess of recognized compensation cost from employee stock compensation
transactions in the amount of $479, which has been recorded as an increase to additional paid-in capital for the
year ended December 31, 2010.

As of December 31, 2010, the Company has not provided for U.S. deferred income taxes on undistributed
earnings of its foreign subsidiaries of approximately $2,626 since these earnings are to be indefinitely reinvested.
Upon distribution of those earnings in the form of dividends or otherwise, the Company will be subject to
additional U.S. and state income taxes (less foreign tax credits), as well as withholding taxes in its foreign
locations. The amount of taxes attributable to the undistributed earnings is not practicably determinable.

The Company establishes reserves for uncertain tax positions based on management’s assessment of
exposure associated with tax deductions, permanent tax differences and tax credits. The tax reserves are analyzed
periodically and adjustments are made as events occur to warrant adjustment to the reserve.

The Company did not have any material unrecognized tax benefits at December 31, 2010, 2009 or 2008. The
Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as a component of

73

KVH INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2010, 2009 and 2008
(in thousands except share and per share amounts)

(8)

Income Taxes—(continued)

income tax expense. The Company’s tax jurisdictions include the United States, Denmark, Brazil, Norway and
Singapore. In general, the statute of limitations with respect to the Company’s United States federal income taxes
has expired for years prior to 2007, and the relevant state and foreign statutes vary. However, preceding years
remain open to examination by United States Federal and state and foreign taxing authorities to the extent of future
utilization of net operating losses and research and development tax credits generated in each preceding year. The
Company is no longer subject to income tax examinations by the Danish tax authorities for years prior to 2007.

(9) Goodwill and Intangible Assets

On September 13, 2010, the Company’s Danish subsidiary, KVH Europe A/S, completed the purchase of
Virtek Communication for approximately $6.5 million. The purchase was made using existing cash, cash
equivalents and marketable securities. In connection with this acquisition, the Company recorded $4,517 of
goodwill, primarily related to expected synergies from combining operations and the value of the existing
workforce, and $2,372 of intangible assets related to intellectual property.

December 31, 2010

Useful Life

Cost

Accumulated
Amortization

Net Carrying
Value

Intellectual property . . . . . . . . . . . . . . . . . . . . . .

7 years

$2,372

$101

$2,271

The Company amortizes its intangible assets over the estimated useful lives of the respective assets.

Amortization expense related to intangible assets was $101 in the year ended December 31, 2010.

Estimated future amortization expense for intangible assets recorded by the Company at December 31, 2010

is as follows:

Years ending December 31,

2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Amortization
Expense

$ 339
339
339
339
339
575

$2,271

Goodwill is recorded when the consideration for an acquisition exceeds the fair value of net tangible and
identifiable intangible assets acquired. The changes in the carrying amount of goodwill during the year ended
December 31, 2010 is as follows:

Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill acquired during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustment

2010

$ —
4,346
171

Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$4,517

74

KVH INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2010, 2009 and 2008
(in thousands except share and per share amounts)

(10) 401(k) Plan

The Company has a 401(k) Plan (the Plan) for all eligible employees. Participants may defer a portion of
their pre-tax earnings subject to limits determined by the Internal Revenue Service. Participants age 50 or older
may be eligible to make additional contributions. As of December 31, 2010, the Company matches one half of
the first 4% contributed by the Plan participants. The Company’s contributions vest over a five-year period from
the date of hire. Total Company matching contributions were $326, $262 and $301 for the years ended
December 31, 2010, 2009, and 2008, respectively. In addition, the Company may make contributions to the Plan
at the discretion of the Compensation Committee of the Board of Directors. There were no discretionary
contributions in 2010, 2009, and 2008.

(11) Business and Credit Concentrations

Significant portions of the Company’s net sales are as follows:

Year Ended
December 31,

2010

2009

2008

Net sales to foreign customers outside the U.S. and Canada . . . . . . . . . . . . . . . .
Net sales to Kongsberg Defence & Aerospace AS (Kongsberg) . . . . . . . . . . . . .

31.8% 44.0% 35.8%
14.1% 15.1%

*

* Represents less than 10% of net sales.

Net sales to Kongsberg accounted for approximately 14% and 15% of the Company’s net sales for the years
ended December 31, 2010 and 2009, respectively, and less than 10% of the Company’s net sales for the year
ended December 31, 2008. In addition, net sales to a subcontractor to Kongsberg accounted for approximately
5% and 7% of the Company’s net sales for the years ended December 31, 2010 and 2009, respectively. The
Company’s net sales to this subcontractor were immaterial for the year ended December 31, 2008. The terms and
conditions of sales to Kongsberg and the subcontractor to Kongsberg are consistent with the Company’s standard
terms and conditions of product sales as discussed in note 1 of the Company’s consolidated financial statements.
As of December 31, 2010, Kongsberg had no outstanding receivable balances and the subcontractor to
Kongsberg was current with all outstanding receivable balances. No other individual customer accounted for
more than 10% of the Company’s net sales for the years ended December 31, 2010, 2009 and 2008, respectively.

(12) Segment Reporting

Under common operational management, the Company designs, develops, manufactures and markets its
navigation, guidance and stabilization and mobile communications products for use in a wide variety of
applications. Products are generally sold directly to third-party consumer electronic dealers and retailers, original
equipment manufacturers, government contractors or to U.S. and other foreign government agencies. Primarily,
sales originating in the Americas consist of sales within the United States and Canada and, to a lesser extent,
Mexico and some Latin and South American countries. The Americas’ sales also include all guidance and
stabilization product sales throughout the world. Sales originating from the Company’s European and Asian
subsidiaries principally consist of sales into all European countries, both inside and outside the European Union,
as well as Africa, Asia/Pacific, the Middle East and India.

The Company operates in two geographic segments, exclusively in the mobile communications, navigation
and guidance and stabilization equipment industry, which it considers to be a single business activity. The
Company has two primary product categories: mobile communication and guidance and stabilization. Mobile
communication sales and services include marine, land mobile, automotive, and aeronautical communication

75

KVH INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2010, 2009 and 2008
(in thousands except share and per share amounts)

(12) Segment Reporting—(continued)

equipment and satellite-based voice, television and Broadband Internet connectivity services. Guidance and
stabilization sales and services include sales of commercial and defense-related navigation and guidance and
stabilization equipment based upon digital compass and fiber optic sensor technology. Mobile communication
and guidance and stabilization sales also include development contract revenue.

The following table summarizes information regarding the Company’s operations by geographic segment:

Year ended December 31, 2010

Mobile communication sales to the United States . . . . . . . . . . . . . . . . . . . .
Mobile communication sales to Canada . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mobile communication sales to Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mobile communication sales to other geographic areas . . . . . . . . . . . . . . .
Guidance and stabilization sales to the United States . . . . . . . . . . . . . . . . .
Guidance and stabilization sales to Canada . . . . . . . . . . . . . . . . . . . . . . . . .
Guidance and stabilization sales to Europe . . . . . . . . . . . . . . . . . . . . . . . . .
Guidance and stabilization sales to other geographic areas . . . . . . . . . . . . .
Intercompany sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Sales Originating From

Americas

$ 46,358
571
524
1,162
24,262
5,353
17,368
2,787
6,528

Europe
and Asia

Total

$ — $ 46,358
571
10,922
4,622
24,262
5,353
17,368
2,787
6,941

—
10,398
3,460
—
—
—
—
413

Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

104,913
(6,528)

14,271
(413)

119,184
(6,941)

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 98,385

$13,858

$112,243

Segment net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8,201
$
$
3,711
$101,116

72
$
$
134
$14,082

8,273
$
$
3,845
$115,198

Year ended December 31, 2009

Mobile communication sales to the United States . . . . . . . . . . . . . . . . . . . .
Mobile communication sales to Canada . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mobile communication sales to Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mobile communication sales to other geographic areas . . . . . . . . . . . . . . .
Guidance and stabilization sales to the United States . . . . . . . . . . . . . . . . .
Guidance and stabilization sales to Canada . . . . . . . . . . . . . . . . . . . . . . . . .
Guidance and stabilization sales to Europe . . . . . . . . . . . . . . . . . . . . . . . . .
Guidance and stabilization sales to other geographic areas . . . . . . . . . . . . .
Intercompany sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Sales Originating From

North
America

$ 32,708
568
4,262
662
17,233
2,897
15,382
3,961
5,597

Europe

Total

$ — $ 32,708
568
12,899
3,412
17,233
2,897
15,382
3,961
5,844

—
8,637
2,750
—
—
—
—
247

Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

83,270
(5,597)

11,634
(247)

94,904
(5,844)

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 77,673

$11,387

$ 89,060

Segment net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

356
(489) $
$
34
$
2,620
$
$ 4,923
$ 92,823

(133)
$
2,654
$
$ 97,746

76

KVH INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2010, 2009 and 2008
(in thousands except share and per share amounts)

(12) Segment Reporting—(continued)

Year ended December 31, 2008

Mobile communication sales to the United States . . . . . . . . . . . . . . . . . . . .
Mobile communication sales to Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mobile communication sales to Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mobile communication sales to other geographic areas . . . . . . . . . . . . . . . .
Guidance and stabilization sales to the United States . . . . . . . . . . . . . . . . . .
Guidance and stabilization sales to Canada . . . . . . . . . . . . . . . . . . . . . . . . . .
Guidance and stabilization sales to Europe . . . . . . . . . . . . . . . . . . . . . . . . . .
Guidance and stabilization sales to other geographic areas . . . . . . . . . . . . .
Intercompany sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Sales Originating From

North
America

$ 37,414
1,136
2,690
771
12,347
1,971
5,966
2,430
11,655

Europe

Total

$ — $ 37,414
1,136
15,477
5,663
12,347
1,971
5,966
2,430
11,655

—
12,787
4,892
—
—
—
—
—

Subtotal

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

76,380
(11,655)

17,679
—

94,059
(11,655)

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 64,725

$17,679

$ 82,404

Segment net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1,788
$ 2,181
$ 89,048

$ 1,270
$
34
$ 4,710

$ 3,058
$ 2,215
$ 93,758

(13) Share Buyback Program

On November 26, 2008, the Company’s Board of Directors authorized a program to repurchase up to one
million shares of the Company’s common stock. As of December 31, 2010, 798,676 shares of the Company’s
common stock remain available for repurchase under the authorized program. The repurchase program is funded
using the Company’s existing cash, cash equivalents, marketable securities and future cash flows. Under the
repurchase program, the Company, at management’s discretion, may repurchase shares on the open market from
time to time, in privately negotiated transactions or block transactions, or through an accelerated repurchase
agreement. The timing of such repurchases depends on availability of shares, price, market conditions, alternative
uses of capital, and applicable regulatory requirements. The program may be modified, suspended or terminated
at any time without prior notice. The repurchase program has no expiration date. There were no other repurchase
programs outstanding during the year ended December 31, 2010, and no repurchase programs expired during the
period.

During the years ended December 31, 2010, 2009 and 2008 the Company repurchased 0, 123,044 and

837,280 shares of its common stock in open market transactions at a cost of $0, $601 and $6,697, respectively.

(14) Long-Term Aviation Antenna Development and Production Agreement

On February 18, 2008, the Company entered into a $20,055 long-term antenna development and production
agreement (the “Agreement”) that was subsequently increased in 2009 to $20,896. Under the terms of the
Agreement,
the Company designs, develops, and manufactures DIRECTV-compatible satellite television
antennas for use on narrowbody commercial aircraft operating in the United States. The Company began
shipment of the antennas in the second quarter of 2009. As of December 31, 2010, the Company has incurred
$4,669 in research and development costs related to this arrangement. In accordance with ASC 730, Research

77

KVH INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2010, 2009 and 2008
(in thousands except share and per share amounts)

(14) Long-Term Aviation Antenna Development and Production Agreement—(continued)

and Development, and the Agreement, these costs are capitalized as they are incurred and then expensed into
costs of product sales as antennas are sold in proportion to the number of antennas delivered versus the total
contractual antenna production requirement. The Company expensed $1,000 of aviation antenna research and
development costs into costs of product sales during the year ended December 31, 2010. The net amount of
$2,868 in remaining capitalized research and development costs are costs that the Company has a contractual
right to recover, and are reflected in other non-current assets as of December 31, 2010.

(15) Comprehensive Income (Loss)

Comprehensive income (loss) includes net income (loss) and other comprehensive income (loss). Other
comprehensive income (loss) includes the effects of unrealized gains or losses on available-for-sale marketable
securities and currency translation adjustments that are separately included in accumulated other comprehensive
(loss) income within stockholders’ equity as well as unrealized losses on derivatives. The Company’s
comprehensive income (loss) for the periods presented is as follows:

Year ended
December 31,

2010

2009

2008

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized (loss) gain on available-for-sale securities . . . . . . .
Currency translation adjustment gain . . . . . . . . . . . . . . . . . . . .
Unrealized loss on interest rate swaps . . . . . . . . . . . . . . . . . . . .

$8,273
(47)
260
(243)

$(133)
(80)
—
—

$3,058
130
—
—

Total comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . .

$8,243

$(213)

$3,188

(16) Fair Value Measurements

Effective January 1, 2008,

the Company adopted the required provisions of ASC 820, Fair Value
Measurements and Disclosures. ASC 820 defines fair value as the exchange price that would be received for an
asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes
a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to
measure fair value:

Level 1:

Level 2:

Level 3:

Unadjusted quoted prices in active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities. The Company’s Level 1 assets are investments
in money market mutual funds, government agency bonds, United States treasuries,
certificates of deposit and corporate notes.

Quoted prices for similar assets or liabilities in active markets; or observable prices that are
based on observable market data, based on directly or indirectly market-corroborated
inputs. The Company’s Level 2 liabilities are interest rate swaps.

Unobservable inputs that are supported by little or no market activity, and are developed
based on the best information available given the circumstances. The Company has no
Level 3 assets.

78

KVH INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2010, 2009 and 2008
(in thousands except share and per share amounts)

(16) Fair Value Measurements—(continued)

Assets and liabilities measured at fair value are based on one or more of four valuation techniques. The four

valuation techniques are identified in the table below and are as follows:

(a) Market approach—prices and other relevant
identical or comparable assets or liabilities

information generated by market

transactions involving

(b) Cost approach—amount that would be required to replace the service capacity of an asset (replacement cost)

(c)

Income approach—techniques to convert future amounts to a single present amount based on market
expectations (including present value techniques, option-pricing and excess earnings models)

(d) The valuations of the interest rate swaps intended to mitigate the Company’s interest rate risk are
determined with the assistance of a third party financial
institution using widely accepted valuation
techniques, including discounted cash flow analysis on the expected cash flows of each instrument. This
analysis utilizes observable market-based inputs, including interest rate curves and interest rate volatility,
and reflects the contractual terms of these instruments, including the period to maturity.

The following tables present financial assets at December 31, 2010 and December 31, 2009 for which the

Company measures fair value on a recurring basis, by level, within the fair value hierarchy:

December 31, 2010

Assets

Total

Level 1

Level 2 Level 3

Valuation
Technique

Money market mutual funds . . . . . . . . . . . . . . . . . . . . . . .
Government agency bonds . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$14,607
11,021
2,572
1,866

$14,607
11,021 —
2,572 —
1,866 —

$— $—
—
—
—

Liabilities

Interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

243

$ — $243

$—

(a)
(a)
(a)
(a)

(d)

December 31, 2009

Assets

Total

Level 1

Level 2 Level 3

Valuation
Technique

Government agency bonds . . . . . . . . . . . . . . . . . . . . . . . . .
United States treasuries . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market mutual funds . . . . . . . . . . . . . . . . . . . . . . .
Government agency discount notes . . . . . . . . . . . . . . . . . .
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$12,064
11,623
5,977
3,499
2,270

$12,064
11,623 —
5,977 —
3,499 —
2,270 —

$— $—
—
—
—
—

(a)
(a)
(a)
(a)
(a)

Certain financial instruments are carried at cost on the consolidated balance sheets, which approximates fair
value due to their short-term, highly liquid nature. These instruments include cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses.

(17) Derivative Instruments and Hedging Activities

Effective April 1, 2010, in order to reduce the volatility of cash outflows that arise from changes in interest
rates, the Company entered into two interest rate swap agreements. These interest rate swap agreements are
intended to hedge the Company’s mortgage loan related to its headquarters facility in Middletown, Rhode Island

79

KVH INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2010, 2009 and 2008
(in thousands except share and per share amounts)

(17) Derivative Instruments and Hedging Activities—(continued)

by fixing the interest rates specified in the mortgage loan to 5.91% for half of the principal amount outstanding
and 6.07% for the remaining half of the principal amount outstanding as of April 1, 2010 until the mortgage loan
expires on April 16, 2019.

As required by ASC Topic 815, Derivatives and Hedging, the Company records all derivatives on the
balance sheet at fair value. As of December 31, 2010, the fair value of the derivatives is included in other accrued
liabilities and the unrealized loss is included in other comprehensive income (loss).

As of December 31, 2010, the Company had the following outstanding interest rate derivatives that were

designated as cash flow hedges of interest rate risk:

Interest Rate Derivatives

Notional
(in thousands)

Asset
(Liability)

Effective Date Maturity Date

Index

Strike Rate

Interest rate swap . . . . .
Interest rate swap . . . . .

$1,904
$1,904

(111)
(132)

April 1, 2010 April 1, 2019
April 1, 2010 April 1, 2019

1-month LIBOR
1-month LIBOR

5.91%
6.07%

(18) Legal Matters

From time to time, the Company is involved in litigation incidental to the conduct of its business. In the
ordinary course of business, KVH is a party to inquiries, legal proceedings and claims including, from time to
time, disagreements with vendors and customers. The Company is not a party to any lawsuit or proceeding that,
in management’s opinion, is likely to materially harm the Company’s business, results of operations, financial
condition or cash flows.

(19) Quarterly Financial Results (Unaudited)

Financial information for interim periods was as follows:

2010
Product sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per share (a):

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2009
Product sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (loss) income per share (a):

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

(in thousands, except per share amounts)

$24,033
3,948
11,804
$ 2,066

$24,379
5,118
11,495
$ 5,324

$21,598
6,165
11,538
637

$

$22,049
4,953
9,973
245

$

$

$

0.15

0.14

$

$

0.37

0.36

$

$

0.04

0.04

$

$

0.02

0.02

$15,565
2,710
5,498
$ (2,557)

$18,129
3,727
7,779
191

$

$18,620
4,023
8,936
385

$

$22,878
3,408
10,097
$ 1,847

Basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (0.18)

$

0.01

$

0.03

$

0.13

80

KVH INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2010, 2009 and 2008
(in thousands except share and per share amounts)

(19) Quarterly Financial Results (Unaudited)—(continued)

(a) Net income (loss) per share is computed independently for each of the quarters. Therefore, the net income

(loss) per share for the four quarters may not equal the annual income (loss) per share data.

See note 8 for more information regarding the impact of a change in the valuation allowance for the
Company’s deferred tax assets in the year ended December 31, 2010. See note 9 for information regarding the
Company’s acquisition of Virtek Communication in the third quarter of 2010.

81

List of Subsidiaries

Exhibit 21.1

KVH Europe A/S

KVH Industries Asia Pte Ltd.

The Denmark Company

The Singapore Company

KVH South America Comunicacao Por Satelite Ltda

The Brazil Company

Virtek Communication AS

The Norway Company

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors
KVH Industries, Inc.:

We consent to the incorporation by reference in the Registration Statement Nos. 333-168406, 333-160230,
333-141404, 333-112341, 333-67556 and 333-08491 on Form S-8 of KVH Industries, Inc. of our report dated
March 14, 2011, with respect to the consolidated balance sheets of KVH Industries, Inc. and subsidiaries as of
December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity and
accumulated other comprehensive income (loss), and cash flows for each of the years in the three-year period
ended December 31, 2010, and the effectiveness of internal control over financial reporting as of December 31,
2010, which report appears in the December 31, 2010 Annual Report on Form 10-K of KVH Industries, Inc.

/s/ KPMG LLP

Providence, Rhode Island
March 14, 2011

Exhibit 31.1

Certification

I, Martin A. Kits van Heyningen, certify that:

1.

I have reviewed this annual report on Form 10-K of KVH Industries, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of
an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s
Board of Directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a

significant role in the registrant’s internal control over financial reporting.

Date: March 14, 2011

/s/ Martin A. Kits van Heyningen
Martin A. Kits van Heyningen
President, Chief Executive Officer and
Chairman of the Board

Exhibit 31.2

Certification

I, Patrick J. Spratt, certify that:

1.

I have reviewed this annual report on Form 10-K of KVH Industries, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of
an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s
Board of Directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a

significant role in the registrant’s internal control over financial reporting.

Date: March 14, 2011

/s/ Patrick J. Spratt
Patrick J. Spratt
Chief Financial and Accounting Officer

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of KVH Industries, Inc. (the “Company”) for the year ended
December 31, 2010, as filed with the Securities and Exchange Commission on the date hereof (the “Report”),
each of the undersigned President, Chief Executive Officer and Chairman of the Board, and Chief Financial and
Accounting Officer of the Company, certifies, to the best knowledge and belief of the signatory, pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.

2.

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Act of 1934; and

The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.

/s/ Martin A. Kits van Heyningen
Martin A. Kits van Heyningen
President, Chief Executive Officer and
Chairman of the Board

/s/ Patrick J. Spratt
Patrick J. Spratt
Chief Financial and Accounting Officer

Date: March 14, 2011

Date: March 14, 2011