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UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

     QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2003

    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIESEXCHANGE ACT OF 1934

For the transitionperiod from              to            

Commission file number:000-22839

Globecomm Systems Inc.

(Exact name of Registrant as specified in itscharter)

|                                                              |  |                                    |  |  |  |  |
|--------------------------------------------------------------|--|------------------------------------|--|--|--|--|
| Delaware                                                     |  | 11-3225567                         |
| (State or other jurisdictionofincorporation or organization) |  | (I.R.S.EmployerIdentification No.) |
| 45 OserAvenue, Hauppauge, NY                                 |  |     11788      |
| (Address of principal executive offices)                     |  | (ZipCode)                          |
|                                                              |

Registrant's telephone number,including area code: (631) 231-9800

Indicate by checkmark whether the registrant (1) has filed all reports required to befiled by Section  13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period thatthe Registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes   No  

Indicate by checkmark whether the Registrant is an accelerated filer (as defined in Rule12b-2 of the Act). Yes  No 

As of February 11,2004, there were 14,086,675 shares of the Registrant's commonstock, $0.001 par value,outstanding.

    

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GLOBECOMM SYSTEMSINC.

Index to the December 31, 2003 Form 10-Q

|                                     |  |                                                                                                                        |  |        |    |        |  |  |  |  |
|-------------------------------------|--|------------------------------------------------------------------------------------------------------------------------|--|--------|----|--------|--|--|--|--|
|                                |  |                                                                                                                   |  | Page   |
| Part I — FinancialInformation |
| Item1.                              |  | Consolidated FinancialStatements                                                                                       |  |   | 3  |   |
|                                |  | Consolidated Balance Sheets — As of December31, 2003 (unaudited) and June  30,2003                               |  |   | 3  |   |
|                                |  | Consolidated Statements ofOperations (unaudited) — For the three and six months endedDecember 31, 2003 and 2002  |  |   | 4  |   |
|                                |  | Consolidated Statement of Changes inStockholders' Equity (unaudited) — For thesix  months ended December 31,2003 |  |   | 5  |   |
|                                |  | Consolidated Statements ofCash Flows (unaudited) — For the six months ended December31, 2003 and 2002            |  |   | 6  |   |
|                                |  | Notes toConsolidated Financial Statements (unaudited)                                                                  |  |   | 7  |   |
| Item 2.                             |  | Management's Discussion and Analysis ofFinancial Condition and Results ofOperations                                    |  |   | 12 |   |
| Item 3.                             |  | Quantitativeand Qualitative Disclosures about Market Risk                                                              |  |   | 26 |   |
| Item 4.                             |  | Controls and Procedures                                                                                                |  |   | 27 |   |
| Part II — Other Information   |
| Item 1.                             |  | Legal Proceedings                                                                                                      |  |   | 27 |   |
| Item 2.                             |  | Changes in Securities and Use ofProceeds                                                                               |  |   | 27 |   |
| Item 3.                             |  | Defaults UponSenior Securities                                                                                         |  |   | 28 |   |
| Item4.                              |  | Submission of Matters to a Vote of SecurityHolders                                                                     |  |   | 28 |   |
| Item 5.                             |  | OtherInformation                                                                                                       |  |   | 28 |   |
| Item 6.                             |  | Exhibits andReports on Form 8-K                                                                                        |  |   | 28 |   |
|                                |  | Signatures                                                                                                             |  |   | 29 |   |
|                                     |

2

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PART I —FINANCIAL INFORMATION

Item 1.     Consolidated FinancialStatements

GLOBECOMM SYSTEMS INC. CONSOLIDATED BALANCESHEETS(In thousands, except share data)

|                                                                                                                                          |  |                  |         |               |  |        |         |         |  |  |
|------------------------------------------------------------------------------------------------------------------------------------------|--|------------------|---------|---------------|--|--------|---------|---------|--|--|
|                                                                                                                                     |  | December 31,2003 |         | June 30, 2003 |
|                                                                                                                                     |  | (Unaudited)      |         |          |
| **Assets**                                                                                                                               |  |             |    |          |  |   |    |    |
| Currentassets:                                                                                                                           |  |             |    |          |  |   |    |    |
| Cash and cashequivalents                                                                                                                 |  | $                | 21,776  |          |  | $      | 22,016  |    |
| Restrictedcash                                                                                                                           |  |             | 1,132   |          |  |   | 608     |    |
| Accountsreceivable,net                                                                                                                   |  |             | 11,766  |          |  |   | 7,865   |    |
| Inventories                                                                                                                              |  |             | 6,836   |          |  |   | 10,990  |    |
| Prepaidexpenses and other currentassets                                                                                                  |  |             | 2,088   |          |  |   | 2,040   |    |
| Deferredincometaxes                                                                                                                      |  |             | 125     |          |  |   | 125     |    |
| Totalcurrentassets                                                                                                                       |  |             | 43,723  |          |  |   | 43,644  |    |
| Fixedassets,net                                                                                                                          |  |             | 16,440  |          |  |   | 17,536  |    |
| Goodwill                                                                                                                                 |  |             | 7,204   |          |  |   | 7,204   |    |
| Otherassets                                                                                                                              |  |             | 1,569   |          |  |   | 1,960   |    |
| Totalassets                                                                                                                              |  | $                | 68,936  |          |  | $      | 70,344  |    |
| **Liabilitiesand Stockholders'Equity**                                                                                                   |  |             |    |          |  |   |    |    |
| Currentliabilities:                                                                                                                      |  |             |    |          |  |   |    |    |
| Accountspayable                                                                                                                          |  | $                | 14,824  |          |  | $      | 10,615  |    |
| Deferredrevenues                                                                                                                         |  |             | 2,703   |          |  |   | 7,666   |    |
| Accruedpayroll and related fringebenefits                                                                                                |  |             | 1,156   |          |  |   | 1,114   |    |
| Otheraccruedexpenses                                                                                                                     |  |             | 2,239   |          |  |   | 1,686   |    |
| Deferredliabilities                                                                                                                      |  |             | 425     |          |  |   | 523     |    |
| Totalcurrentliabilities                                                                                                                  |  |             | 21,347  |          |  |   | 21,604  |    |
| Deferredliabilities, less currentportion                                                                                                 |  |             | 1,145   |          |  |   | 1,303   |    |
| Commitmentsandcontingencies                                                                                                              |  |             |    |          |  |   |    |    |
| Stockholders'equity:                                                                                                                     |  |             |    |          |  |   |    |    |
| Series A JuniorParticipating, shares authorized, issued and outstanding: none atDecember 31, 2003 and June 30,2003                       |  |             | — |          |  |   | — |    |
| Commonstock, $.001 par value, 22,000,000 shares authorized, sharesissued: 14,541,676 at December 31, 2003 and 12,980,108 at June 30,2003 |  |             | 15      |          |  |   | 13      |    |
| Additional paid-incapital                                                                                                                |  |             | 123,970 |          |  |   | 123,739 |    |
| Accumulateddeficit                                                                                                                       |  |             | (75,002 | )        |  |   | (73,857 | )  |
| Accumulatedother comprehensive income(loss)                                                                                              |  |             | 242     |          |  |   | (10     | )  |
| Treasurystock, at cost, 465,351 shares at December 31, 2003 and 403,845 at June30,2003                                                   |  |             | (2,781  | )        |  |   | (2,448  | )  |
| Totalstockholders'equity                                                                                                                 |  |             | 46,444  |          |  |   | 47,437  |    |
| Totalliabilities and stockholders'equity                                                                                                 |  | $                | 68,936  |          |  | $      | 70,344  |    |
|                                                                                                                                          |

Seeaccompanying notes.

3

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GLOBECOMM SYSTEMS INC. CONSOLIDATEDSTATEMENTS OF OPERATIONS (In thousands, except per sharedata)(Unaudited)

|                                                                                             |  |                   |         |                  |  |                 |         |                  |  |        |         |         |  |        |         |         |  |  |
|---------------------------------------------------------------------------------------------|--|-------------------|---------|------------------|--|-----------------|---------|------------------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                                                        |  | ThreeMonths Ended |         | Six MonthsEnded  |
|                                                                                        |  | December31,2003   |         | December 31,2002 |  | December31,2003 |         | December 31,2002 |
| Revenuesfrom ground segment systems, networks and enterprisesolutions                       |  | $                 | 19,891  |             |  | $               | 11,854  |             |  | $      | 36,922  |    |  | $      | 20,018  |    |
| Revenuesfrom data communicationsservices                                                    |  |              | 3,809   |             |  |            | 3,202   |             |  |   | 7,239   |    |  |   | 7,472   |    |
| Totalrevenues                                                                               |  |              | 23,700  |             |  |            | 15,056  |             |  |   | 44,161  |    |  |   | 27,490  |    |
| Costsand operating expenses:                                                                |  |
| Costs from groundsegment systems, networks and enterprisesolutions                          |  |              | 17,798  |             |  |            | 10,787  |             |  |   | 33,102  |    |  |   | 18,479  |    |
| Costsfrom data communicationsservices                                                       |  |              | 3,255   |             |  |            | 4,484   |             |  |   | 6,473   |    |  |   | 10,773  |    |
| Sellingandmarketing                                                                         |  |              | 1,126   |             |  |            | 1,615   |             |  |   | 2,242   |    |  |   | 3,247   |    |
| Researchanddevelopment                                                                      |  |              | 236     |             |  |            | 157     |             |  |   | 711     |    |  |   | 422     |    |
| Generalandadministrative                                                                    |  |              | 2,103   |             |  |            | 2,418   |             |  |   | 2,997   |    |  |   | 4,374   |    |
| Totalcosts and operatingexpenses                                                            |  |              | 24,518  |             |  |            | 19,461  |             |  |   | 45,525  |    |  |   | 37,295  |    |
| Lossfromoperations                                                                          |  |              | (818    | )           |  |            | (4,405  | )           |  |   | (1,364  | )  |  |   | (9,805  | )  |
| Otherincome (expense):                                                                      |  |
| Interestincome                                                                              |  |              | 66      |             |  |            | 116     |             |  |   | 128     |    |  |   | 286     |    |
| Interestexpense                                                                             |  |              | — |             |  |            | (230    | )           |  |   | — |    |  |   | (463    | )  |
| Gainon sale of available-for-salesecurities                                                 |  |              | 91      |             |  |            | — |             |  |   | 91      |    |  |   | — |    |
| Netloss                                                                                     |  | $                 | (661    | )           |  | $               | (4,519  | )           |  | $      | (1,145  | )  |  | $      | (9,982  | )  |
| Basicand diluted net loss per commonshare                                                   |  | $                 | (0.05   | )           |  | $               | (0.36   | )           |  | $      | (0.09   | )  |  | $      | (0.79   | )  |
| Weighted-averageshares used in the calculation of basic and diluted net lossper commonshare |  |              | 12,575  |             |  |            | 12,566  |             |  |   | 12,576  |    |  |   | 12,575  |    |
|                                                                                             |

Seeaccompanying notes.

4

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GLOBECOMM SYSTEMS INC. CONSOLIDATEDSTATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE SIXMONTHS ENDED DECEMBER 31, 2003 (In thousands)(Unaudited)

|                                                                          |  |                                                             |        |                          |  |                    |        |                                           |  |                |         |                           |  |        |         |         |  |        |        |         |  |        |        |        |  |        |        |         |  |        |        |         |  |  |
|--------------------------------------------------------------------------|--|-------------------------------------------------------------|--------|--------------------------|--|--------------------|--------|-------------------------------------------|--|----------------|---------|---------------------------|--|--------|---------|---------|--|--------|--------|---------|--|--------|--------|--------|--|--------|--------|---------|--|--------|--------|---------|--|--|
|                                                                     |  |         CommonStock |        | AdditionalPaid-inCapital |  | AccumulatedDeficit |        | AccumulatedOtherComprehensiveIncome(Loss) |  | Treasury Stock |         | TotalStockholders' Equity |
|                                                                     |  | Shares                                                      |        | Amount                   |  | Shares             |        | Amount                                    |  |
| Balance at June 30,2003                                                  |  |                                                        | 12,980 |                     |  | $                  | 13     |                                      |  | $              | 123,739 |                      |  | $      | (73,857 | )  |  | $      | (10    | )  |  |   | 404    |   |  | $      | (2,448 | )  |  | $      | 47,437 |    |
| Proceedsfrom exercise of stockoptions                                    |  |                                                        | 43     |                     |  |               |   |                                      |  |           | 176     |                      |  |   |    |    |  |   |   |    |  |   |   |   |  |   |   |    |  |   | 176    |    |
| Issuanceof common stock in connection with employee stock purchaseplan   |  |                                                        | 19     |                     |  |               |   |                                      |  |           | 54      |                      |  |   |    |    |  |   |   |    |  |   |   |   |  |   |   |    |  |   | 54     |    |
| Issuanceof stock options forservices                                     |  |                                                        |   |                     |  |               |   |                                      |  |           | 3       |                      |  |   |    |    |  |   |   |    |  |   |   |   |  |   |   |    |  |   | 3      |    |
| Purchasesof treasurystock                                                |  |                                                        |   |                     |  |               |   |                                      |  |           |    |                      |  |   |    |    |  |   |   |    |  |   | 61     |   |  |   | (333   | )  |  |   | (333   | )  |
| Issuanceof common stock and warrants in connection with privateplacement |  |                                                        | 1,500  |                     |  |               | 2      |                                      |  |           | 6,292   |                      |  |   |    |    |  |   |   |    |  |   |   |   |  |   |   |    |  |   | 6,294  |    |
| CommonStock subscriptions receivable in connection with privateplacement |  |                                                        |   |                     |  |               |   |                                      |  |           | (6,294  | )                    |  |   |    |    |  |   |   |    |  |   |   |   |  |   |   |    |  |   | (6,294 | )  |
| Comprehensiveloss:                                                       |  |
| Netloss                                                                  |  |                                                        |   |                     |  |               |   |                                      |  |           |    |                      |  |   | (1,145  | )  |  |   |   |    |  |   |   |   |  |   |   |    |  |   | (1,145 | )  |
| Gainfrom foreign currencytranslation                                     |  |                                                        |   |                     |  |               |   |                                      |  |           |    |                      |  |   |    |    |  |   | 57     |    |  |   |   |   |  |   |   |    |  |   | 57     |    |
| Unrealizedgain on available-for-salesecurities                           |  |                                                        |   |                     |  |               |   |                                      |  |           |    |                      |  |   |    |    |  |   | 195    |    |  |   |   |   |  |   |   |    |  |   | 195    |    |
| Totalcomprehensiveloss                                                   |  |                                                        |   |                     |  |               |   |                                      |  |           |    |                      |  |   |    |    |  |   |   |    |  |   |   |   |  |   |   |    |  |   | (893   | )  |
| Balanceat December 31,2003                                               |  |                                                        | 14,542 |                     |  | $                  | 15     |                                      |  | $              | 123,970 |                      |  | $      | (75,002 | )  |  | $      | 242    |    |  |   | 465    |   |  | $      | (2,781 | )  |  | $      | 46,444 |    |
|                                                                          |

Seeaccompanying notes.

5

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GLOBECOMM SYSTEMS INC. CONSOLIDATEDSTATEMENTS OF CASH FLOWS (In thousands)(Unaudited)

|                                                                                         |  |                  |         |                  |  |        |         |         |  |  |
|-----------------------------------------------------------------------------------------|--|------------------|---------|------------------|--|--------|---------|---------|--|--|
|                                                                                    |  | SixMonths Ended  |
|                                                                                    |  | December31, 2003 |         | December 31,2002 |
| **OPERATINGACTIVITIES:**                                                                |  |
| Netloss                                                                                 |  | $                | (1,145  | )           |  | $      | (9,982  | )  |
| Adjustmentsto reconcile net loss to net cash provided by (used in) operatingactivities: |  |
| Depreciation andamortization                                                            |  |             | 1,606   |             |  |   | 2,184   |    |
| Changein bad debtexpense                                                                |  |             | (899    | )           |  |   | 75      |    |
| Gain on saleof available-for-salesecurities                                             |  |             | (91     | )           |  |   | — |    |
| Stockcompensationexpense                                                                |  |             | 3       |             |  |   | — |    |
| Change indeferredliabilities                                                            |  |             | (256    | )           |  |   | (2,101  | )  |
| Changesin operating assets and liabilities:                                             |  |
| Accountsreceivable                                                                      |  |             | (2,893  | )           |  |   | 4,124   |    |
| Inventories                                                                             |  |             | 4,268   |             |  |   | (1,360  | )  |
| Prepaidexpenses and other currentassets                                                 |  |             | (132    | )           |  |   | 69      |    |
| Otherassets                                                                             |  |             | 91      |             |  |   | (884    | )  |
| Accountspayable                                                                         |  |             | 4,043   |             |  |   | (5,176  | )  |
| Deferredrevenues                                                                        |  |             | (5,027  | )           |  |   | 1,934   |    |
| Accruedpayroll and related fringebenefits                                               |  |             | 39      |             |  |   | 75      |    |
| Other accruedexpenses                                                                   |  |             | 555     |             |  |   | 649     |    |
| Netcash provided by (used in) operatingactivities                                       |  |             | 162     |             |  |   | (10,393 | )  |
| **INVESTINGACTIVITIES:**                                                                |  |
| Purchases of fixedassets                                                                |  |             | (507    | )           |  |   | (536    | )  |
| Repayment ofpromissory note from a relatedparty                                         |  |             | 300     |             |  |   | — |    |
| Proceeds from saleof available-for-salesecurities                                       |  |             | 391     |             |  |   | — |    |
| Restrictedcash                                                                          |  |             | (523    | )           |  |   | — |    |
| Netcash used in investingactivities                                                     |  |             | (339    | )           |  |   | (536    | )  |
| **FINANCINGACTIVITIES:**                                                                |  |
| Proceeds from sale of common stockin connection with employee stock purchaseplan        |  |             | 54      |             |  |   | 81      |    |
| Purchases of treasurystock                                                              |  |             | (333    | )           |  |   | (149    | )  |
| Proceeds fromexercise of stockoptions                                                   |  |             | 176     |             |  |   | — |    |
| Payments undercapitallease                                                              |  |             | — |             |  |   | (230    | )  |
| Netcash used in financingactivities                                                     |  |             | (103    | )           |  |   | (298    | )  |
| Effectof foreign currency translation oncash                                            |  |             | 40      |             |  |   | 21      |    |
| Netdecrease in cash and cashequivalents                                                 |  |             | (240    | )           |  |   | (11,206 | )  |
| Cash andcash equivalents at beginning ofperiod                                          |  |             | 22,016  |             |  |   | 38,708  |    |
| Cashand cash equivalents at end ofperiod                                                |  | $                | 21,776  |             |  | $      | 27,502  |    |
|                                                                                         |

Seeaccompanying notes.

6

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GLOBECOMM SYSTEMSINC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31,2003 (Unaudited)

1.    Basis of Presentation

The accompanying unaudited consolidated financial statements havebeen prepared in accordance with accounting principles generallyaccepted in the United States for interim financial information and inaccordance with the instructions to Form 10-Q and Article 10 ofRegulation S-X. Accordingly, they do not include all of the informationand footnotes required by accounting principles generally accepted inthe United States for complete financial statements. In the opinion ofmanagement, all material adjustments (consisting of normal recurringadjustments) considered necessary for a fair presentation of theresults for such periods have been included. The consolidated balancesheet at June 30, 2003 has been derived from the audited consolidatedfinancial statements at that date but does not include all of theinformation and footnotes required by accounting principles generallyaccepted in the United States for complete financial statements. Theresults of operations for the three and six months ended December 31,2003, are not necessarily indicative of the results that may beexpected for the full fiscal year ending June 30, 2004, or for anyfuture period.

The accompanying consolidated financialstatements should be read in conjunction with the audited consolidatedfinancial statements of the Company for the fiscal year ended June 30,2003 and the accompanying notes thereto contained in theCompany's Annual Report on Form 10-K, filed with the Securitiesand Exchange Commission on September 29, 2003.

Principles ofConsolidation

The consolidated financial statements include theaccounts of the Company and its wholly-owned subsidiaries, NetSatExpress, Inc., or NetSat, and Globecomm Systems Europe Limited(collectively, the "Company"). Allsignificant intercompany balances and transactions have been eliminatedin consolidation.

Sale of Stock by Subsidiary

TheCompany recognizes changes in the ownership percentage of itssubsidiaries caused by issuances of the subsidiary's stock as anadjustment to additional paid-in capital in the consolidated statementof changes in stockholders' equity.

AccountingEstimates

The preparation of financial statements in conformitywith accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affect theamounts reported in the consolidated financial statements andaccompanying notes. Actual results could differ from thoseestimates.

Revenue Recognition

The Company recognizesrevenue in accordance with Staff Accounting Bulletin No. 104("SAB 104"), Revenue Recognition, for itsproduction-type contracts that are sold separately as standardsatellite ground segment systems when persuasive evidence of anarrangement exists, the selling price is fixed or determinable,collectibility is reasonably assured, delivery has occurred and thecontractual performance specifications have been met. TheCompany's standard satellite ground segment systems produced inconnection with these contracts are typically short-term (less thantwelve months in term) and manufactured using a standard modularproduction process. Such systems require less engineering, drafting anddesign efforts than the Company's long-term complexproduction-type projects. Revenue is recognized on the Company'sstandard satellite ground segment systems upon shipment and acceptanceof factory performance testing which is when title transfers to thecustomer. The amount of revenues recorded on each standardproduction-type contract is reduced by the customers' contractualholdback amount, which typically requires 10% to 30% ofthe contract value to be retained by the customer until 

7

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installation and final acceptance is complete.The customer generally becomes obligated to pay 70% to90% of the contract value upon shipment and acceptance offactory performance testing. Installation is not deemed to be essentialto the functionality of the system since installation does not requiresignificant changes to the features or capabilities of the system, doesnot require complex software integration and interfacing and theCompany has not experienced any difficulties installing such equipment.In addition, the customer or other third party vendors can install thesystem. The estimated relative fair value of the installation servicesis determined by management, which is typically less than thecustomer's contractual holdback percentage. If the holdback isless than the fair value of installation, the Company will deferrecognition of revenues, determined on a contract-by-contract basisequal to the fair value of the installation services. Payments receivedin advance by customers are deferred until shipment and are presentedas deferred revenues in the accompanying consolidated balancesheets.

The Company recognizes revenue using thepercentage-of-completion method of accounting upon the achievement ofcertain contractual milestones in accordance with Statement of Position81-1 ("SOP 81-1"), Accounting for Performanceof Construction-Type and Certain Production-Type Contracts, for itsnon-standard, complex production-type contracts for the production ofsatellite ground segment systems and equipment that are generallyintegrated into the customers' satellite ground segment network.The equipment and systems produced in connection with these contractsare typically long-term (in excess of twelve months in term) andrequire significant customer-specific engineering, drafting and designeffort in order to effectively integrate all of the customizable earthstation equipment into the customers' ground segment network.These contracts generally have larger contract values, greater economicrisks and substantive specific contractual performance requirements dueto the engineering and design complexity of such systems and relatedequipment. Progress payments received in advance by customers arenetted against the inventory balances in the accompanying consolidatedbalance sheets.

Contract costs generally include purchasedmaterial, direct labor, overhead and other indirect costs. Anticipatedcontract losses are recognized, as they become known.

Revenuesfrom data communications services are derived primarily from Internetaccess service fees. Service revenues from Internet access arerecognized ratably over the period in which services are provided.Payments received in advance of providing Internet access services aredeferred until the period such services are provided and are presentedas deferred revenues in the accompanying consolidated balancesheets.

Costs from Ground Segment Systems, Networks andEnterprise Solutions

Costs from ground segment systems,networks and enterprise solutions consist primarily of the costs ofpurchased materials (including shipping and handling costs), directlabor and related overhead expenses, project-related travel and livingcosts and subcontractor salaries.

Costs from DataCommunications Services

Costs from data communications servicesrelating to Internet access service fees consist primarily of satellitespace segment charges, Internet connectivity fees and networkoperations expenses. Satellite space segment charges consist of thecosts associated with obtaining satellite bandwidth (the measure ofcapacity) used in the transmission of services to and from thesatellite leased from operators and network operations expenses.Network operations expenses consist primarily of costs associated withthe operation of the Network Operation Center, on a twenty-four hour aday, seven-day a week basis, including personnel and related costs anddepreciation.

Research and Development

Research anddevelopment expenditures are expensed as incurred.

Stock-BasedCompensation

The Company accounts for stock option grants usingthe intrinsic value method prescribed in Accounting Principles BoardOpinion No. 25 ("APBO No. 25"), Accountingfor Stock Issued to Employees, and complies with the disclosureprovisions of Statement of Financial Accounting Standards No. 123,Accounting for Stock-Based Compensation ("SFAS No.123"), as amended by SFAS No. 148, Accounting forStock-Based Compensation-Transition and Disclosure ("SFASNo. 148").

8

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Goodwill

Goodwill represents theexcess of the purchase price over the fair value of the net assetsacquired. In accordance with Statement of Financial AccountingStandards No. 142, Goodwill and Other Intangible Assets("SFAS No. 142"), goodwill and otherindefinite life intangible assets are no longer amortized, but insteadtested for impairment at least annually.

The net carrying valueof goodwill was approximately $7,204,000, at December 31, 2003 and June30, 2003, which relates to the buyback of the minority interests ofNetSat.

Comprehensive Loss

Comprehensive loss for thethree and six months ended December 31, 2003 of approximately $543,000and $893,000, respectively, includes a foreign currency translationgain of approximately $23,000 and $57,000 and an unrealized gain onavailable-for-sale securities of approximately $95,000 and $195,000 forthe three and six months ended December 31, 2003, respectively.Comprehensive loss for the three and six months ended December 31, 2002of approximately $4,436,000 and $9,983,000, respectively, includes aforeign currency translation gain of approximately $34,000 and $42,000and an unrealized gain (loss) on available-for-sale securities ofapproximately $49,000 and ($43,000) for the three and six months endedDecember 31, 2002, respectively.

Income Taxes

Inassessing the realizability of deferred tax assets, managementconsiders whether it is more likely than not that some portion or allof the deferred tax assets will be realized. The ultimate realizationof the net deferred tax assets is dependent upon the generation offuture taxable income prior to the expiration of any net operating losscarryforwards. For the six months ended December 31, 2003 and the yearended June 30, 2003, due to the uncertainty regarding theCompany's ability to utilize its net operating losses in thefuture, the Company provided a valuation allowance against itsoperating losses and temporary differences except for approximately$125,000, representing state investment tax credit carryforwards thatwill be utilized during fiscal 2004 to offset state capital taxes onthe Company's combined state tax return. 

ProductWarranties

The Company offers warranties on its contracts; thespecific terms and conditions of which vary depending upon the contractand work performed. Generally, a basic limited warranty, includingparts and labor, is provided to customers for one-year. The Company canrecoup certain of these costs through product warranties it holds withits original equipment manufacturers, which typically are one-year interm. Historically, warranty expense has been minimal, however,management periodically assesses the need for any additional warrantyreserve.

2.    Basic and Diluted Net Loss Per CommonShare

The Company computes net loss per common share inaccordance with the provisions of SFAS No. 128, Earnings Per Share.Basic and diluted net loss per common share is computed by dividing thenet loss for the period by the weighted-average number of commonequivalent shares outstanding for the period. Common equivalent sharesconsist of the incremental common shares issuable upon the conversionof preferred stock (using an if-converted method) and incrementalcommon shares issuable upon the exercise of stock options and warrants(using the treasury stock method). Incremental common equivalent sharesare excluded from the calculation of diluted net loss per common share,as their effect is anti-dilutive. Diluted net loss per common share forthe three and six months ended December 31, 2003 excludes the effect ofapproximately 361,000 and 161,000 stock options, respectively, as theireffect would have been anti-dilutive. Diluted net loss per common sharefor the three and six months ended December 31, 2002 excludes theeffect of approximately 2,000 and 3,000 stock options, respectively, astheir effect would have been anti-dilutive.

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3.    Inventories

Inventoriesconsist of the following:

|                                  |  |                  |       |              |  |        |        |        |  |  |
|----------------------------------|--|------------------|-------|--------------|--|--------|--------|--------|--|--|
|                             |  | December31, 2003 |       | June 30,2003 |
|                             |  | (Unaudited)      |       |         |
|                             |  | (Inthousands)    |
| Raw materials and componentparts |  | $                | 214   |         |  | $      | 142    |   |
| Work-in-progress                 |  |             | 6,622 |         |  |   | 10,848 |   |
|                             |  | $                | 6,836 |         |  | $      | 10,990 |   |
|                                  |

AtDecember 31, 2003 and June 30, 2003, there were no progress payments tonet against inventories under long-term contracts.

4.    FairValue Disclosure of Stock Options

Interim pro-forma informationregarding net loss and net loss per common share is required by SFASNo. 148, Accounting for Stock-Based Compensation - Transition andDisclosure, if the Company accounts for its stock options granted underthe intrinsic value method. The fair value of options granted under theCompany's 1997 Stock Incentive Plan was estimated at the date ofgrant using a Black-Scholes option pricing model.

TheBlack-Scholes option valuation model was developed for use inestimating the fair value of traded options, which have no vestingrestrictions and are fully transferable. In addition, option valuationmodels require the input of highly subjective assumptions, includingthe expected stock price volatility. Because the Company's stockoptions have characteristics significantly different from those oftraded options, and because changes in the subjective input assumptionscan materially affect the fair value estimate, in management'sopinion, the existing models do not necessarily provide a reliablesingle measure of the fair value of its stock options under theBlack-Scholes option valuation model.

For purposes of pro-formadisclosures, the estimated fair value of the options is amortized toexpense over the options' vesting period. The Company'spro-forma information is as follows:

|                                                     |  |                                      |        |                  |  |                 |        |                 |  |        |        |         |  |        |         |         |  |  |
|-----------------------------------------------------|--|--------------------------------------|--------|------------------|--|-----------------|--------|-----------------|--|--------|--------|---------|--|--------|---------|---------|--|--|
|                                                |  | ThreeMonths Ended                    |        | Six MonthsEnded  |
|                                                |  | December31,2003                      |        | December 31,2002 |  | December31,2003 |        | December31,2002 |
|                                                |  | (Unaudited)                          |
|                                                |  | (Inthousands, except per share data) |
| Reported netloss                                    |  | $                                    | (661   | )           |  | $               | (4,519 | )          |  | $      | (1,145 | )  |  | $      | (9,982  | )  |
| Pro-formastock compensationexpense                  |  |                                 | (621   | )           |  |            | (727   | )          |  |   | (1,281 | )  |  |   | (1,464  | )  |
| Pro-formanetloss                                    |  | $                                    | (1,282 | )           |  | $               | (5,246 | )          |  | $      | (2,426 | )  |  | $      | (11,446 | )  |
| Reportedbasic and diluted net loss per commonshare  |  | $                                    | (0.05  | )           |  | $               | (0.36  | )          |  | $      | (0.09  | )  |  | $      | (0.79   | )  |
| Pro-formabasic and diluted net loss per commonshare |  | $                                    | (0.10  | )           |  | $               | (0.42  | )          |  | $      | (0.19  | )  |  | $      | (0.91   | )  |
|                                                     |

Duringthe three and six months ended December 31, 2003 stock compensationexpense of $3,000 was included in the reported net loss. There was nostock compensation expense included in the reported net loss during thethree and six months ended December 31, 2002.

5.    PrivatePlacement

On December 31, 2003, the Company completed a privateplacement transaction of equity securities totaling $6,750,000 in grossproceeds. The Company issued 1,500,000 shares of common stock at aprice of $4.50 per share and warrants to purchase up to 750,000 sharesof common stock at an exercise price of 

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$5.50 per share. The warrants are exercisableon July 1, 2004 and will expire on December 31, 2008. On January 5,2004, the Company received the net proceeds of $6,294,000, afterplacement agent fees. At December 31, 2003, the proceeds receivablefrom this transaction of $6,294,000 were recorded as a subscriptionreceivable and included as a reduction of additional paid-in capital inthe accompanying consolidated balance sheets.

6.    RelatedParty Transaction

During fiscal 2002, the Company advanced$300,000 to an officer of the Company and received a promissory notepayable on September 30, 2004, which bore interest at an annual rate of5.0% payable quarterly, and was secured by a stock pledgeagreement. On November 12, 2003, the officer sold 61,506 shares of theCompany's common stock at a fair market price of $5.41 per shareto the Company in connection with its stock repurchase program. OnNovember 12, 2003, the officer paid approximately $333,000 to theCompany to satisfy all amounts outstanding on the promissory note,together with accrued interest thereon.

7.    SegmentInformation

The Company operates through two business segments.Its ground segment systems, networks and enterprise solutions segment,through Globecomm Systems Inc. and Globecomm Systems Europe Limited, isengaged in the design, assembly and installation of ground segmentsystems, networks and enterprise solutions. Its data communicationsservices segment, through NetSat, is engaged in providing high-speed,satellite-delivered data communications services. NetSat also providesInternet access to customers who have limited or no access to aterrestrial network infrastructure capable of supporting the economicaldelivery of such services.

The Company's reportablesegments are business units that offer different products and services.The reportable segments are each managed separately because theyprovide distinct products and services.

The following is theCompany's business segment information for the three and sixmonths ended December 31, 2003 and 2002 and as of December 31, 2003 andJune 30, 2003:

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|                                                         |  |                    |         |                  |  |                 |         |                 |  |        |         |         |  |        |         |         |  |  |
|---------------------------------------------------------|--|--------------------|---------|------------------|--|-----------------|---------|-----------------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                    |  | Three Months Ended |         | Six MonthsEnded  |
|                                                    |  | December31,2003    |         | December 31,2002 |  | December31,2003 |         | December31,2002 |
|                                                    |  | (Unaudited)        |
|                                                    |  | (Inthousands)      |
| Revenues:                                               |  |
| Groundsegment systems, networks andenterprisesolutions  |  | $                  | 19,891  |             |  | $               | 11,854  |            |  | $      | 36,922  |    |  | $      | 20,018  |    |
| Datacommunicationsservices                              |  |               | 3,809   |             |  |            | 3,202   |            |  |   | 7,239   |    |  |   | 7,472   |    |
| Totalrevenues                                           |  | $                  | 23,700  |             |  | $               | 15,056  |            |  | $      | 44,161  |    |  | $      | 27,490  |    |
| Lossfrom operations:                                    |  |
| Ground segment systems,networks andenterprisesolutions  |  | $                  | (676    | )           |  | $               | (2,034  | )          |  | $      | (1,737  | )  |  | $      | (4,677  | )  |
| Datacommunicationsservices                              |  |               | (146    | )           |  |            | (2,374  | )          |  |   | 365     |    |  |   | (5,134  | )  |
| Interestincome                                          |  |               | 66      |             |  |            | 116     |            |  |   | 128     |    |  |   | 286     |    |
| Interestexpense                                         |  |               | — |             |  |            | (230    | )          |  |   | — |    |  |   | (463    | )  |
| Gainon sale of available-for-salesecurities             |  |               | 91      |             |  |            | — |            |  |   | 91      |    |  |   | — |    |
| Intercompanyeliminations                                |  |               | 4       |             |  |            | 3       |            |  |   | 8       |    |  |   | 6       |    |
| Netloss                                                 |  | $                  | (661    | )           |  | $               | (4,519  | )          |  | $      | (1,145  | )  |  | $      | (9,982  | )  |
| Depreciationand amortization:                           |  |
| Ground segment systems,networks and enterprisesolutions |  | $                  | 377     |             |  | $               | 511     |            |  | $      | 754     |    |  | $      | 1,022   |    |
| Datacommunicationsservices                              |  |               | 434     |             |  |            | 584     |            |  |   | 860     |    |  |   | 1,168   |    |
| Intercompanyeliminations                                |  |               | (4      | )           |  |            | (3      | )          |  |   | (8      | )  |  |   | (6      | )  |
| Totaldepreciation andamortization                       |  | $                  | 807     |             |  | $               | 1,092   |            |  | $      | 1,606   |    |  | $      | 2,184   |    |
| Expendituresfor long-lived assets:                      |  |
| Ground segmentsystems, networks andenterprisesolutions  |  | $                  | 90      |             |  | $               | 25      |            |  | $      | 132     |    |  | $      | 71      |    |
| Datacommunicationsservices                              |  |               | 370     |             |  |            | 454     |            |  |   | 400     |    |  |   | 504     |    |
| Intercompanyeliminations                                |  |               | (25     | )           |  |            | (39     | )          |  |   | (25     | )  |  |   | (39     | )  |
| Totalexpenditures for long-livedassets                  |  | $                  | 435     |             |  | $               | 440     |            |  | $      | 507     |    |  | $      | 536     |    |
|                                                         |

|                                                         |  |                  |         |              |  |        |         |         |  |  |
|---------------------------------------------------------|--|------------------|---------|--------------|--|--------|---------|---------|--|--|
|                                                    |  | December31, 2003 |         | June 30,2003 |
|                                                    |  | (Unaudited)      |         |         |
|                                                    |  | (Inthousands)    |
| Assets:                                                 |  |
| Ground segmentsystems, networks and enterprisesolutions |  | $                | 118,490 |         |  | $      | 118,180 |    |
| Datacommunicationsservices                              |  |             | 10,933  |         |  |   | 10,405  |    |
| Intercompanyeliminations                                |  |             | (60,487 | )       |  |   | (58,241 | )  |
| Totalassets                                             |  | $                | 68,936  |         |  | $      | 70,344  |    |
|                                                         |

Item2.    Management's Discussion and Analysis of FinancialCondition and Results of Operations.

You should read thefollowing discussion of our financial condition and results ofoperations with the consolidated financial statements and related notesincluded elsewhere in this Quarterly Report on Form 10-Q. Thisdiscussion contains, in addition to historical information,forward-looking statements, within the meaning of the PrivateSecurities Litigation Reform Act of 1995, based on our currentexpectations, assumptions, estimates and projections. Theseforward-looking statements involve risks and uncertainties. Our actualresults could differ materially from those anticipated in theseforward-looking statements as 

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a result of certain factors, such as, amongothers, uncertain demand for our services and products due to economicand industry-specific conditions, the risks associated with operatingin international markets and our dependence on a limited number ofcontracts for a high percentage of our revenues. These risks and othersare more fully described in the "RiskFactors" section of this Quarterly Report and in our otherfilings with the Securities and Exchange Commission, including ourAnnual Report on Form 10-K and Quarterly Reports on Form 10-Q. Weundertake no obligation to update publicly any forward-lookingstatements for any reason, even if new information becomes available orother events occur in the future.

Overview

Since ourinception, a majority of our revenues have been generated by our groundsegment systems, networks and enterprise solutions business. Contractsfor the ground segment systems, networks and enterprise solutions anddata communications services have been fixed-price contracts in amajority of cases. Profitability of such contracts is subject toinherent uncertainties as to the cost of performance. In addition topossible errors or omissions in making initial estimates, cost overrunsmay be incurred as a result of unforeseen obstacles, including bothphysical conditions and unexpected problems encountered in engineeringdesign and testing. Since our business is frequently concentrated in alimited number of large contracts, a significant cost overrun on anycontract could have a material adverse effect on our business,financial condition and results of operations.

Contract costsgenerally include purchased material, direct labor, overhead and otherdirect costs. Anticipated contract losses are recognized in the periodidentified. Costs from ground segment systems, networks and enterprisesolutions consist primarily of the costs of purchased materials(including shipping and handling costs), direct labor and relatedoverhead expenses, project-related travel and living costs andsubcontractor salaries. Costs from data communications services consistprimarily of satellite space segment charges, Internet connectivityfees and network operations expenses. Satellite space segment chargesconsist of the costs associated with obtaining satellite bandwidth (themeasure of capacity) used in the transmission of services to and fromthe satellite leased from operators. Network operations expensesconsist primarily of costs associated with the operation of the networkoperations center on a twenty-four hour a day, seven-day a week basis,including personnel and related costs and depreciation. Selling andmarketing expenses consist primarily of salaries, travel and livingcosts for sales and marketing personnel. Research and developmentexpenses consist primarily of salaries and related overhead expenses.General and administrative expenses consist of expenses associated withour management, finance, contract and administrative functions.

Our business has been adversely affected by the recent globaleconomic slowdown and, in particular, the significant challenges facingthe telecommunications industry worldwide. These challenges includeexcess bandwidth resulting from weak consumer and business demand,which had fallen far short of expectations, and the attendant financialdistress facing both traditional telecommunication carriers and the newgeneration of competitive local exchange carriers. Moreover, as aresult of the uncertainties facing the economy, corporations restrictedtheir capital expenditures. The reduction in demand was accompanied bypricing pressures and intensifying competition, while the financialdifficulties of industry participants and customers have created risksassociated with collectibility of accounts receivable. Recently we haveseen improvement in the segments we serve, however, some of the adverseconsequences of the downturn continue to impact pricing and competitionand we may experience a decline in bookings of contract orders ifcustomers and prospects delay projects, which will negatively impactour business and prospects in the future.

Critical AccountingPolicies

Certain of our accounting policies require judgment bymanagement in selecting the appropriate assumptions for calculatingfinancial estimates. By their nature, these judgments are subject to aninherent degree of uncertainty. These judgments are based on ourhistorical experience, terms of existing contracts, our observance oftrends in the industry, information provided by our customers, andinformation available from other outside sources, as appropriate.Actual results may differ from these judgments under differentassumptions or conditions. Our accounting policies that requiremanagement to apply significant judgment include:

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    Revenue Recognition

We recognize revenue in accordance with SAB 104, RevenueRecognition, for our production-type contracts that are sold separatelyas standard satellite ground segment systems when persuasive evidenceof an arrangement exists, the selling price is fixed or determinable,collectibility is reasonably assured, delivery has occurred and thecontractual performance specifications have been met. Our standardsatellite ground segment systems produced in connection with thesecontracts are typically short-term (less than twelve months in term)and manufactured using a standard modular production process. Suchsystems require less engineering, drafting and design efforts than ourlong-term complex production-type projects. Revenue is recognized onour standard satellite ground segment systems upon shipment andacceptance of factory performance testing which is when title transfersto the customer. The amount of revenues recorded on each standardproduction-type contract is reduced by the customer's contractualholdback amount, which typically requires 10% to 30% ofthe contract value to be retained by the customer until installationand final acceptance is complete. The customer generally becomesobligated to pay 70% to 90% of the contract value uponshipment and acceptance of factory performance testing. Installation isnot deemed to be essential to the functionality of the system sinceinstallation does not require significant changes to the features orcapabilities of the equipment, does not require complex softwareintegration and interfacing and we have not experienced anydifficulties installing such equipment. In addition, the customer orother third party vendors can install the equipment. The estimatedrelative fair value of the installation services is determined bymanagement, which is typically less than the customer'scontractual holdback percentage. If the holdback is less than the fairvalue of installation, we will defer recognition of revenues,determined on a contract-by-contract basis equal to the fair value ofthe installation services. Payments received in advance by customersare deferred until shipment and are presented as deferred revenues.

We recognize revenue using the percentage-of-completion method ofaccounting upon the achievement of certain contractual milestones inaccordance with SOP 81-1, Accounting for Performance ofConstruction-Type and Certain Production-Type Contracts, for ournon-standard, complex production-type contracts for the production ofsatellite ground segment systems and equipment that are generallyintegrated into the customers' satellite ground segment network.The equipment and systems produced in connection with these contractsare typically long-term (in excess of twelve months in term) andrequire significant customer-specific engineering, drafting and designeffort in order to effectively integrate all of the customizable earthstation equipment into the customers' ground segment network.These contracts generally have larger contract values, greater economicrisks and substantive specific contractual performance requirements dueto the engineering and design complexity of such systems and relatedequipment. Progress payments received in advance by customers arenetted against the inventories balance.

Revenues from datacommunications services are derived primarily from Internet accessservice fees. Service revenues from Internet access are recognizedratably over the period in which services are provided. Paymentsreceived in advance of providing Internet access services are deferreduntil the period such services are provided and are presented asdeferred revenues.

    Costs from Ground Segment Systems,Networks and Enterprise Solutions

Costs related to ourproduction-type contracts and our non-standard, complex production-typecontracts rely on estimates based on total expected contract costs. Weuse reasonable, dependable estimates of the costs applicable to variouselements. Since these contract costs depend on estimates, which areassessed continually during the term of these contracts, costs aresubject to revisions as the contract progresses to completion. Revisionin cost estimates are reflected in the period in which they becomeknown. In the event an estimate indicates that a loss will be incurredat completion, we record the costs in the period identified.

    Goodwill

Goodwill represents the excess ofthe purchase price over the fair value of the net assets acquiredprimarily from the buyback of the minority interests of NetSat.Beginning in the fiscal year ended 

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June  30,  2002 with our adoptionof SFAS No. 142, Goodwill and Other Intangible Assets, goodwill andother indefinite life intangible assets are no longer being amortized,but instead tested for impairment at least annually.

Inassessing goodwill, we must make assumptions regarding the estimatedfuture cash flows and other factors to determine the fair value of ourreporting units. Future events could cause us to conclude thatimpairment indicators exist and that the goodwill associated withNetSat is impaired. Any resulting impairment could have a materialadverse effect on our financial condition and results ofoperations.

    Allowances for DoubtfulAccounts

We maintain allowances for doubtful accounts forestimated losses resulting from the inability of our customers to makerequired payments. We assess the customer's ability to pay basedon a number of factors, including our past transaction history with thecustomer and the credit worthiness of the customer. An assessment ofthe inherent risks in conducting our business with foreign customers isalso made since a significant portion of our revenues is international.Management specifically analyzes accounts receivable, historical baddebts, customer concentrations, customer credit-worthiness and currenteconomic trends. If the financial condition of our customers were todeteriorate in the future, resulting in an impairment of their abilityto make payments, additional allowances may be required.

    Inventories

Inventories consist primarily ofwork-in-progress from costs incurred in connection with specificcustomer contracts, which are stated at the lower of cost or marketvalue. In assessing the realizability of inventories, we are requiredto make estimates of the total contract costs based on the variouselements of the work-in-progress. It is possible that changes to theseestimates could cause a reduction in the net realizable value of ourinventories.

    Stock-Based Compensation

Wecurrently measure compensation expense for stock option grants usingthe intrinsic value method prescribed in APBO No. 25, Accounting forStock Issued to Employees. Under this method, we do not recordcompensation expense when stock options are granted as long as theexercise price is not less than the fair market value of the stock whenthe option is granted. In accordance with SFAS No. 123, Accounting forStock-Based Compensation, and SFAS No. 148, Accounting for Stock-BasedCompensation - Transition and Disclosure, we disclose our pro-forma netloss and pro-forma net loss per common share as if the fair value-basedmethod had been applied in measuring compensation expense for our stockoption grants.

Results of Operations

Three and SixMonths Ended December 31, 2003 and 2002

Revenues from GroundSegment Systems, Networks and Enterprise Solutions. Revenuesincreased by $8.0 million, or 67.8%, to $19.9 million for thethree months ended December 31, 2003 and increased by $16.9 million, or84.4%, to $36.9 million for the six months ended December 31,2003, compared to $11.9 million and $20.0 million for the three and sixmonths ended December 31, 2002, respectively. The increase in revenueswas primarily the result of increased sales activity due to animproving operating environment in the telecommunications industrysegments we serve and the achievement of shipment milestones associatedwith projects currently in progress.

Revenues from DataCommunications Services. Revenues increased by $0.6 million, or18.9%, to $3.8 million for the three months ended December 31,2003 and decreased by $0.2 million, or 3.1%, to $7.2 million forthe six months ended December 31, 2003, compared to $3.2 million and$7.5 million for the three and six months ended December 31, 2002,respectively. The increase over the three-month period was primarilydue to revenues generated from new contracts booked in fiscal 2004, aswell as increased upgrades in service from certain existing customers.The decrease over the six-month period was due to agreements made withtwo of our vendors in February 2003 and October 2002 in which weassigned contracts, which reduced our quarterly recurring revenues byapproximately $1.2 million, partially offset by new contracts andupgrades in service from certain existing customers.

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Costs from Ground Segment Systems,Networks and Enterprise Solutions. Costs from ground segmentsystems, networks and enterprise solutions increased by $7.0 million,or 65.0%, to $17.8 million for the three months ended December31, 2003 and increased by $14.6 million, or 79.1% to $33.1million for the six months ended December 31, 2003, compared to $10.8million and $18.5 million for the three and six months ended December31, 2002, respectively. The increase was attributable to a higherrevenue base. Costs as a percentage of related revenues decreased to89.5% and 89.7% for the three and six months endedDecember 31, 2003, respectively, compared to 91.0% and92.3% for the three and six months ended December 31, 2002,respectively. The decrease was mainly attributable to the cost overrunsincurred on a major project during the three and six months endedDecember 31, 2002.

Costs from Data Communications Services.Costs from data communications services decreased by $1.2 million,or 27.4%, to $3.3 million for the three months ended December31, 2003 and decreased by $4.3 million, or 39.9%, to $6.5million for the six months ended December 31, 2003, compared to $4.5million and $10.8 million for the three and six months ended December31, 2002, respectively. Costs as a percentage of related revenuesdecreased to 85.5% and 89.4% for the three and six monthsended December 31, 2003, respectively, compared to 140.0% and144.2% for the three and six months ended December 31, 2002,respectively. These decreases were due to agreements reached with twoof our vendors during February 2003 and October 2002, in which wesignificantly reduced our space segment transponder costs.

Selling and Marketing. Selling and marketing expensesdecreased by $0.5 million, or 30.3%, to $1.1 million for thethree months ended December 31, 2003 and decreased by $1.0 million, or31.0% to $2.2 million for the six months ended December 31,2003, compared to $1.6 million and $3.2 million for the three and sixmonths ended December 31, 2002, respectively. The decrease wasprincipally due to a reduction in salary and salary related expensesassociated with reductions in sales and marketing personnel as part ofour cost cutting initiatives.

Research and Development.Research and development expenses increased by $0.1 million, or50.3%, to $0.2 million for the three months ended December 31,2003 and increased by $0.3 million, or 68.5%, to $0.7 millionfor the six months ended December 31, 2003, compared to $0.2 millionand $0.4 million for the three and six months ended December 31, 2002,respectively. The increase was due to product research and developmentinitiatives associated with projects currently in progress, researchefforts in remote video monitoring systems and internal development ofnew monitoring and control technologies.

General andAdministrative. General and administrative expenses decreased by$0.3 million, or 13.0%, to $2.1 million for the three monthsended December 31, 2003 and decreased by $1.4 million, or 31.5%,to $3.0 million for the six months ended December 31, 2003, compared to$2.4 million and $4.4 million for the three and six months endedDecember 31, 2002, respectively. The decrease in general andadministrative expenses for the three-month period was primarily due toreductions in legal expenses. The decrease in general andadministrative expenses for the six-month period ended December 31,2003 was primarily due to the recovery of $1.0 million in August 2003,from a former customer in the Middle East, against which we previouslyestablished an allowance for uncollectible accounts receivable duringthe fourth quarter of fiscal year ended June 30, 2002.

Interest Income. Interest income decreased by $0.1 million,or 43.1%, to $0.1 million for the three months ended December31, 2003 and decreased by $0.2 million, or 55.2%, to $0.1million for the six months ended December 31, 2003 compared to $0.1million and $0.3 million for the three and six months ended December31, 2002, respectively. The decrease was primarily the result of adecrease in cash and cash equivalents due to cash used in ouroperations during the twelve months ended December 31, 2003.

Interest Expense. Interest expense decreased to zero forthe three and six months endedDecember 31, 2003 compared to $0.2million and $0.5 million for the three months and six months endedDecember 31, 2002, respectively. The decrease was due to thetermination of our capital lease obligation in February 2003.

Gain on Sale of Available-For-Sale Securities. The gain onsale of available-for-sale securities of $0.1 million for the three andsix months ended December 31, 2003 related to the sale of an investmentthat resulted in proceeds of $0.4 million during the three months endedDecember 31, 2003.

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Liquidity and Capital Resources

At December 31, 2003, we had working capital of $22.4 million,including cash and cash equivalents of $21.8 million, restricted cashof $1.1 million, net accounts receivable of $11.8 million, inventoriesof $6.8 million, prepaid expenses and other current assets of $2.1million and deferred income taxes of $0.1 million offset by $14.8million in accounts payable, $2.7 million in deferred revenues and $3.8million in accrued expenses and other current liabilities.

OnDecember 31, 2003, we completed a private placement transaction inwhich we issued 1,500,000 shares of our common stock and warrants topurchase up to 750,000 shares of our common stock. We received the netproceeds of $6.3 million in January 2004 pursuant to this transactionwhich will be used for working capital and general corporate purposes,as well as for strategic purposes such as selected acquisitions thatmay be considered in the future to expand our product and serviceofferings.

Net cash provided by operating activities during thesix months ended December 31, 2003 was $0.2 million, which primarilyrelated to a decrease in inventory of $4.3 million from shipments madeassociated with the increase in business levels, an increase inaccounts payable of $4.0 million based on the timing of payments tocertain vendors and depreciation and amortization expense of $1.6million primarily related to the network operations center andsatellite earth station equipment, offset by a decrease in deferredrevenue of $5.0 million associated with the achievement of milestonerevenues relating to the increase in business levels, an increase inaccounts receivable of $3.9 million based on significant billings inDecember 2003 and a decrease in the provision for doubtful accounts dueto the recovery of $1.0 million from a former Middle East customer..

Net cash used in investing activities during the six monthsended December 31, 2003 was $0.3 million, which primarily related tothe purchase of $0.5 million of fixed assets for our network operationscenter and an increase in restricted cash of $0.5 million based on acertificate of deposit issued as collateral for a specific project,offset by proceeds received of $0.4 million from the sale ofavailable-for-sale securities and a repayment of a $0.3 millionpromissory note from a related party.

Net cash used in financingactivities during the six months ended December 31, 2003 was $0.1million, which primarily related to the purchase of $0.3 million oftreasury stock, offset by $0.2 million for proceeds received from theexercise of stock options and sale of common stock in connection withthe employee stock purchase plan.

In September 2003, we enteredinto a new one-year credit agreement with our existing bank, whichprovides for a working capital credit facility of up to $7.5 millionconsisting of a $3.75 million secured domestic line of credit and a$3.75 million Export-Import Bank secured guaranteed line of credit. Wewill be advanced up to 80% of eligible domestic accountsreceivable and 90% of eligible foreign accounts receivable undereach respective line of credit, as defined in the agreement. Each lineof credit bears interest at the greater of 6.0% or the primerate plus 2.0% per annum, and is collateralized by a firstsecurity interest on all of our personal property. The credit agreementallows us to borrow and apply letters of credit against theavailability under each line of credit. In addition, the new creditagreement contains certain financial and other covenants, depositrequirements, monthly reporting provisions and other requirements, asdefined in the credit agreement, with which we were in compliance withat December 31, 2003. As of December 31, 2003, no amounts wereoutstanding under this credit facility, however, there were standbyletters of credit of approximately $7.3 million, which were appliedagainst and reduced the amounts available under this creditfacility.

We lease satellite space segment services and otherequipment under various operating lease agreements, which expire invarious years through 2008. Future minimum lease payments due on theseleases through December 31, 2004 are approximately $7.1million.

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At December 31, 2003 we had contractualobligations and commercial commitments as follows (in thousands):

|                                 |  |                       |        |                |  |           |       |           |  |             |        |        |  |   |         |        |  |   |         |        |  |  |
|---------------------------------|--|-----------------------|--------|----------------|--|-----------|-------|-----------|--|-------------|--------|--------|--|---|---------|--------|--|---|---------|--------|--|--|
|                            |  | Payments Due byPeriod |
|                            |  | Total                 |        | Lessthan 1year |  | 1-3 years |       | 4-5 years |  | After5years |
| **ContractualObligations**      |  |
| Operatingleases                 |  | $                     | 27,848 |           |  | $         | 7,078 |      |  | $           | 14,746 |   |  | $ | 6,024   |   |  | $ | — |   |
| Total contractualobligations    |  | $                     | 27,848 |           |  | $         | 7,078 |      |  | $           | 14,746 |   |  | $ | 6,024   |   |  | $ | — |   |
| **Other CommercialCommitments** |  |
| Standby letters ofcredit        |  | $                     | 7,252  |           |  | $         | 3,161 |      |  | $           | 4,091  |   |  | $ | — |   |  | $ | — |   |
| Total commercialcommitments     |  | $                     | 7,252  |           |  | $         | 3,161 |      |  | $           | 4,091  |   |  | $ | — |   |  | $ | — |   |
|                                 |

The aboveoperating lease obligations include two contracts we entered into witha vendor in fiscal 2001 for satellite space segment services onsatellites which were scheduled to be launched in late 2002 andoperational by March 2003, for a total value of approximately $6.0million. Such satellite space segment services are scheduled to beginwhen the satellite transponders are commercially operational, asdefined in the agreements. During fiscal 2003, we learned that thevendor has experienced significant delays in the planned launch andoperational dates for the satellites. As a result of these delays, wemaintain that we have a right to terminate the contracts without costand have provided notification of such termination. The vendor hasdenied our assertion that we have a right to terminate the contractswithout cost. If our position were sustained, total operating leasecommitments would be reduced by approximately $6.0 million.

OnNovember 7, 2001, our Board of Directors authorized a stock repurchaseprogram whereby we can repurchase up to $2.0 million of our outstandingstock, representing approximately 3.7% of the total sharesoutstanding on that date. On November 12, 2003, we repurchased 61,506shares at a fair market price of $5.41 per share from an officer of ourCompany. Since November 2001, we have repurchased, an aggregate of317,606 shares for approximately $1.7 million. The timing, price,quantity and manner of future purchases will be at the discretion ofmanagement, depending on market conditions and other factors, subjectto compliance with the applicable securities laws.

We expectthat our cash and working capital requirements for operating activitieswill increase as we continue to implement our business strategy.Management anticipates additional working capital requirements for workin progress for orders obtained and that we will experience negativecash flows due to continued operating losses. Our expectation is thatthe working capital requirements will ease as shipments are made on neworders, although we cannot assure you as to the timing and amount ofnew orders.

NetSat has had, and we expect it will continue tohave, working capital requirements, which have, and will, put pressureon our capital resources. We have implemented strategies to reduce thedrain on our resources caused by NetSat's losses. We can onlyachieve our goal of improving NetSat's working capital byimproving operating performance. We cannot assure you that we willsuccessfully improve NetSat's operating performance.

Ourfuture capital requirements will depend upon many factors, includingthe success of our marketing efforts in the ground segment systems,networks, and data communications services business, the nature andtiming of customer orders and the extent to which we must conductresearch and development efforts internally. Based on current plans, webelieve that our existing capital resources will be sufficient to meetworking capital requirements for at least the next 12 months. However,we cannot assure you that there will be no unforeseen events orcircumstances that would consume available resources significantlybefore that time. For example, future events occurring in response tothe war with Iraq, or in connection with any other war, including,without limitation, future terrorist attacks against the United Statesor its allies or military or trade or travel disruptions impacting ourability to sell and market our products and services in the UnitedStates and internationally may impact our results of operations.

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Unexpected events negatively impactinginternational commerce, including additional conflicts in the MiddleEast, could defer our ability to close contracts with internationalcustomers. Additional funds may not be available when needed and, evenif available, additional funds may be raised through financingarrangements and/or the issuance of preferred or common stock orconvertible securities on terms and prices significantly more favorablethan those of the currently outstanding common stock, which could havethe effect of diluting or adversely affecting the holdings or rights ofour existing stockholders. If adequate funds are unavailable, we may berequired to delay, scale back or eliminate some of our operatingactivities, including, without limitation, the timing and extent of ourmarketing programs and research and development activities and furtherreductions in headcount. We cannot assure you that additional financingwill be available to us on acceptable terms, or at all.

RiskFactors

We have a history of operating losses and negativecash flow and expect our losses to continue.

We have incurredsignificant net losses since we began operating in August 1994. Weincurred net losses of $1.1 million during the six months endedDecember 31, 2003, $19.6 million during the fiscal year ended June 30,2003 and $17.3 million during the fiscal year ended June 30, 2002. Asof December 31, 2003, our accumulated deficit was $75.0 million. Weanticipate that we will continue to incur net losses, although weexpect them to be less in the fiscal year ending June 30, 2004 thanthose we incurred in the fiscal year ended June 30, 2003. Our abilityto achieve and maintain profitability will depend upon our ability togenerate significant revenues through new profitable customer contractsand the expansion of our existing products and services, including ourdata communications services. We cannot assure you that we will be ableto obtain new profitable customer contracts or generate significantadditional revenues from those contracts or any new products orservices that we introduce. Even if we become profitable, we may notsustain or increase our profits on a quarterly or annual basis in thefuture.

Since sales of satellite communications equipment aredependent on the growth of communications networks, as market demandfor these networks declines, our revenues and profitability are likelyto decline.

We derive, and expect to continue to derive, asignificant amount of revenues from the sale of satellite groundsegment systems and networks. If the long-term growth in demand forcommunications networks does not return from its depressed level, thedemand for our satellite ground segment systems and networks maydecline or grow more slowly than we expect. As a result, we may not beable to grow our business, our revenues may decline from current levelsand our results of operations may be harmed. The demand forcommunications networks and the products used in these networks isaffected by various factors, many of which are beyond our control. Forexample, the uncertain general economic conditions have affected theoverall rate of capital spending by our customers. Also, many companieshave found it difficult to raise capital to finish building theircommunications networks and, therefore, have placed fewer orders withour customers. The economic slowdown resulted in a softening of demandfrom our customers. We cannot predict the extent to which demand willincrease. Further, increased competition among satellite ground segmentsystems and networks manufacturers has increased pricing pressures.

Risks associated with operating in international markets couldrestrict our ability to expand globally and harm our business andprospects.

We market and sell our products and services in theUnited States and internationally. We anticipate that internationalsales will continue to account for a significant portion of our totalrevenues for the foreseeable future with a significant portion of theinternational revenue coming from developing countries. We presentlyconduct our international sales in the following geographic areas:Africa, the Asia-Pacific Region, Australia, Central and South America,Eastern and Central Europe and the Middle East. There are a number ofrisks inherent in conducting our business internationally,including:

|              |                                                                                                                                                                                                             |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | general political andeconomic instability in international markets, including the war inIraq, could impede our ability to deliver our products and services tocustomers and harm our results of operations; |

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|              |                                                                                                                 |
|--------------|-----------------------------------------------------------------------------------------------------------------|
| •  | changesin regulatory requirements could restrict our ability to deliverservices to our international customers; |

|              |                                                                                                                                  |
|--------------|----------------------------------------------------------------------------------------------------------------------------------|
| •  | export restrictions, tariffs,licenses and other trade barriers could prevent us from adequatelyequipping our network facilities; |

|              |                                                                                                                                           |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------|
| •  | differing technology standardsacross countries may impede our ability to integrate our products andservices across international borders; |

|              |                                                                                                                                                                                                               |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | protectionist laws and businesspractices favoring local competition may give unequal bargainingleverage to key vendors in countries where competition is scarce,significantly increasing our operating costs; |

|              |                                                                                                               |
|--------------|---------------------------------------------------------------------------------------------------------------|
| •  | increased expenses associated withmarketing services in foreign countries could effect our ability tocompete; |

|              |                                                                                                                                              |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------|
| •  | relying on localsubcontractors for installation of our products and services couldadversely impact the quality of our products and services; |

|              |                                                                                              |
|--------------|----------------------------------------------------------------------------------------------|
| •  | difficulties in staffing andmanaging foreign operations could effect our ability to compete; |

|              |                                                                            |
|--------------|----------------------------------------------------------------------------|
| •  | potentially adverse taxes couldadversely affect our results of operations; |

|              |                                                                           |
|--------------|---------------------------------------------------------------------------|
| •  | complex foreign laws and treatiescould affect our ability to compete; and |

|              |                                                                                                 |
|--------------|-------------------------------------------------------------------------------------------------|
| •  | difficulties in collecting accountsreceivable could adversely affect our results of operations. |

These and other risks could impede our ability to manage ourinternational operations effectively, limit the future growth of ourbusiness, increase our costs and require significant managementattention. 

If NetSat does not execute its business strategy orif the market for its services fails to develop or develops more slowlythan it expects, our results of operations will be harmed.

NetSat's future revenues and results of operations aredependent on its execution of its business strategy and development ofthe market for its current and future services. Despite the settlementagreements, which modified and reduced our satellite bandwidthobligations, we cannot assure you that the transponder space will beefficiently and substantially utilized or that an increase in orderswill be realized. NetSat has had, and we expect will continue to have,cash requirements, which have and will decrease our cash resources. IfNetSat does not efficiently and substantially utilize its transponderspace capacity and increase its level of orders, its cash requirementsmay increase and our results of operations will be harmed.

Youshould not rely on our quarterly operating results as an indication ofour future results because they are subject to significantfluctuations, and if we fail to meet the expectations of public marketanalysts or investors, our stock price could declinesignificantly.

Our future revenues and results of operationsmay significantly fluctuate due to a combination of factors,including:

|              |                                                          |
|--------------|----------------------------------------------------------|
| •  | delays and/or adecrease in the booking of new contracts; |

|              |                                                                                                     |
|--------------|-----------------------------------------------------------------------------------------------------|
| •  | general political and economicconditions in the United States and abroad, including the war inIraq; |

|              |                                                                       |
|--------------|-----------------------------------------------------------------------|
| •  | the length of time neededto initiate and complete customer contracts; |

|              |                                                                     |
|--------------|---------------------------------------------------------------------|
| •  | the demand for and acceptance of ourexisting products and services; |

|              |                                                 |
|--------------|-------------------------------------------------|
| •  | the cost of providing our productsand services; |

|              |                                                |
|--------------|------------------------------------------------|
| •  | market acceptanceof new products and services; |

|              |                                                                                                        |
|--------------|--------------------------------------------------------------------------------------------------------|
| •  | the mix of revenue between ourstandard products, custom-built products and our communicationsservices; |

|              |                                              |
|--------------|----------------------------------------------|
| •  | the timing ofsignificant marketing programs; |

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|              |                                          |
|--------------|------------------------------------------|
| •  | ourability to hire and retain personnel; |

|              |                                    |
|--------------|------------------------------------|
| •  | the competition in our markets;and |

|              |                                                                                   |
|--------------|-----------------------------------------------------------------------------------|
| •  | difficult global economicconditions and uncertain international currency markets. |

Accordingly, you should not rely on quarter-to-quarter comparisonsof our results of operations as an indication of our futureperformance. It is possible that in future periods our results ofoperations may be below expectations, which could cause the tradingprice of our common stock to decline.

Our markets are highlycompetitive and we have many established competitors, and we may losemarket share as a result.

The markets in which we operate arehighly competitive and this competition could harm our ability to sellour products and services on prices and terms favorable to us. Ourprimary competitors in the satellite ground segment and networks marketinclude systems integrators, like IDB Systems, a division of MCI, andequipment manufacturers who also provide integrated systems, likeAndrew Corporation and Tripoint Global.

In the end-to-endsatellite-based communication solutions and communications servicesmarkets, we compete with other satellite communication companies whoprovide similar services, like Verestar. In addition, we may competewith other communications service providers, like MCI, and satelliteowners, like Panamsat, Loral Skynet, New Skies Satellites N.V. andIntelsat. We anticipate that our competitors may develop or acquireservices that provide functionality that is similar to that provided byour services and that those services may be offered at significantlylower prices or bundled with other services. These competitors may havethe financial resources to withstand substantial price competition andmay be in a better position to endure difficult economic conditions ininternational markets, and may be able to respond more quickly than wecan to new or emerging technologies and changes in customerrequirements. Moreover, many of our competitors have more extensivecustomer bases, broader customer relationships and broader industryalliances than we do that they could use to their advantage incompetitive situations.

The markets in which we operate havelimited barriers to entry and we expect that we will face additionalcompetition from existing competitors and new market entrants in thefuture. Moreover, our current and potential competitors haveestablished or may establish strategic relationships among themselvesor with third parties to increase the ability of their products andservices to address the needs of our current and prospective customers.Existing and new competitors with their potential strategicrelationships may rapidly acquire significant market share, which wouldharm our business and financial condition.

If the satellitecommunications industry fails to continue to develop or new technologymakes it obsolete, our business and financial condition will beharmed.

Our business is dependent on the continued success anddevelopment of satellite communications technology, which competes withterrestrial communications transport technologies like terrestrialmicrowave, coaxial cable and fiber optic communications systems. Fiberoptic communications systems have penetrated areas in which we havetraditionally provided services. If the satellite communicationsindustry fails to continue to develop, or any technological developmentsignificantly improves the cost or efficiency of competing terrestrialsystems relative to satellite systems, then our business and financialcondition would be materially harmed.

We may be unable to raiseadditional funds to meet our capital requirements in the future.

We have incurred negative cash flows from operations in each yearsince our inception. We believe that our available cash resources willbe sufficient to meet our working capital and capital expenditurerequirements through at least the next twelve months. However, ourfuture liquidity and capital requirements are difficult to predict, asthey depend on numerous factors, including the success of our existingproduct and service offerings, as well as competing technological andmarket developments. We 

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may need to raise additional funds in orderto meet additional working capital requirements and to supportadditional capital expenditures. Should this need arise, additionalfunds may not be available when needed and, even if additional fundsare available, we may not find the terms favorable or commerciallyreasonable. If adequate funds are unavailable, we may be required todelay, reduce or eliminate some of our operating activities, includingmarketing programs and research and development programs. If we raiseadditional funds by issuing equity securities, our existingstockholders will own a smaller percentage of our capital stock and newinvestors may pay less on average for their securities than, and couldhave rights superior to, existing stockholders.

A limitednumber of customer contracts account for a significant portion of ourrevenues, and the inability to replace a key customer contract wouldadversely affect our results of operations, business and financialcondition.

We rely on a small number of customer contracts fora large portion of our revenue. Specifically, we currently haveagreements with six customers to provide equipment and services, fromwhich we expect to generate a significant portion of our revenues. Ifany of these customers is unable to implement its business plan, themarket for its services declines, or if all or any of the customersmodifies or terminates its agreement with us, and we are unable toreplace these contracts, our results of operations, business andfinancial condition would be materially harmed.

If our productsand services are not accepted in developing countries with emergingmarkets, our revenues will be impaired.

We anticipate that asubstantial portion of the growth in the demand for our products andservices will come from customers in developing countries due to a lackof basic communications infrastructure in these countries. However, wecannot guarantee an increase in the demand for our products andservices in developing countries or that customers in these countrieswill accept our products and services at all. Our ability to penetrateemerging markets in developing countries is dependent upon variousfactors including:

|              |                                                                                                                                                                                              |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | the speed atwhich communications infrastructure, including terrestrial microwave,coaxial cable and fiber optic communications systems, which competewith satellite-based services, is built; |

|              |                                                                                                                          |
|--------------|--------------------------------------------------------------------------------------------------------------------------|
| •  | the effectiveness of our localresellers and sales representatives in marketing and selling ourproducts and services; and |

|              |                                                          |
|--------------|----------------------------------------------------------|
| •  | theacceptance of our products and services by customers. |

|               |                                                                                                                                     |
|---------------|-------------------------------------------------------------------------------------------------------------------------------------|
| •   | If our products and services arenot accepted, or the market potential we anticipate does not develop,our revenues will be impaired. |

We depend upon certain keypersonnel and we may not be able to retain these employees.

Ourfuture performance depends on the continued service of our keytechnical, managerial and marketing personnel; in particular, DavidHershberg, Kenneth Miller, Stephen Yablonski and Donald Woodring. Theemployment of any of our key personnel could cease at any time.

Unauthorized use of our intellectual property by third parties maydamage our business.

We regard our trademarks, trade secretsand other intellectual property as beneficial to our success.Unauthorized use of our intellectual property by third parties maydamage our business. We rely on trademark, trade secret and patentprotection and contracts, including confidentiality and licenseagreements with our employees, customers, strategic collaborators,consultants and others to protect our intellectual property rights.Despite our precautions, it may be possible for third parties to obtainand use our intellectual property without our authorization.

Wecurrently have been granted three patents in the United States, one forremote access to the Internet using satellites, another for satellitecommunication with automatic frequency control, and most 

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recently, we have been granted a patentconcerning a monitor and control system for satellite communicationsnetworks and the like. We have two other patents pending in the UnitedStates, one for implementing facsimile and data communications usingInternet protocols and another for a distributed satellite-basedcellular network. We currently have one Patent Cooperation Treatypatent application pending for implementing facsimile and datacommunications using Internet protocols. We also intend to seek furtherpatents on our technology, if appropriate. We cannot assure you thatpatents will be issued for any of our pending or future patents or thatany claims allowed from such applications will be of sufficient scope,or be issued in all countries where our products and services can besold, to provide meaningful protection or any commercial advantage tous. Also, our competitors may be able to design around our patents. Thelaws of some foreign countries in which our products and services areor may be developed, manufactured or sold may not protect our productsand services or intellectual property rights to the same extent as dothe laws of the United States and thus make the possibility of piracyof our technology and products and services more likely.

We havefiled applications for trademark registration of Globecomm SystemsInc., Globecomm, and GSI in the United States and various othercountries, and have been granted registrations for some of these termsin the United States, Europe and Russia. We have received trademarkregistrations for NetSat in the United States, the European Community,Russia, Singapore and Brazil. We have various other trademarksregistered or pending for registration in the United States and inother countries and may seek registration of other trademarks andservice marks in the future. We cannot assure you that registrationswill be granted from any of our pending or future applications, or thatany registrations that are granted will prevent others from usingsimilar trademarks in connection with related goods and services.

Defending against intellectual property infringement claims couldbe time consuming and expensive, and if we are not successful, couldcause substantial expenses and disrupt our business.

We cannotbe sure that our products, services, technologies, and advertising weemploy in our business do not or will not infringe valid patents,trademarks, copyrights or other intellectual property rights held bythird parties. We may be subject to legal proceedings and claims fromtime to time relating to the intellectual property of others in theordinary course of our business. Prosecuting infringers and defendingagainst intellectual property infringement claims could be timeconsuming and expensive, and regardless of whether we are or are notsuccessful, could cause substantial expenses and disrupt our business.We may incur substantial expenses in defending against these thirdparty claims, regardless of their merit. Successful infringement claimsagainst us may result in substantial monetary liability and/or maymaterially disrupt the conduct of, or necessitate the cessation of, ourbusiness.

We may not be able to keep pace with technologicalchanges, which would make our products and services becomenon-competitive and obsolete.

The telecommunications industry,including satellite-based communications services, is characterized byrapidly changing technologies, frequent new product and serviceintroductions and evolving industry standards. If we are unable, fortechnological or other reasons, to develop and introduce new productsand services or enhancements to existing products and services in atimely manner or in response to changing market conditions or customerrequirements, our products and services would become non-competitiveand obsolete, which would harm our business, results of operations andfinancial condition.

We depend on our suppliers, some of whichare our sole or a limited source of supply, and the loss of thesesuppliers would materially adversely affect our business, results ofoperations and financial condition.

We currently obtain most ofour critical components and services from single or limited sources andgenerally do not maintain significant inventories or have long-term orexclusive supply contracts with our vendors. We have from time to timeexperienced delays in receiving products from vendors due to lack ofavailability, quality control or manufacturing problems, shortages ofmaterials or components or product design difficulties. We mayexperience delays in the future and replacement services or productsmay not be available when needed, or at all, or at commerciallyreasonable rates or prices. If we were to 

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change some of our vendors, we would have toperform additional testing procedures on the service or productsupplied by the new vendors, which would prevent or delay theavailability of our products and services. Furthermore, our costs couldincrease significantly if we need to change vendors. If we do notreceive timely deliveries of quality products and services, or if thereare significant increases in the prices of these products or services,it could have a material adverse effect on our business, results ofoperations and financial condition.

Our network may experiencesecurity breaches, which could disrupt our services.

Ournetwork infrastructure may be vulnerable to computer viruses,break-ins, denial of service attacks and similar disruptive problemscaused by our customers or other Internet users. Computer viruses,break-ins, denial of service attacks or other problems caused by thirdparties could lead to interruptions, delays or cessation in service toour customers. There currently is no existing technology that providesabsolute security, and the cost of minimizing these security breachescould be prohibitively expensive. We may face liability to customersfor such security breaches. Furthermore, these incidents could deterpotential customers and adversely affect existing customerrelationships.

Satellites upon which we rely may be damaged orlost, or malfunction.

The damage, loss or malfunction of any ofthe satellites used by us, or a temporary or permanent malfunction ofany of the satellites upon which we rely, would likely result in theinterruption of our satellite-based communications services. Thisinterruption would have a material adverse effect on our business,results of operations and financial condition.

Risks Related toGovernment Approvals

We are subject to many governmentregulations, and failure to comply with them will harm ourbusiness.

Operations and Use of Satellites

We aresubject to various federal laws and regulations, which may havenegative effects on our business. We operate Federal CommunicationCommission, or FCC, licensed earth stations in Hauppauge, New York,subject to the Communications Act of 1934, as amended, or the FCC Act,and the rules and regulations of FCC. Pursuant to the FCC Act andrules, we have obtained and are required to maintain radio transmissionlicenses from the FCC for both domestic and foreign operations of ourearth stations. We have also obtained and are required to maintainauthorization issued under Section 214 of the FCC Act to act as atelecommunications carrier, which authorization also extends to NetSat.These licenses should be renewed by the FCC in the normal course aslong as we remain in compliance with FCC rules and regulations.However, we cannot guarantee that the FCC will grant additionallicenses when our existing licenses expire, nor are we assured that theFCC will not adopt new or modified technical requirements that willrequire us to incur expenditures to modify or upgrade our equipment asa condition of retaining our licenses. We are also required to complywith FCC regulations regarding the exposure of humans to radiofrequency radiation from our earth stations. These regulations, as wellas local land use regulations, restrict our freedom to choose where tolocate our earth stations. In addition, prior to a third partyacquisition of us, we would need to seek approval from the FCC totransfer the radio transmission licenses we have obtained to the thirdparty upon the consummation of the acquisition. However, we cannotassure you that the FCC will permit the transfer of these licenses.These approvals may make it more difficult for a third party to acquireus.

Foreign Ownership

We may, in the future, berequired to seek FCC approval if foreign ownership of our stock exceedsspecified criteria. Failure to comply with these policies could resultin an order to divest the offending foreign ownership, fines, denial oflicense renewal and/or license revocation proceedings against thelicensee by the FCC.

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Foreign Regulations

Regulatoryschemes in countries in which we may seek to provide oursatellite-delivered data communications services may impose impedimentson our operations. Some countries in which we intend to operate havetelecommunications laws and regulations that do not currentlycontemplate technical advances in telecommunications technology likeInternet/intranet transmission by satellite. We cannot assure you thatthe present regulatory environment in any of those countries will notbe changed in a manner, which may have a material adverse impact on ourbusiness. Either we or our local partners typically must obtainauthorization for each country in which we provide oursatellite-delivered data communications services. The regulatoryschemes in each country are different, and thus there may be instancesof noncompliance of which we are not aware. We cannot assure you thatour licenses and approvals are or will remain sufficient in the view offoreign regulatory authorities, or that necessary licenses andapprovals will be granted on a timely basis in all jurisdictions inwhich we wish to offer our products and services or that restrictionsapplicable thereto will not be unduly burdensome.

Regulation ofthe Internet

Due to the increasing popularity and use of theInternet, it is possible that a number of laws and regulations may beadopted at the local, national or international levels with respect tothe Internet, covering issues including user privacy and expression,pricing of products and services, taxation, advertising, intellectualproperty rights, information security or the convergence of traditionalcommunication services with Internet communications. It is anticipatedthat a substantial portion of our Internet operations will be carriedout in countries that may impose greater regulation of the content ofinformation coming into the country than that which is generallyapplicable in the United States; for example, privacy regulations in 35countries in Europe and content restrictions in countries such as thePeople's Republic of China. To the extent that we provide contentas a part of our Internet services, it will be subject to lawsregulating content. Moreover, the adoption of laws or regulations maydecrease the growth of the Internet, which could in turn decrease thedemand for our Internet services or increase our cost of doing businessor in some other manner have a material adverse effect on our business,operating results and financial condition. In addition, theapplicability of existing laws governing issues including propertyownership, copyrights and other intellectual property issues, taxation,libel, court jurisdiction and personal privacy to the Internet isuncertain. The vast majority of these laws was adopted prior to theadvent of the Internet and related technologies and, as a result, donot contemplate or address the unique issues of the Internet andrelated technologies. Changes to these laws intended to address theseissues, including some recently proposed changes, could createuncertainty in the marketplace which could reduce demand for ourproducts and services, could increase our cost of doing business as aresult of costs of litigation or increased product development costs,or could in some other manner have a material adverse effect on ourbusiness, financial condition and results of operations. For example, aUnited States federal law banning states from imposing sales tax oncertain Internet access charges expired on October 31, 2003 and, ifCongress does not implement new legislation reinstating the sales taxban, states may impose sales taxes on Internet access charges, whichcould adversely affect our results of operations.

Telecommunications Taxation, Support Requirements, and AccessCharges

All telecommunications carriers providing domesticservices in the United States are required to contribute a portion oftheir gross revenues for the support of universal telecommunicationsservices; and some telecommunications services are subject to specialtaxation and to contribution requirements to support services tospecial groups, like persons with disabilities. Our services may besubject to new or increased taxes and contribution requirements thatcould affect our profitability, particularly if we are not able to passthem through to customers for either competitive or regulatoryreasons.

Internet services are currently exempt from chargesthat long distance telephone companies pay for access to the networksof local telephone companies in the United States. Efforts have beenmade from time to time, and may be made again in the future, toeliminate this exemption. If these access charges are imposed ontelephone lines used to reach Internet service providers and/or if flatrate telephone services for Internet access are eliminated orcurtailed, the cost to customers who access our satellite 

25

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facilities using telephone company-providedfacilities could increase to an extent that could discourage the demandfor our services. Likewise, the demand for our services in othercountries may be affected by the availability and cost of localtelephone or other telecommunications facilities to reach ourfacilities. 

Export of Telecommunications Equipment

Thesale of our ground segment systems, networks, and communicationsservices outside the United States is subject to compliance with theregulations of the United States Export Administration Regulations. Theabsence of comparable restrictions on competitors in other countriesmay adversely affect our competitive position. In addition, in order toship our products into other countries, the products must satisfy thetechnical requirements of that particular country. If we were unable tocomply with such requirements with respect to a significant quantity ofour products, our sales in those countries could be restricted, whichcould have a material adverse effect on our business, results ofoperations and financial condition.

Risks Related to theSecurities Markets and Ownership of Our Common Stock

Our stockprice is highly volatile.

In calendar year 2003 our closingstock price ranged from a low of $2.34 per share to a high of $7.29 pershare. The market price of our common stock, like that of thesecurities of many telecommunications and high technology industrycompanies, could be subject to significant fluctuations and is likelyto remain volatile based on many factors, including thefollowing:

|              |                                          |
|--------------|------------------------------------------|
| •  | quarterly variationsin operatingresults; |

|              |                                                                                       |
|--------------|---------------------------------------------------------------------------------------|
| •  | announcements of newtechnology, products or services by us or any of our competitors; |

|              |                                                                                                                               |
|--------------|-------------------------------------------------------------------------------------------------------------------------------|
| •  | acceptance of satellite-basedcommunication services and Internet access services in developingcountries and emerging markets; |

|              |                                                                          |
|--------------|--------------------------------------------------------------------------|
| •  | changes in financial estimates orrecommendations by securities analysts; |

|              |                              |
|--------------|------------------------------|
| •  | general market conditions;or |

|              |                                                                          |
|--------------|--------------------------------------------------------------------------|
| •  | domestic and internationaleconomic factors unrelated to our performance. |

Additionally,numerous factors relating to our business may cause fluctuations ordeclines in our stock price.

The stock markets in general andthe markets for telecommunications stocks in particular, haveexperienced extreme volatility that has often been unrelated to theoperating performance of particular companies. These broad marketfluctuations may adversely affect the trading price of our commonstock. Accordingly, we cannot assure you that you will be able toresell the shares of common stock at any particular price, or atall.

A third party could be prevented from acquiring shares ofour stock at a premium to the market price because of our anti-takeoverprovisions.

Various provisions with respect to votes in theelection of directors, special meetings of stockholders, and advancenotice requirements for stockholder proposals and director nominationsof our amended and restated certificate of incorporation, bylaws andSection 203 of the General Corporation Law of the State of Delawarecould make it more difficult for a third party to acquire us, even ifdoing so might be beneficial to our stockholders. In addition, we havea poison pill in place that could make an acquisition of us by a thirdparty more difficult.

Item 3.    Quantitative and QualitativeDisclosures About Market Risk

We are subject to a variety ofrisks, including foreign currency exchange rate fluctuations relatingto certain purchases from foreign vendors and our wholly-ownedsubsidiary, Globecomm Systems Europe Limited, which primarily deals inBritish Pounds Sterling. In the normal course of business, we assessthese risks and have established policies and procedures to manage ourexposure to fluctuations in foreign currency values.

26

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Our objective to managing the exposure toforeign currency exchange rate fluctuations is to reduce the impact ofadverse fluctuations in earnings and cash flows associated with foreigncurrency exchange rates. Accordingly, we may utilize from time to timeforeign currency forward contracts to hedge our exposure on firmcommitments denominated in foreign currency. During the six monthsended December  31, 2003 and the fiscal year ended June 30, 2003,we had no such foreign currency forward contracts.

Our resultsof operations and cash flows are subject to fluctuations due to changesin interest rates primarily from our investment of available cashbalances in money market funds with portfolios of investment gradecorporate and government securities. Under our current positions, we donot use interest rate derivative instruments to manage exposure tointerest rate changes.

Item 4.    Controls andProcedures

Quarterly Evaluation of the Company'sDisclosure Controls and Internal Controls.

|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|-----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (a)  | As of the end of the period covered by thisQuarterly Report on Form 10-Q, an evaluation was carried out under thesupervision and with the participation of senior management, includingour Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of our disclosure controlsand procedures (as defined in Rules 13a- 14(c) and 15d- 14(c) under theSecurities Exchange Act of 1934, as amended). Based upon thatevaluation, our Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures are effective forgathering, analyzing and disclosing the information that the Company isrequired to disclose in reports filed under the Securities Exchange Actof 1934, as amended. |

|           |                                                                                                                                                                                                                                                                                                                                                                                                      |
|-----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (b)  | There have been nosignificant changes in the Company's internal controls overfinancial reporting (as defined in Exchange Act Rule 13a-15(f) of theSecurities Exchange Act of 1934, as amended) or in other factors duringthe fiscal quarter ended December 31, 2003 that materially affected, orare reasonably likely to materially affect, the Company'sinternal controls over financial reporting. |

Part II —Other Information

|               |                  |
|---------------|------------------|
| Item 1.  | LegalProceedings |

|        |      |
|--------|------|
|   | None |

|              |                                           |
|--------------|-------------------------------------------|
| Item2.  | Changes in Securities and Use of Proceeds |

|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | On December 31, 2003, the Company completed aprivate placement transaction of equity securities totaling $6,750,000in gross proceeds. The Company issued 1,500,000 shares of common stockat a price of $4.50 per share and warrants to purchase up to 750,000shares of common stock at an exercise price of $5.50 per share. Thewarrants are exercisable on July 1, 2004 and will expire on December31, 2008. On January 5, 2004, the Company received the net proceeds of$6,294,000, after placement agent fees. At December 31, 2003, theamounts receivable from this transaction of $6,294,000 were recorded asa subscription receivable and included as a reduction in additionalpaid-in capital in the accompanying consolidated balance sheets. |

|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | The securities offered and sold in the privateplacement were not registered with the Securities and ExchangeCommission (the "SEC") and were sold withoutregistration in reliance upon the exemption from securitiesregistration afforded by Regulation D under the Securities Act of 1933,as amended. The Company registered for resale the common stock of theCompany sold in the private placement, as well as the common stockissuable upon exercise of the warrants sold in the private placement,by filing a registration statement on Form S-3 with the SEC on January20, 2004 (Commission File No. 333-112024). The SEC declared theregistration statement effective on February 3, 2004. |

27

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|              |                                 |
|--------------|---------------------------------|
| Item3.  | Defaults Upon Senior Securities |

|        |      |
|--------|------|
|   | None |

|              |                                                    |
|--------------|----------------------------------------------------|
| Item4.  | Submission of Matters to a Vote of SecurityHolders |

|        |      |
|--------|------|
|   | None |

|              |                  |
|--------------|------------------|
| Item5.  | OtherInformation |

|           |                                                                                                 |
|-----------|-------------------------------------------------------------------------------------------------|
| (a)  | The Company'sAnnual Meeting of Stockholders was held on November 17, 2003 (the"AnnualMeeting"). |

|           |                                                                                           |
|-----------|-------------------------------------------------------------------------------------------|
| (b)  | Thematters voted upon at the Annual Meeting and the results of the votingwere as follows: |

|        |     |                                                                                  |
|--------|-----|----------------------------------------------------------------------------------|
|   | (i) | The followingindividuals were elected by the Stockholders to serve as Directors: |

|                        |  |        |            |          |  |        |         |        |  |  |
|------------------------|--|--------|------------|----------|--|--------|---------|--------|--|--|
| BoardMember            |  | For    |            | Withheld |
| RichardE. Caruso       |  |   | 10,927,811 |     |  |   | 190,966 |   |
| DavidE.Hershberg       |  |   | 10,954,762 |     |  |   | 164,015 |   |
| HarryL. Hutcherson,Jr. |  |   | 10,985,212 |     |  |   | 133,565 |   |
| Brian T.Maloney        |  |   | 10,926,362 |     |  |   | 192,415 |   |
| KennethA. Miller       |  |   | 11,008,256 |     |  |   | 110,521 |   |
| A.RobertTowbin         |  |   | 11,009,052 |     |  |   | 109,725 |   |
| C.J.Waylan             |  |   | 10,928,607 |     |  |   | 190,170 |   |
| Stephen C.Yablonski    |  |   | 11,008,246 |     |  |   | 110,531 |   |
|                        |

|        |      |                                                                                                                                                                                                                              |
|--------|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (ii) | Theappointment of Ernst & Young LLP as independent auditors of theCompany to serve for the year ending June 30, 2004 was voted upon asfollows: 11,018,518 shares for; 95,600 shares against; and 4,659 sharesabstaining. |

Item 6.    Exhibits and Reports on Form8-K

|           |          |
|-----------|----------|
| (a)  | Exhibits |

Indexto Exhibits:

Exhibit No.

|            |                                                                                                                                                                                                                                                                                 |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1  | Form of Securities Purchase Agreement,dated as of December 31, 2003, by and between the Company and each ofthe purchasers listed on Exhibit A thereto (incorporated herein byreference to Exhibit 4.5 of the Company's Registration Statementon Form S-3, File No. 333-112024). |

|            |                                                                                                                                                                                                                                                           |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2  | Form of Warrant, dated as of December31, 2003, by and between the Company and each of the purchasers listedon Exhibit A thereto (incorporated herein by reference to Exhibit 4.5of the Company's Registration Statement on Form S-3, File No.333-112024). |

|            |                                                                                                                                                |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1  | Chief ExecutiveOfficer Certification required by Rules 13a-14 and 15d-14 under theSecurities Exchange Act of 1934, as amended (filedherewith). |

|            |                                                                                                                                                   |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2  | Chief Financial OfficerCertification required by Rules 13a- 14 and 15d- 14 under theSecurities Exchange Act of 1934, as amended (filed herewith). |

|          |                                                                                                                                        |
|----------|----------------------------------------------------------------------------------------------------------------------------------------|
| 32  | Certification Pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes-OxleyAct of 2002 (filed herewith). |

|           |                    |
|-----------|--------------------|
| (b)  | Reportson Form 8-K |

We filed a Current Report on Form 8-K dated December31, 2003, in which we reported under Item 5 that on December  31,2003, the Company executed definitive agreements for a privateplacement of equity securities, which resulted in the issuance of1,500,000 shares of its Common Stock, par value $0.001 per share, andwarrants to purchase up to an aggregate of 750,000 shares of CommonStock.

28

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Actof 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.

|  | **GLOBECOMM SYSTEMS INC.**(Registrant) |
|--|----------------------------------------|

Date: February 13, 2004  /s/DAVID E. HERSHBERG

|  | David E. HershbergChairman of the Board and Chief Executive Officer (PrincipalExecutive Officer) |
|--|--------------------------------------------------------------------------------------------------|

Date: February 13,2004  /s/ ANDREW C. MELFI

|  | Andrew C. Melfi Vice President, ChiefFinancial Officer and Treasurer (Principal Financial andAccounting Officer) |
|--|------------------------------------------------------------------------------------------------------------------|

29

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Index toExhibits:

Exhibit No.

|            |                                                                                                                                                                                                                                                                                 |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1  | Form of Securities PurchaseAgreement, dated as of December 31, 2003, by and between the Companyand each of the purchasers listed on Exhibit A thereto (incorporatedherein by reference to Exhibit 4.5 of the Company's RegistrationStatement on Form S-3, File No. 333-112024). |

|            |                                                                                                                                                                                                                                                           |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2  | Form of Warrant, dated as of December31, 2003, by and between the Company and each of the purchasers listedon Exhibit A thereto (incorporated herein by reference to Exhibit 4.5of the Company's Registration Statement on Form S-3, File No.333-112024). |

|            |                                                                                                                                                 |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1  | Chief ExecutiveOfficer Certification required by Rules 13a-14 and 15d-14 under theSecurities Exchange Act of 1934, as amended (filed herewith). |

|            |                                                                                                                                                 |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2  | Chief Financial Officer Certificationrequired by Rules 13a-14 and 15d-14 under the Securities Exchange Actof 1934, as amended (filed herewith). |

|          |                                                                                                                                        |
|----------|----------------------------------------------------------------------------------------------------------------------------------------|
| 32  | Certification Pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes-OxleyAct of 2002 (filed herewith). |

30

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