SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the three month period ended September 30, 2001.

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

Commission file number 0-11685-NY

RADYNE COMSTREAM INC.

(Exact name of registrant as specified in its charter)

DELAWARE
(State or other jurisdiction of incorporation or organization)

11-2569467
(IRS EMPLOYER IDENTIFICATION NO.)

3138 East Elwood Street, Phoenix, AZ 85034
(Address of principal executive offices)

602-437-9620
(Registrant’s Telephone number)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such period that the registrant was required to file such reports), and (2) has been subject to such filing requirements, for the past 90 days.

YES   þ      NO   o

Indicate by check mark whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

YES   þ      NO   o

The registrant had 15,005,952 shares of its common stock, par value $.001, outstanding as of October 31, 2001.

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PART I – FINANCIAL INFORMATION
RADYNE COMSTREAM INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

			September 30, 2001			December 31, 2000
ITEM 1			Unaudited			Audited
		Assets
Current assets:
Cash & cash equivalents			$	8,814,570		$	16,244,591
Accounts receivable — trade, net of allowance for doubtful accounts				12,301,112			11,019,149
Inventories, net				18,614,228			11,330,565
Prepaid expenses				584,790			670,726
Deferred tax asset				2,974,036			3,854,418
		Total current assets		43,288,736			43,119,449
Property and equipment, net				4,309,192			3,288,867
Other assets:
Purchased technology, net of accumulated amortization of $1,205,000 and $905,000, respectively				1,295,000			1,595,000
Goodwill, net of accumulated amortization of $801,446 and $442,748, respectively				4,403,673			3,299,536
Non-compete covenants, net of accumulated amortization of $208,330 and $20,833, respectively				291,670			479,167
Deposits and other				59,418			61,526
		Total other assets		6,049,761			5,435,229
			$	53,647,689		$	51,843,545
	Liabilities and Stockholders’ Equity
Current liabilities:
Current installments of obligations under capital leases			$	75,905		$	78,056
Accounts payable, trade				2,615,373			2,225,363
Accrued expenses				4,486,539			5,485,061
Customer advances				731,122			1,192,235
Taxes payable				278,900			280,000
		Total current liabilities		8,187,839			9,260,715
Deferred rent				140,917			178,190
Obligations under capital leases, excluding current installments				75,129			85,712
Accrued stock option compensation				501,809			505,413
		Total liabilities		8,905,694			10,030,030
Stockholders’ equity:
Preferred stock, $.001 par value, 10,000,000 shares authorized; no shares issued and outstanding at September 30, 2001 and December 31, 2000				—			—
Common stock, $.001 par value, 50,000,000 shares authorized; shares issued and outstanding 14,981,351 at September 30, 2001 and 14,822,820 at December 31, 2000.				14,982			14,823
Additional paid-in capital				49,930,613			49,249,999
Deferred compensation				(153,462	)		(844,032	)
Accumulated deficit				(5,031,218	)		(6,607,275	)
Foreign currency translation adjustment				(18,920	)		—
		Total stockholders’ equity		44,741,995			41,813,515
			$	53,647,689		$	51,843,545

The accompanying notes are an integral part of these condensed consolidated financial statements.

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RADYNE COMSTREAM INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

			Three Months Ended						Nine Months Ended
			September 30, 2001			September 30, 2000			September 30, 2001			September 30, 2000
Net sales			$	16,958,369		$	17,334,187		$	49,421,790		$	52,007,185
Cost of sales				9,752,854			9,502,554			27,890,600			27,957,046
		Gross profit		7,205,515			7,831,633			21,531,190			24,050,139
Operating expenses:
Selling, general and administrative				3,834,470			3,187,510			11,415,624			10,917,469
Research and development				2,756,670			2,433,205			7,938,469			7,018,330
		Total operating expenses		6,591,140			5,620,715			19,354,093			17,935,799
Earnings from operations				614,375			2,210,918			2,177,097			6,114,340
Other (income) expense:
	Interest expense			12,139			89,529			32,258			473,458
	Other (income)			(93,347	)		(321,494	)		(457,499	)		(758,817	)
Earnings before income taxes				695,583			2,442,883			2,602,338			6,399,699
Income tax expense/(benefit)				267,086			(4,122,199	)		1,026,281			(4,044,023	)
Net earnings			$	428,497		$	6,565,082		$	1,576,057		$	10,443,722
Basic net earnings per common share			$	0.03		$	0.45		$	0.11		$	0.76
Diluted net earnings per common share			$	0.03		$	0.41		$	0.10		$	0.67
Weighted average shares used in computation
	Basic			14,978,599			14,492,029			14,922,978			13,767,017
Weighted average shares used in computation
	Diluted			15,375,257			15,952,767			15,443,280			15,511,717

The accompanying notes are an integral part of these condensed consolidated financial statements.

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RADYNE COMSTREAM INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

					Nine Months Ended
					September 30, 2001			September 30, 2000
Cash flows from operating activities:
	Net earnings				$	1,576,057		$	10,443,722
	Adjustments to reconcile net earnings to cash flows provided by (used in) Operating activities:
		Loss on disposal of assets				—			30,307
		Depreciation and amortization				2,712,992			1,709,410
		Increase (decrease) in cash resulting from changes in:
			Accounts receivable			80,037			690,353
			Other receivables			—			(21,500	)
			Inventories			(5,896,663	)		(3,759,308	)
			Deferred assets			880,382			(4,332,000	)
			Prepaid expenses			85,936			572,328
			Deposits and other			2,108			147,214
			Accounts payable, trade			390,010			(1,333,740	)
			Accrued expenses			(1,363,522	)		204,260
			Customer advances			(496,113	)		149,975
			Taxes payable			(1,100	)		12,941
			Deferred rent			(37,273	)		—
			Accrued stock option compensation			(3,604	)		(184,525	)
				Net cash provided by (used in) operating activities		(2,070,753	)		4,329,437
Cash flows from investing activities:
	Capital expenditures					(1,551,552	)		(973,694	)
	Acquisition, net of cash acquired					(4,456,835	)		—
				Net cash used in investing activities		(6,008,387	)		(973,694	)
Cash flows from financing activities:
	Payments on notes payable under line of credit					—			(12,920,000	)
	Net proceeds from exercise of stock options					167,412			1,035,579
	Net proceeds from sale of common stock through employee stock purchase plan					513,361			—
	Net proceeds from sale of common stock					—			22,126,478
	Principal payments on capital lease obligations					(12,734	)		(57,950	)
				Net cash provided by financing activities		668,039			10,184,107
Effects of exchange rate changes on cash and cash equivalents						(18,920	)		—
Net increase (decrease) in cash						(7,430,021	)		13,539,850
Cash and cash equivalents, beginning of year						16,244,591			2,947,660
Cash and cash equivalents, end of period					$	8,814,570		$	16,487,510
Supplemental disclosure of cash flow information:
	Cash paid for interest				$	32,258		$	776,663
	Cash paid for taxes				$	1,100		$	475,036
	Deferred tax asset for stock options exercised and sold				$	—		$	1,044,000

The accompanying notes are an integral part of these condensed consolidated financial statements.

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RADYNE COMSTREAM INC.

Notes to Condensed Consolidated Financial Statements

(Information for September 30, 2001 and September 30, 2000 is unaudited)

1      Organization and Acquisition

         Radyne ComStream Inc. (the “Company”) has operations in Phoenix and Chandler, Arizona and in San Diego, California. The Company designs, manufactures, sells, integrates and installs products, systems and software used for the transmission and reception of data over satellite, microwave and cable communication networks. During 2000, the Company changed its state of incorporation from New York to Delaware and changed the par value of its common stock from $.002 to $.001.

         ComStream Holdings, Inc., a major subsidiary acquired in 1998 (ComStream), operates primarily in North America in the satellite communications industry. ComStream designs, markets and manufacturers satellite interactive modems and earth stations. Additionally, ComStream manufactures and markets full-transponder satellite digital audio receivers for music providers and has designed and developed a PC broadband satellite receiver card, which is an Internet and high-speed data-networking product.

         Description of Recent Acquisitions

         On December 8, 2000, the Company completed the acquisition of all of the outstanding shares of common stock of Armer Communications Engineering Services, Inc. (“Armer”) for an aggregate purchase price of $1,926,940 consisting of $1,200,000 in cash and 130,680 shares of common stock of the Company. The fair value of the stock was determined based on the average market price of the stock over a reasonable period of time before and after the terms of the acquisition were agreed to and announced. Armer specializes in the integration and installation of ground segment equipment and networks for a wide range of satellite-based telecommunications systems and applications. This acquisition has been recorded in accordance with the “purchase method” of accounting and, accordingly, the purchase price has been allocated to the assets purchased and the liabilities assumed based upon the estimated fair values at the date of acquisition. The excess of the purchase price over the fair values of the net assets acquired was $1,943,892 and has been recorded as goodwill, which is being amortized on a straight-line basis over twelve years.

         Certain Armer stockholders were issued 169,320 shares of restricted common stock. These shares are subject to immediate forfeiture in the event the holder terminates employment with Armer or Radyne within one year from the effective date of the merger. The Company recorded deferred compensation of $920,762 based upon the fair value of the stock at the date of issuance, which is being amortized on a straight-line basis over one year.

         Concurrent with the close of this transaction, six key employees of Armer entered into two-year non-disclosure and non-compete agreements with the Company. The cost of these agreements was $500,000, and is being amortized using the straight-line method over the term of the agreements.

         On April 18, 2001, Tiernan Radyne ComStream Inc. (“TRC”), a wholly owned subsidiary of the Company, obtained all of the assets of Tiernan Communications, Inc. (“TCI”) through a private foreclosure sale relating to a secured note TRC had purchased for $3.9 million in cash. Product lines acquired include standard digital TV encoders, high definition TV encoders, and ATM video network adapters as well as integrated receiver/decoders. TRC offered employment to most of the employees of TCI. The acquisition was recorded in accordance with the “purchase method” of accounting and, accordingly, the purchase price has been allocated to the assets purchased and certain liabilities assumed based upon the estimated fair values at the date of acquisition. The excess of the purchase price over the fair values of the net assets acquired was approximately $1,462,000 and has been recorded as goodwill, which is being amortized on a straight-line basis over seven years.

         The following summary, prepared on a pro forma basis, combines the consolidated results of operations (unaudited) as if the acquisition of Tiernan had taken place on January 1, 2001. Such pro forma amounts are not necessarily indicative of what the actual results of operations might have been if the acquisition had been effective on January 1, 2001.

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	(Unaudited)
	Nine months ended
	September 30, 2001
Net sales	$	52,210,000
Operating expenses		21,927,140
Net earnings		493,000
Net earnings per share, basic and diluted		.03

2      Summary of Significant Accounting Policies

(a)    Basis of Presentation

     The interim unaudited condensed consolidated financial statements furnished reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of financial position as of September 30, 2001 and the results of operations and cash flows for the three months and nine months ended September 30, 2001 and 2000. Such adjustments are of a normal recurring nature. This information should be read in conjunction with the consolidated financial statements included in the Company’s Form 10-K for the year ended December 31, 2000.

     The results of operations for the interim period are not necessarily indicative of the results to be expected for the full year.

(b)    Use of Estimates

     The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the financial statement date and the reported amounts of revenue and expenses during the reporting period. Rapid technological change and short product life cycles characterize the industry in which the Company operates. As a result, estimates are required to provide for product obsolescence and warranty returns as well as other matters. Actual results could differ from those estimates.

(c)    Principles of Consolidation

     The condensed consolidated financial statements include the accounts of Radyne ComStream Inc. and its subsidiaries. Significant intercompany accounts and transactions have been eliminated in the consolidation.

(d)    Cash Equivalents

     All money market accounts with maturities of 90 days or less are considered cash equivalents.

(e)    Revenue Recognition

     The Company recognizes revenue upon transfer of title and shipment of product.

(f)    Inventories

     Inventories, consisting of satellite modems and related products, are valued at the lower of cost (first-in, first-out) or market.

(g)    Property and Equipment

     Property and equipment are stated at cost. Equipment held under capital leases is stated at the present value of future minimum lease payments. Expenditures for repairs and maintenance are charged to operations as incurred, and improvements which extend the useful lives of the assets, are capitalized. Depreciation and amortization of machinery and equipment are computed using the straight-line method over an estimated useful life of three to ten years. Equipment held under capital leases and leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or estimated useful lives of the assets.

(h)    Intangible Assets

     Intangible assets consist of goodwill, which represents the excess of purchase price over fair value of net assets acquired and is amortized on a straight-line basis over a period of seven to twelve years. Goodwill acquired as a result of the purchase of ComStream is being amortized on a straight-line basis over 10 years. Goodwill

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acquired as a result of the purchase of Armer is being amortized on a straight-line basis over 12 years. Goodwill acquired as a result of the purchase of assets from Tiernan is being amortized on a straight-line basis over 7 years. Intangible assets also consist of covenants not to compete, which are being amortized on a straight-line basis over the contractual term on the covenants of two years.

(i)    Purchased Technology

     In connection with the acquisition of ComStream, value was assigned to purchased technology. Purchased technology is being amortized on a straight-line basis over the expected period to be benefited of 6.25 years.

(j)    Impairment of Long-Lived Assets

     Management reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

(k)    Warranty Costs

     The Company provides limited warranties on certain of its products and systems for periods generally not exceeding two years. The Company accrues estimated warranty costs for potential product liability and warranty claims based on our claim experience. Such costs are accrued as cost of sales at the time revenue is recognized.

(l)    Research and Development

     The cost of research and development is charged to expense as incurred.

(m)    Income Taxes

     The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future consequences attributed to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Differences between income for financial and tax reporting purposes arise primarily from accruals for warranty reserves and compensated absences. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

(n)    Concentration of Credit Risk

     Financial instruments, which potentially subject the Company to concentrations of credit risk, are principally accounts receivable. The Company maintains ongoing credit evaluations of our customers and generally does not require collateral. The Company provides reserves for potential credit losses and such losses have not exceeded management’s expectations.

(o)    Net Earnings/ Per Share

     Basic earnings per share is computed by dividing earnings available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or contracts to issue common stock were exercised or converted to common stock or resulted in the issuance of common stock that then shared in the earnings of Radyne Comstream.

(p)    Fair Value of Financial Instruments

     The fair value of accounts receivable, accounts payable and accrued expenses approximates the carrying value due to the short-term nature of these instruments. Management has estimated that the fair values of the notes payable, approximate the current balances outstanding, based on currently available rates for debt with similar terms.

(q)    Employee Stock Options

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     Management has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations in accounting for its employee stock options and to adopt the “disclosure only” alternative treatment under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123). SFAS 123 requires the use of fair value option valuation models that were not developed for use in valuing employee stock options. Under SFAS No. 123, deferred compensation is recorded for the excess of the fair value of the stock on the date of the option grant, over the exercise price of the option. The deferred compensation is amortized over the vesting period of the option.

(r)    Segment Reporting

     The Company has only one operating business segment: the design, manufacture, sale and installation of equipment for satellite, microwave, cable and broadcast communications networks.

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3      Inventories

	September 30, 2001			December 31, 2000
Inventories consist of the following:
Raw materials and components	$	11,342,411		$	6,378,329
Work in process		4,863,122			3,959,419
Finished goods		2,769,663			1,371,973
		18,975,196			11,709,721
Obsolescence reserve		(360,968	)		(379,156	)
Total	$	18,614,228		$	11,330,565

5      Property and Equipment

	September 30, 2001			December 31, 2000
Property and equipment consist of the following:
Machinery and equipment	$	5,309,596		$	3,265,723
Furniture and fixtures		3,344,380			2,587,068
Leasehold improvements		719,028			713,301
Computers and software		747,141			1,365,077
		10,120,415			7,931,169
Less accumulated depreciation & amortization		(5,810,953	)		(4,642,302	)
Total	$	4,309,192		$	3,288,867

6      Accrued Liabilities

	September 30, 2001		December 31, 2000
Accrued liabilities consist of the following:
Wages and related payroll taxes	$	1,149,441	$	1,100,503
Professional fees		515,598		544,416
Warranty reserve		1,459,557		1,622,644
Other		1,361,943		2,217,498
Total	$	4,486,539	$	5,485,061

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7      Earnings/ Per Share

A summary of the reconciliation from basic earnings per share to diluted earnings per share follows:

	Three Months				Nine Months
	Ended				Ended
	September 30				September 30
	2001		2000		2001		2000
Net Earnings	$	428,497		6,565,082		1,576,057		10,443,722
Basic EPS — Weighted Average Shares Outstanding		14,978,599		14,492,029		14,922,978		13,767,017
Basic Earnings Per Share	$	0.03		0.45		0.11		0.76
Basic Weighted Average Shares		14,978,599		14,492,029		14,922,978		13,767,017
Effect of diluted stock options		396,658		1,460,738		520,302		1,744,700
Diluted EPS — Weighted Average Shares Outstanding		15,375,257		15,952,767		15,443,280		15,511,717
Diluted Earnings Per Share	$	0.03		0.41		0.10		0.67
Stock Options not included in Diluted EPS Since Antidilutive		3,915,759		1,167,053		3,915,759		1,167,053

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

         This information should be read in conjunction with the condensed consolidated financial statements and the notes thereto included in Item 1 of Part I of this Quarterly Report and the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2000 contained in the Company’s 2000 Annual Report on Form 10-K.

         Except for the historical information contained herein, the following discussion includes statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”) and Radyne ComStream claims the protection of the safe-harbor for forward-looking statements contained in the Reform Act. These forward-looking statements are often characterized by the terms “may,” “believes,” “projects,” “expects,” or “anticipates,” and do not reflect historical facts. Specific forward-looking statements contained in the following discussion include, but are not limited to, (i) anticipated increases in sales upon market improvement, (ii) expansion of new and current product lines to generate a significant portion of revenue, and (iii) the belief that bank credit lines, existing cash and cash from operations will be sufficient to meet future operational needs and capital requirements.

         Forward-looking statements involve risks, uncertainties and other factors which may cause actual results, performance or achievements of Radyne ComStream to be materially different from those expressed or implied by such forward-looking statements. Factors that could affect Radyne ComStream’s results and cause them to materially differ from those contained in the forward-looking statements include:

• loss of, and failure to replace, any significant customers;

• timing and success of new product introductions;

• product developments, introductions and pricing of competitors;

• timing of substantial customer orders;

• availability of qualified personnel;

• the effects of terrorist activity and armed conflict such as disruptions in general economic activities and changes in our operations;

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• the impact of local political and economic conditions and foreign exchange fluctuations on international sales;

• performance of suppliers and subcontractors;

• decreasing or stagnant market demand and industry and general economic or business conditions;

• availability, cost and terms of capital;

• our level of success in effectuating our strategic plan;

• our ability to successfully integrate acquisitions;

• adequacy of our inventory, receivables and other reserves;

• other factors to which this report refers or to which the Company’s 2000 Annual Report on Form 10-K refers.

• other factors that the Company is currently unable to identify or quantify, but may arise or become known in the future.

         In addition, the foregoing factors may affect generally Radyne ComStream’s business, results of operations and financial position.

         Forward-looking statements speak only as of the date the statement was made. Radyne ComStream does not undertake and specifically declines any obligation to update any forward-looking statements.

Results of Operations

         Results of operations for the three month period ended September 30, 2001 compared to the three month period ended September 30, 2000, were as follows:

         Net sales decreased 2% to $16,958,000 during the period ended September 30, 2001 from $17,334,000 during the period ended September 30, 2000 due to a downturn in market conditions in the telecommunications industry. Armer and Tiernan sales combined for approximately $4,700,000 of current period sales, without which, the company’s sales would have declined farther. We anticipate that sales will increase when market conditions improve. Although we have achieved some success with new product lines recently introduced into the market, due to the market conditions, sales of these product lines were lower than expected. We expect sales on our new product lines to generate a significant portion of our revenue when market conditions improve.

         Cost of sales as a percentage of net sales increased to 58% during the three month period ended September 30, 2001 compared to 55% during the three month period ended September 30, 2000. This was primarily due to the change in the mix of product sales between the periods. Costs increased, in terms of absolute dollars to $9,753,000 during the three months ended September 30, 2001 from $9,503,000 for the three months ended September 30, 2000. The increase in cost is mainly due to a change in the mix of products and systems sold (partially due to the addition of the lower-margin systems business) during the periods being compared. Additionally, because of the downturn in the economy, we experienced under-utilization costs related to the operation of our factories at less than full capacity.

         Selling, general and administrative costs increased to $3,834,000 during the three month period ended September 30, 2001 from $3,188,000 during the three month period ended September 30, 2000. Our administrative expenses were higher than the corresponding period of the prior year primarily as a result of the addition of the operations of Armer and Tiernan in December 2000 and April 2001, respectively. These expenses included approximately $155,000 of amortization of intangible assets related to the acquisition of these entities.

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         Research and development expenditures increased to $2,757,000 (16.3% of sales) during the three month period ended September 30, 2001 from $2,433,000 (14.0% of sales) for the three month period ended September 30, 2000. The increase is primarily due to an increase in our engineering staff during the current period, which is attributable to the acquisition of the Tiernan product lines and the development of new products within our core business. However, these expenditures may fluctuate from period to period depending on the staging of on going projects. In future periods, we anticipate research and development expenditures will remain high and may even increase as we expand current product lines to address new markets and customer requirements.

         Interest expense decreased to $12,000 in the three month period ended September 30, 2001 from $90,000 in the three month period ended September 30, 2000 due to a decrease in the Company’s average debt level.

         The effective income tax rate was 38% for the 3 months ended September 30, 2001.

         Other income decreased to $93,000 in the three month period ended September 30, 2001 from $321,000 during the three month period ended September 30, 2000 due mainly to a decrease in interest income due to reduced cash levels.

         New-orders-booked (Bookings) increased to $17,682,000 for the three month period ended September 30, 2001 from $17,404,000 during the three month period ended September 30, 2000.

         Backlog (the level of unfilled-orders-to-ship) decreased 20% to $13,956,000 at September 30, 2001 from $17,436,000 at September 30, 2000 as a result of lower booking levels during the previous three quarters.

         Results of operations for the nine month period ended September 30, 2001 compared to the nine month period ended September 30, 2000, were as follows:

Net sales decreased to $49,422,000 during the nine month period ended September 30, 2001 from $52,007,000 during the nine month period ended September 30, 2000 due to the downturn in conditions in the telecommunications industry. Armer and Tiernan sales combined for approximately $12,700,000 of the current period sales, without which, the company’s sales would have declined farther. We anticipate that sales will increase when market conditions improve. Although we have achieved some success with new product lines recently introduced into the market, due to the market conditions, sales of these product lines were lower than expected. We expect sales on our new product lines to generate a significant portion of our revenue when market conditions improve.

Cost of sales decreased to $27,891,000 during the nine month period ended September 30, 2001 compared to $27,957,000 during the nine month period ended September 30, 2000. This decrease is due to the decrease in sales as discussed above. Costs increased, in terms of percentage of sales, to 56% for the current nine month period ended September 30, 2001 from 54% during the nine month period ended September 30, 2000. The increase in percentage is mainly due to a change in the mix of products sold, including the addition of lower-margin systems business, during the periods being compared. Additionally, because of the downturn in the economy, we experienced under-utilization costs related to the operation of our factories at less than full capacity.

         Selling, general and administrative costs increased to $11,416,000 during the nine month period ended September 30, 2001 from $10,917,000 during the nine month period ended September 30, 2000. Our administrative expenses were higher than the corresponding period of the prior year primarily as a result of the addition of the operations of Armer and Tiernan in December 2000 and April 2001, respectively. These expenses included approximately $413,000 of amortization of intangible assets related to the acquisition of these entities.

         Research and development expenditures increased 13.1% to $7,938,000 during the nine month period ended September 30, 2001 from $7,018,000 during the nine month period ended September 30, 2000. These expenditures fluctuate from period to period depending on the staging of on going projects. The Company released two new products to the market during 2001. Our new MM-200 is a microwave/cable product that allows users the ability to transmit analog data at speeds up to 200 Megabits per second. We have received approximately $2.1 million in orders for this product to date. Our new IPSAT Plus Internet-over-satellite product provides a TDMA return channel for true 2-way Internet access at very high speeds. Our “Demandwidth” technology provides for dynamic bandwidth allocation, which will allow unused portions of the available bandwidth to be utilized by

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ISP/POPs that are busy and reduce costs for the space segment for all users. In addition, we have incurred additional costs attributable to the acquisition of the Tiernan assets and product lines in April 2001. In future periods, we anticipate research and development expenditures will remain high and may even increase as we expand current product lines to address market and customer requirements.

         Interest expense decreased to $32,000 in the nine month period ended September 30, 2001 from $473,000 in the nine month period ended September 30, 2000 due to a decrease in the Company’s debt level.

         Other income (which includes interest income) decreased to $457,000 in the nine month period ended September 30, 2001 from $759,000 during the nine month period ended September 30, 2000 due mainly to a decrease in overall cash levels and declining interest rates.

         The effective income tax rate was 39% for the nine months ended September 30, 2001.

         New-orders-booked (Bookings) decreased by 16.8% to $45,691,000 for the nine month period ended September 30, 2001 from the record $54,921,000 during the nine month period ended September 30, 2000. This decrease is due to current market conditions as discussed above.

         Backlog (the level of unfilled-orders-to-ship) decreased 20.0% to $13,956,000 at September 30, 2001 from $17,436,000 at September 30, 2000.

            Impact of Recently Issued Accounting Standards

         In July 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement 141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.

         The Company is required to adopt the provisions of Statement 141 immediately. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-Statement 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of Statement 142.

         Upon adoption of Statement 142, the Company will need to evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart from goodwill. Upon adoption of Statement 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period.

         In connection with the transitional goodwill impairment evaluation, Statement 142 will require the Company to perform an assessment of whether there is an indication that goodwill (and equity-method goodwill) is impaired as of the date of adoption. To accomplish this the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including

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the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The company will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit’s carrying amount. To the extent a reporting unit’s carrying amount exceeds its fair value, an indication exists that the reporting unit’s goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit’s goodwill, determined by allocating the reporting unit’s fair value to all of its assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with Statement 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company’s statement of earnings.

         As of September 30, 2001, the Company has unamortized goodwill in the amount of $4,404,000 and unamortized identifiable intangible assets in the amount of $1,587,000, all of which will be subject to the transition provisions of Statements 141 and 142. Identifiable intangible assets as of September 30, 2001 consists of $1,295,000 related to purchased technology, and $292,000 related to non-compete covenants. These assets are being amortized over six and one quarter years, two years and nine months, respectively. Amortization expense related to goodwill was $189,000 and $358,000 for the year ended December 31, 2000 and the nine months ended September 30, 2001, respectively. Because of the extensive effort needed to comply with adopting Statements 141 and 142, it is not practicable to reasonably estimate the impact of adopting these Statements on the Company’s financial statements at the date of this report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle.

         On October 3, 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While Statement No. 144 supersedes Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it retains many of the fundamental provisions of that Statement.

         Statement No. 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. However, it retains the requirement in Opinion No. 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. By broadening the presentation of discontinued operations to include more disposal transactions, the FASB has enhanced management’s ability to provide information that helps financial statement users to assess the effects of a disposal transaction on the ongoing operations of an entity. Statement No. 144 is effective for fiscal years beginning after December 15, 2001. At the current time, management does not believe that the adoption of this statement on January 1, 2002 will have a material impact on the Company’s financial position.

Liquidity and Capital Resources

         Net cash used in operating activities was $2,071,000 for the nine month period ended September 30, 2001, as compared to $4,329,000 of cash provided by operating activities during the nine month period ended September 30, 2000. This increase in cash used is primarily attributed to the lower earnings during the current period and higher net inventories, resulting from lower than expected sales. Inventory increased $5,897,000 during the current period compared to an increase of $3,759,000 during the same period in the prior year, partially due to a decline in sales in the current period and our inability to reduce the flow of incoming inventory for a long period of time after our sales had been reduced as well as inventory acquired in the Armer and Tiernan purchases. Accrued expenses decreased by approximately $1,364,000 compared to an increase of $204,000 during the prior period. This decrease is partially due to a reduction in accrued bonuses and commissions during the current period, due to lower sales and earnings, when compared to the same period in 2000. Customer advances also decreased by approximately $496,000 during 2001 compared to an increase of $150,000 in 2000. This change is primarily the result of current period sales volumes and the fluctuations in payment terms required of our customers during any particular period. Cash flows increased between the respective periods due to an increase in accounts payable by approximately $390,000

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during the current period compared to a decrease of $1,334,000 in the prior period and decreases in accounts receivable of approximately $80,000 during 2001 compared to a decrease of $690,000 in 2000 and in deferred assets of approximately $880,000 compared to an increase of $4,332,000 in the prior period.

         Cash used in investing activities was $6,008,000 for the nine month period ended September 30, 2001 compared to $974,000 for the nine month period ended September 30, 2000. The increase between the two periods is primarily due to assets acquired, net of cash, in the Tiernan acquisition, for $4,457,000 and other additions to property and equipment of $1,552,000 during the nine month period ended September 30, 2001.

         Net cash provided by financing activities decreased to $668,000 for the nine months ended September 30, 2001 from $10,184,000 for the nine months ended September 30, 2000. The 2000 period included cash from a public offering completed in February 2000 and subsequent exercise of stock warrants which provided cash of $22,126,000, partially offset by $12,920,000 of payments on notes payable under lines of credit during the nine month period ended September 30, 2000. In addition, the Company received $681,000 in proceeds from the exercise of stock options and through common stock sold through the Employee Stock Purchase Plan in 2001 compared to proceeds of $1,036,000 from the exercise of stock options in 2000.

         Management believes that its bank credit lines, cash on hand, and cash from operations will be sufficient to fund its planned future operations and capital requirements for continued growth for the next twelve months.

Item 3 — Quantitative and Qualitative Disclosures about Market Risk

         We are exposed to market risk on our financial instruments from changes in interest rates. We do not use financial instruments for trading purposes or to manage interest rate risk. As of September 30, 2001, a 1% change in interest rates would, over a year’s period, have a potential pretax impact of $88,000, which is immaterial to our consolidated financial statements.

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         PART II — OTHER INFORMATION

Item 6 — Exhibits and Reports on Form 8-K

(a)	Exhibit	Description
	3.1*	Certificate of Incorporation
	3.2**	Bylaws

*	Incorporated by reference from exhibit 3.1 to registrant’s description of capital stock on form 8-A12G filed on July 13, 2000.
**	Incorporated by reference from exhibit 3.2 to registrant’s description of capital stock on form 8-A12G filed on July 13, 2000.

(j)  Registrant did not file any reports on Form 8-K during the period of July 1, 2001 through September 30, 2001.

          Items 1, 2, 3, 4 and 5 are not applicable and have been omitted.

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         SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: November 14, 2001	RADYNE COMSTREAM INC.
	By:	/s/ Garry D. Kline Garry D. Kline Vice President, Finance; Chief Financial Officer (Chief Accounting Officer and Duly Authorized Officer)

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