10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

þ	Annual Report Pursuant to Section 13 or 15(D) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2002 or
o	Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the transition period from                          to

Commission File Number 0-11685

Radyne ComStream Inc.

(Exact name of Registrant as specified in its charter)

Delaware	11-2569467
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

3138 East Elwood Street, Phoenix, Arizona	85034
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number including area code: (602) 437-9620
 
Securities Registered Under Section 12(b) of the Exchange Act: None
 
Securities Registered Under Section 12(g) of the Exchange Act:
Common Stock, $.001 Par Value
Common Stock Purchase Warrants

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes þ No o

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

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934.    Yes o No þ

     The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $17 million based on the closing price of $3.25 per share of common stock as reported on the Nasdaq Stock Market on June 28,2002. For purposes of this determination, shares of common stock held by each officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates of the registrant. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

     The number shares of the registrant’s common stock, which were outstanding as of the close of business on March 20, 2003, was 15,308,832.

DOCUMENTS INCORPORATED BY REFERENCE

     Items 10, 11, 12, and 13 of Part III incorporate information by reference from the definitive proxy statement for the registrant’s Annual Meeting of Stockholders to be held on June 18, 2003.

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TABLE OF CONTENTS

Part I
	Item 1. Business
	Item 2. Properties
	Item 3. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
PART II
	Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
	Item 6. Selected Financial Data
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 7A. Quantitative and Qualitative Disclosures About Market Risk
	Item 8. Financial Statements and Supplementary Data
	Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
	Item 10. Directors, Executive Officers and Key Employees
	Item 11. Director and Executive Compensation
	Item 12. Security Ownership of Certain Beneficial Owners and Management
	Item 13. Certain Relationships and Related Transactions
	Item 14. Disclosures and Controls
PART IV
	Item 15. Exhibits, Financial Statement Schedules And Reports On Form 8-K
SIGNATURES
EXHIBIT INDEX
EX-21.1
EX-23.1
EX-99.1
EX-99.2
EX-99.3

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Disclosure Concerning Forward-Looking Statements

     This Annual Report on Form 10-K, 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 this Annual Report on Form 10-K in the Notes to Consolidated Financial Statements and under the captions “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” include, but are not limited to: (i) growth in demand for satellite system ground-based equipment and satellite-delivered communications services, (ii) continued global deregulation and privatization of telecommunications carriers, (iii) worldwide demand for Internet over Satellite connectivity and communications services in general, (iv) an increase in total foreign sales, (v) an increase in market share, and (vi) sufficient cash reserves and cash from operations to fund planned future operations and capital requirements through the end of 2003.

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

• performance of suppliers and subcontractors;

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

• availability, cost and terms of capital;

• the “Risk Factors” set forth in Exhibit 99.1, which is attached hereto and incorporated by reference into this Annual Report on Form 10-K; and

• Other factors that Radyne ComStream is currently unable to identify or quantify, but may exist 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.

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Part I

Item 1. Business

Overview

     We design, manufacture, integrate, install and sell equipment used in the ground-based portion of satellite communication systems to receive and transmit data, video, audio and Internet over satellite, microwave and cable communications networks. Our products are used in applications for telephone, data, video and audio broadcast communications, private and corporate data networks, Internet applications, and digital television for cable and network broadcast. Through our Tiernan subsidiary (www.tiernan.com), we supply HDTV and SDTV encoding and transmission equipment, and our Armer subsidiary (www.armercom.com) provides innovative solutions for the integration and installation of turnkey communications systems. Information contained on the foregoing websites is not a part of this report. Through our network of international sales and service offices and area distributors and sales representatives, we serve customers in over 80 countries, including customers in the television broadcast industry, international telecommunications companies, Internet service providers, private communications networks, network and cable television and the United States government.

     Our products have been utilized in major communication systems worldwide, including the following:

• The world’s highest capacity domestic, digital satellite telephone network-PT Telkom, Indonesia.

• Italy’s first digital telephone/data network-Telespacio, Italian Railways.

• Colombia’s first alternate telecommunications network-Anditel.

• Supplied HDTV Encoders and IRDs for Major Korean Broadcasters

• Earth stations for the first international satellite links in China, India, Pakistan, Brazil, Haiti and Zambia.

• One of the world’s largest private satellite broadcast network-Reuters.

• Supplied complete Data Broadcast network for Shanghia Stock Exchange-over 4,000 sites throughout mainland China.

• International Cablecasting Technologies — utilizing 40,000 digital audio broadcast receivers.

• Supply of Ground equipment for delivery of IP over Satellite to major satellite bandwidth providers.

• First major Internet over Satellite network with 300 terminals deployed in the Dominican Republic for a distance learning application.

• Major private audio network in Mexico and Central America for a department store chain, which transmits music, advertising and product announcements to all its store locations.

• Supply of major control room equipment plus engineering, installation and training at new customer service center for PanAmSat Corporation.

• Broadband satellite modems and frequency converters to provide telephone and Internet connectivity for VSNL, the largest international telecommunications provider in India.

• High-Speed DVB Modulators for Hughes Direct to PC network.

• High Definition Television encoders and IRDs for major international sporting events (2002 winter Olympics through NBC, 2002 World Cup through Korea Telecom and various programming through ESPN-Star TV in Singapore).

• First Internet broadcast network in the Republic of Myanmar.

• Selected by PamAmSat, Intelsat and ChinaSat as preferred vendor for the deployment of IP over satellite solutions.

• Major expansion of US Government Satellite Communications Network.

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Industry Overview

     Satellite technology has been established as a key element in the worldwide infrastructure of communications systems. Satellites enable high-speed communications service where there is no suitable alternative available. Unlike the cost of land-based networks, such as microwave and fiber cable, the cost to provide services via satellite does not increase with the distance between sending and receiving stations. Satellite networks can be rapidly installed, upgraded, and reconfigured as compared with land-based networks, which require rights-of-way and are expensive and time consuming to install and upgrade. The three principal categories of satellite communications service applications are fixed satellite services, mobile satellite services, and direct broadcast services.

     Fixed Satellite Services. Fixed satellite services provide point-to-point and point-to-multipoint satellite communication of voice, data, and video between fixed ground-based earth stations. The introduction of high-power satellites has created additional growth within the fixed satellite services segment by enabling the use of smaller, less costly earth stations for applications such as corporate data networks, Intranet access, and rural telephony.

     Mobile Satellite Services. Mobile satellite services operate between fixed earth stations and mobile user earth stations, or terminals. These services provide mobile voice and data transmission capability on land, sea, and air. New mobile satellite services are being developed to bring more extensive coverage and circuit reliability for mobile telephone and data services to under-served populations throughout the world.

     Direct Broadcast Services. Direct broadcast satellite services provide a direct transmission link from high-power satellites to customers over a wide geographic area. This includes direct-to-home television services, direct broadcast data services, and Internet access.

     Satellite communication systems that are used to provide these services consist of two elements: satellites (the “space segment”) and ground-based transmission and reception systems (the “ground segment”). The space segment consists of a single satellite or a constellation of satellites in earth orbit, which typically provide continuous communications coverage over a wide geographic area. These satellites typically contain multiple transponders, each of which is capable of simultaneously receiving and transmitting one or more signals to or from multiple users. The satellite ground segment consists principally of one or more earth stations. An earth station is an integrated system consisting of antennae, radio signal transmitting and receiving equipment, a satellite modem, a frequency controller, and voice, data, and video network interface equipment. Earth stations provide a communications link to the end user either directly or through land-based networks.

     We have participated principally in the ground segment products, systems, and networks portion of the market. A Merrill Lynch Study, “Global Satellite Marketplace 2000,” estimated the global market for satellite ground equipment and integration services was $30 billion in 2000, of which our management estimates $1 billion was for the type of equipment and systems we develop, manufacture, and market.

Industry Growth

     We believe that demand for satellite system ground-based equipment has been and will continue to be driven by, among other things, the growth of satellite-delivered communications services such as the fixed, mobile, and direct broadcast services described above. We believe that future demand for satellite communications services will be driven principally by the following major factors:

• Worldwide demand for Internet over Satellite connectivity. A large number of the World Wide Web sites reside in North America and high-speed access to the web will continue to be a major issue.

• Worldwide demand for communications services in general, including data communications services, high-speed digital television/HDTV and corporate Intranets.

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• The relative cost-effectiveness of satellite communications for many applications, such as digital television delivery, distance learning and IP over satellite.

• Technological advancements that broaden applications for and increase the capacity in satellite networks.

• Lack of global terrestrial infrastructure to support increased demand for Broadband and Internet applications and services.

• U.S. Federal Communications Commission mandate for Television Broadcasters to adopt DTV standards by 2008.

     Deregulation and Privatization. Many developing countries that had previously not committed significant resources to or placed a high priority on developing and upgrading their communications systems are now doing so, primarily through deregulation and privatization. A significant number of these countries do not have the resources, or have large geographic areas or terrain that make it difficult, to install extensive land-based networks on a cost-effective basis. This provides an opportunity for satellite communications services systems to meet the requirement for communications services in these countries.

     Worldwide Demand for Communications Services. Factors contributing to the demand for communications services include worldwide economic development and the increasing globalization of commerce. Businesses have a need for higher bandwidth services to communicate with their customers and employees around the world and are increasingly reliant upon Internet and multimedia applications. We expect demand for these kinds of higher bandwidth services to grow in both developed and developing countries.

     Cost-Effectiveness of Satellite Communications. The relative cost-effectiveness of satellite communications services is a major factor driving the growth of satellite communications services in areas with rapidly growing telecommunications infrastructures. Large geographic areas, where population concentrations are separated by significant distances, require a technology whose cost and speed of implementation is relatively insensitive to distance. Unlike the cost of land-based networks, the cost to provide services via satellite does not increase with the distance between sending and receiving stations.

     Technological Advances. Technological advances continue to increase the capacity of a single satellite and reduce the overall cost of a system and the service it delivers. This increases the number of potential end-users for the services and expands the available market. We believe that recent technological developments such as bandwidth on demand, digital television compression technology, and signal processing methods will continue to stimulate the demand for the use of satellite communication services.

Market Opportunities

     Satellite communication systems provide a number of advantages over land-based networks for a variety of applications. We have identified several key markets and customer groups that we believe provide opportunities to sell our products.

International and Rural Telephony

     Satellite communication systems enjoy advantages in international telecommunications markets for several reasons:

• It is not cost effective to utilize land-based networks in many areas of the world, such as in developing countries where the infrastructure is not in place and modern communications capabilities are just beginning to develop.

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• All areas within a satellite beam receive the same level of service, making it highly attractive in rough terrain or underdeveloped regions.

• Satellites can be deployed much more rapidly to offer international services.

     We believe there are certain communication requirements that can be reasonably satisfied only with satellite systems. For example, satellite communications offer a cost-effective solution that can be installed relatively quickly to provide communications services in remote or sparsely populated areas, in rugged or in mountainous terrain, or in nations composed of many islands, a geographical feature which is relatively common in the Pacific region.

     The potential to reach areas of low subscriber density without costly construction of land-based networks makes satellite communication systems a viable solution for rural telephony systems. Rural telephony can be described as an intra-country telecommunications network linking many remote locations, such as small villages or islands. These networks allow villages to communicate with each other and with the world. In a typical rural telephony system, a small village might install a satellite earth station in a central location such as the local post office. Residents then use this convenient location to communicate throughout the country and the world.

Private Networks

     As businesses and other organizations expand into regions of the world where the telecommunications infrastructure is inadequate for land-based networks, the need for alternative communications connections among multiple facilities becomes evident. A private network is a dedicated communications and/or data transmission network. Such a network may link employees of a multiple-location business with co-workers located throughout the world. Users can consolidate multiple-applications over a single satellite network and receive the same quality of service at a lower over-all cost. We believe the satellite communications industry is poised to gain a foothold in this market by offering reliable high-speed connectivity. Satellite systems can bypass the complexity of land-based networks, multiple carriers, and varying price and billing schedules.

Information and Radio Broadcasts

     Satellites are an ideal transmission medium for broadcast services, as a single satellite has the ability to communicate with ground locations spread across up to one-third of the surface of the earth. Financial news providers, merchandise retailers, and others use satellite systems to provide financial data and other audio and video transmissions for a variety of applications, such as news wire services and supermarket in-store radio.

Television Video Distribution

     Compressed digital video is a recently developed technology that provides significant new market opportunities for the satellite communications industry. The development of digital compression technology allows the transmission of television signals via satellite in a smaller bandwidth than is currently possible through alternative technologies. This advance in communications technology is enabling a wider application of satellite solutions for television and video broadcast services, including the following:

• Satellites provide television broadcasters with an efficient and economical method to distribute their programming to cable service providers and direct broadcast satellite operators.

• Compressed video encoding and decoding make satellites available for less demanding video transmissions, including business teleconferencing, private business networks, and telemedicine.

• The economics of compressed video allow the use of satellite transmission for long-distance teaching applications.

• Digital cinema distribution is emerging as a viable alternative to the physical distribution of feature length

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	films.
•	There is an emerging market to provide data and video directly to the personal computer via satellite.

Internet Communications

     The Internet is evolving into a global medium, allowing millions of individuals throughout the world to communicate, share information, and engage in electronic commerce. Growth in this sector is expected to be driven by the large and growing number of personal computers installed in homes and offices, the declining prices of personal computers, improvements in network infrastructure, the availability of faster and cheaper Internet access, and the increasing familiarity with and acceptance of the Internet by businesses and consumers. Internet usage also is expected to continue to grow rapidly due to unique characteristics that differentiate it from traditional media, such as real-time access to interactive content, real-time communication capabilities, and the absence of geographic or temporal limitations.

     We expect satellite communications to continue to offer a cost-effective augmentation capability for Internet service providers, particularly in markets where land-based networks are unlikely to be either cost-effective or abundant, such as rural areas. Additionally, satellite broadcast architecture provides an attractive alternative for Internet service providers, which presently are dealing with the bottlenecks associated with rapid and uneven Internet growth. Satellite systems can relieve congestion by providing a low-cost means of selectively distributing content to sites closer to end-users. Today, only 1,000 Websites represent over 80% of the most frequently accessed content on the Internet. These Web pages can be transmitted via satellite at regular intervals to designated server destinations and then stored in servers for local users to access. This cached content reduces the need to retrieve the most popular data from the source, thus reducing delays and congestion on the Internet. Likewise, we expect Internet multicasting to serve as a solution for the distribution of large applications, such as database updates.

Government and Military

     The United States government provides a significant market opportunity for satellite equipment manufacturers as the defense budget shrinks and government policies encourage the use of commercial off-the-shelf components whenever feasible. This provides us with the opportunity to configure our standard products for a customer that is sizable and likely to provide consistent business.

Strategy

     Our business goals are to expand our market share in our ground-based satellite systems business and improve profitability. We expect to achieve these goals through the following strategies:

     Target Providers of Fixed, Mobile, and Direct Broadcast Communications Services Worldwide. We plan to target developing markets that we believe will account for a significant portion of the demand for satellite-based systems. These markets typically lack terrestrial infrastructure adequate to support demand for domestic and international communications services. We plan to target providers of rural telephony services and Internet service providers in developing markets because we believe they will rely extensively upon satellite communication solutions. In developed countries, we plan to target emerging satellite communications service providers such as those offering direct broadcast applications.

     Exploit New Applications for Our Existing Satellite Technology. We plan to adapt existing products for use in the Internet broadband, cable television, and television news gathering markets, which utilize digital receivers and transmission equipment using many of the same modulation, coding, interface, and protocol technologies as the satellite business. We have adapted some of our products for the television distribution market, including satellite modems that we converted for use in cable television systems.

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     Develop New Products to Exploit New Market Opportunities. We plan to use our international sales force and our research and development capabilities to identify new market opportunities and develop new products to exploit these opportunities. We intend to develop new products to penetrate and increase our presence in the markets for Internet communications, rural telephony for developing markets, high-speed satellite communications, government data equipment, cable television distribution, and private networks for businesses and governments.

     Provide High-Margin Customized Products to Niche Markets. We design our products so we can adapt them to differing specifications with minimal engineering. We plan to design and produce customized products for niche markets, particularly military and government markets, which require customized technology.

     Pursue Strategic Acquisitions. We intend to pursue strategic acquisitions of competitive or complementary companies in order to gain market share, increase our revenues, expand our product lines, improve our sales force and increase our profitability.

Products and Services

     We offer the following product families:

• Satellite modems and earth stations.

• Internet via Satellite terminal equipment.

• Frequency converters.

• Data, audio, and video broadcast equipment.

• Digital video broadcast (DVB) and high-speed modems.

• Cable and microwave modems.

• Standard and High Definition Digital Television (HDTV) encoders and IRDs (Integrated Receivers / Decoders).

• Digital TV ATM and network interface adapters.

     We offer the following services:

• Design, integration and installation of turnkey communication systems.

Satellite Modems and Earth Stations

We produce satellite modems that are sold individually and earth stations that are a bundled solution built around our satellite modems. Satellite modems transform user information, such as data, video or audio, into a signal that can be further processed for transmission via satellite. We produce several varieties of satellite modems, which operate at different speeds using a variety of modulation techniques.

We’ve recently introduced a major addition to our satellite modem line, the Turbo forward error correction codec. The turbo product provides customers with greatly improved satellite and bandwidth performance, which directly translates to space segment cost savings. This product also affords our installed base of customers (in excess of 10,000 modems) the opportunity to improve their performance at a significant operational cost saving.

Our earth stations commonly consist of several components, including a satellite modem, a frequency converter, a

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transceiver, a transmitter, and an antenna. Earth stations serve as an essential link in transmitting signals to, and receiving signals from, satellites. Our earth stations enable users to program power levels and operating parameters in order to compensate for low signal levels, extreme weather conditions, and other variables. We design and manufacture our earth stations using components that we manufacture as well as components that we obtain from other manufacturers.

Our Star Network Management System augments these product offerings. The Star Network Management System, which consists of a Windows NT® point and click system, is used to remotely monitor and maintain the functioning of an entire network of modems, earth stations, and ancillary equipment. This can be done from a single location, thereby eliminating the need to travel to each remote location. This system provides local and remote modem management, control of the equipment connected to the modems and earth stations, collection of network status and alarm information, remote channel monitoring, and dial-up control.

Frequency Converters

We currently market two varieties of converters used to transmit signals to satellites and three converters used to receive signals relayed from satellites. We also produce a redundancy control unit, which will switch a satellite system to stand-by equipment in the event of a malfunction in a satellite modem or converter. Such redundancy is a critical element for many of our customers, such as rural or international telephony networks, that strive to provide uninterrupted satellite communications services to their customers.

Each satellite is configured to receive or transmit a particular radio wave pattern, otherwise called a frequency band, which is typically different from the frequency of the satellite modem. Frequency converters are used to alter the input/output of a satellite modem into a wave pattern that can be interpreted by the particular satellite being used in the satellite system to relay communication signals.

Data, Audio and Video Broadcast Equipment

Our digital audio distribution products provide radio networks, service providers, and merchandise retailers with a satellite distribution system for the broadcast of in-store advertising and background music. Our data distribution products deliver real-time, high-value data and digital video broadcast services. To date, the primary customers for our data distribution products have been participants in the financial industry. For example, our IntelliCast Digital Data Broadcast Receiver is used by customers, such as Reuters, to distribute financial information, up-to-date news stories or image files of weather information and database updates from a central location to many remote outlets. Recently the Ministry of Radio & Television in the Republic of Myanmar has also adopted our IntelliCast Digital Data Broadcast Receiver as the standard for their distance learning network.

Our MediaCast Satellite PC/Receiver card allows personal computers to request information over a telephone link and then receive a digital video broadcast of a wide range of data, audio, and video information directly from a satellite. This speeds the reception of information, particularly in regions with underdeveloped telephony, and is often used by Internet service providers.

Two-way Internet Satellite Terminal Equipment

Our IPSat Internet Satellite Terminal is designed as a fully integrated modular system capable of receive only, transmit only or full duplex satellite connectivity to the Internet anywhere in the world. Utilizing the IPSat’s modularity and integrated routing capabilities end users can take advantage of hybrid configurations in situations where terrestrial return resources such as telephone, cable or other “upstream” technologies are available to be used in conjunction with satellite broadcasting. Where such return resources are not available, or too expensive, the IPSat system can support the return channel over satellite. The IPSat can offer the most flexible, cost efficient performance for high-speed satellite downloads from the World Wide Web for ISP’s, Corporations, Educational Institutions and Government Agencies.

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Digital Video Broadcast (DVB) and High-Speed Modems

Our DVB modems facilitate the transmission of high-quality video images among multiple locations via satellite. These modems utilize digital compression technology that allows users to transmit television signals in a smaller bandwidth than is possible using older technology, thereby making television transmission by satellite more economical. Video compression allows for the transmission by satellite of a much higher number of channels than was previously the case, thus producing a significant new market for our products. Satellites are often used in industries where live, high-quality video images are essential, such as direct television broadcasts.

Our high-speed digital modems transmit a greater volume of data than standard satellite modems. Our modems are used in large satellite system connections that transmit significant amounts of data at high speeds. Internet service providers and government agencies are principal customers for our high-speed and digital high-speed products.

Cable and Microwave Modems

Our cable modems are used primarily in the distribution of digital video for use by cable television distributors and in high-definition television. The design of our cable modems allows for the transmission of digital video on terrestrial, broadband cable and enables system operators to manage and control the available bandwidth. Our microwave modems transmit over microwave frequencies and usually feature high-speed and multidata-rate capabilities that provide a complete point-to-multipoint communication link that facilitates microwave link upgrades. For example, television stations use our microwave modems to transmit audio and video over a microwave link to and from digital news gathering trucks.

Standard and High Definition Digital TV Encoders

We offer a complete product line of Standard and High Definition TV encoders for professional applications. Our encoders are used throughout the world to provide distribution, contribution and broadcast services. Encoders are used in satellite, cable and terrestrial applications. The majority of US broadcasters rely on our encoders to provide news gathering and direct to home service. Our encoders are recognized for their outstanding picture quality, ease of use and rugged design.

Digital TV Integrated Receivers / Decoders

Our integrated receiver/decoders complement the encoder products enabling us to provide complete system solutions. Receivers and decoders support DVB and ATSC standards for use in both domestic and international markets. One of our receiver/decoders, the TDR6 has been adopted by ABC and NBC as a standard. The modular TDR6 is unique, in that it supports both standard definition and high definition TV.

Digital TV ATM and Network Interface Adapters

There is an increasing demand to transport TV terrestrially via common and private carriers. Terrestrial transport of video introduces technical requirements relating to interface types, stability and jitter. Interface adapters allow encoders and decoders to operate in circuit-switched and ATM networks. Our products are widely accepted for these applications. For example, the TUI10 Universal Interface Adapter has been certified by AT&T and is an industry standard.

Design, Integration and Installation of Turnkey Communications Systems

At our Armer Communications Engineering facility in Chandler, Arizona, we design, integrate and test turnkey communications systems ranging from small VSAT installations to Intelsat standard stations. We deliver products and services from initial engineering and system development to final testing and after sales support. Our ability to deliver a full compliment of equipment and services to our customers is a benefit to our customers who desire a one-stop solution to their needs.

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Research and Development

     We conduct an active and ongoing research and development program that focuses on advancing technology, developing improved design and manufacturing processes, and improving the overall quality of the products we provide. Our goal is to provide our customers with new solutions that address their needs. Our research and development personnel concentrate on technology for the satellite and microwave communications, telecommunications, and cable television industries. Our future growth depends on increasing the market share of our new products, adapting our existing products/technologies to new applications, and introducing new communications products that will find market acceptance and benefit from our established international distribution channels. Accordingly, we are actively applying our communications technology expertise to improving the performance of our existing products and developing new products to serve existing and new markets.

     We work closely with our customers and potential customers to assess their needs in order to facilitate our design and development of new products. We believe that this approach minimizes our development risk and improves the potential for market acceptance of our product introductions. Additionally, we use information obtained from our customers and our technological expertise to develop custom-designed products for our customers’ special applications.

     Research and development expenses amounted to $8.7 million for the year ended December 31, 2002, $10.8 million for the year ended December 31, 2001 and $9.3 million for the year ended December 31, 2000. A number of new products were either launched or reached an advanced stage of development during these periods.

     We intend to use a significant portion of our cash flows from earnings to fund our research into products for Internet over Satellite links, High Definition Television (HDTV) and other new telecommunications products. We also plan to target our research and development activities at digital audio, video, and data products. However, there is no assurance that we will continue to have access to sufficient capital to fund the necessary research and development or that such efforts, even if adequately funded, will prove successful.

Sales and Marketing

     We sell our products through an international sales force with sales and/or service offices in San Diego, Phoenix, Boca Raton, Beijing, Singapore, London, Amsterdam, and Jakarta. Our direct sales force consists of 14 individuals supported by systems and applications engineers. We focus direct sales activities on expanding our international sales by identifying emerging markets and establishing new customer accounts. Additionally, we directly target certain major accounts that may provide entry into new markets or lead to subsequent distribution arrangements. International representatives, distributors and systems integrators sell our products, supported by our sales and marketing personnel.

     We participate in approximately six trade shows each year. We also generate new sales leads through advertising in trade magazines, direct mail, and our website.

     We maintain a warranty department which also includes customer service and support staff that support customers and distributors and is also responsible for after-sale support and installation supervision. In certain instances, we use third-party companies to install and maintain our products at our customers’ sites.

Customers

     Our customers generally include national and international telecommunications providers, digital television users, including broadcast and cable networks, Internet service providers, financial information providers, systems integrators, and the U.S. government.

     During the years ended December 31, 2002 and 2001, no single customer represented more than 10% of our net sales. For the year ended December 31, 2000 one customer represented 12.4% of our net sales. Because of the nature of our business, we anticipate that any customers that represent 10% or more of our total revenue will vary from period

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to period depending upon the placement of significant orders by a particular customer or customers in any given year.

     Our sales in principal foreign markets for the periods indicated consisted of the following percentages of total sales.

	Year ended			Year ended			Year ended
Region	12-31-02			12-31-01			12-31-00
Asia		27	%		20	%		25	%
Africa/Middle East		5	%		3	%		2	%
Latin America		3	%		7	%		3	%
Europe		11	%		15	%		13	%
Canada		1	%		1	%		1	%
Total Foreign Sales		47	%		46	%		44	%

     The one customer who accounted for 12.4% of our total sales, in 2000, was classified as a domestic customer. However, the products purchased by the customer were used to complete Internet over satellite circuits from the U.S. to foreign (principally Latin American) countries. Likewise, we believe that as much as 60% of our domestic sales are ultimately destined for foreign use.

     We believe that foreign sales will continue to make up the bulk of our total sales in subsequent periods. We consider our ability to continue to sell our products in developing markets to be important to our future growth. We may not, however, succeed in our efforts to cultivate such markets.

Competition

     We have a number of major competitors in the satellite communications field. These include large companies, such as Hughes Network Systems, NEC, and Comtech EFData Corp., all of which have significantly larger and more diversified operations and greater financial, marketing, human and other resources than we possess. We estimate that our major competitors, in the principal markets in which we compete, have the following market shares as compared to our market share:

	Market Segment
	Satellite Modems &
Principle Companies Within	Small Earth			Broadband
Addressable Market Segment	Stations			IP VSAT			Datacasting			Digital TV			Integration
Comtech EF Data		15	%		*			*			*			*
Paradise Datacom (Intelek)		15	%		*			*			*			*
Gilat Satellite Networks Ltd.		15	%		20	%		15	%		*			*
Hughes Network Systems		*			30	%		5	%		*			*
ViaSat		5	%		20	%		15	%		*			*
IDC		*			*			25	%		*			*
Tandberg Television ASA		*			*			*			40	%		*
Scopus Network Technologies		*			*			*			10	%		*
Wegener Corporation		*			*			*			10	%		*
IDB Systems		*			*			*			*			20	%
Globecomm Systems Inc.		5	%		*			*			*			20	%
VertexRSI		5	%		*			*			*			20	%
Radyne ComStream		15	%		5	%		5	%		10	%		5	%

* Competitor does not participate in product category or comprises less than 5% of the total market.

     We do not believe that any other single competitor has a greater than 10% market share for any of these

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product classes. However, the foregoing market share figures represent estimates based on the limited information available to us, and we cannot assure you that it is accurate.

     We compete by concentrating our sales efforts in the international market and emphasizing our product features, quality and after-sales service. We believe that the quality, performance, and capabilities of our products, our ability to customize certain network functions, and the relatively lower overall cost of our products as compared to the cost of the competing products generally offered by our major competitors represent major factors in our ability to compete. However, our major competitors have the resources to develop products with features and functions that are competitive with or superior to our products. Competition from current competitors or future entrants in the markets in which we compete could cause us to lose orders or customers or could force us to lower the prices we charge for our products.

     We believe we are well positioned to capitalize on the demand for satellite ground segment systems and that our future success in this market will be based upon our ability to leverage our competitive advantages, which include the following:

• An experienced management group, which has extensive technological and engineering expertise and excellent customer relationships. The members of our management team have an average of over 20 years of experience in the satellite communications industry.

• Our expansive line of well-known, well-respected, off-the-shelf, state-of-the-art equipment that enables us to meet our customers’ requirements.

• Our ability to custom design products for our customers’ special applications and to provide a one-stop shopping option to our customers.

• Our ability to meet the complex satellite ground communications systems requirements of our customers in diverse political, economic, and regulatory environments in various locations around the world.

• Our worldwide sales and service organization with the expertise to successfully conduct business internationally through sales and service offices staffed by our employees in most of our major markets throughout the world, including in Boca Raton, Beijing, Singapore, London, Jakarta, and Amsterdam.

Manufacturing

     We assemble and test certain products at our Phoenix, Arizona and San Diego, California facilities using subsystems and circuit boards that we obtain from subcontractors. We obtain the remainder of our products, completely assembled and tested, from subcontractors. Although we believe that we maintain adequate stock to reduce the procurement lead-time for certain components, our products use a number of specialized chips and customized components or subassemblies produced by a limited number of suppliers. In the event that such suppliers were unable or unwilling to fulfill our requirements, we could experience an interruption in production until we develop an alternative supply source. We maintain an inventory of certain chips and components and subassemblies to limit the potential for such an interruption. We believe that there are a number of companies capable of providing replacements for the types of chips and customized components and subassemblies used in our products.

     During 1999 and 2000, our Phoenix and San Diego facilities were awarded ISO 9001 certification, the international quality control standard for research and development, marketing, sales, manufacturing, and distribution processes. Subsequently, we have continued to improve our processes and methods of operations, consistent with our goals and the certification requirements. This certification will assist in increasing the acceptance of our products in foreign markets.

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Intellectual Property

     We rely on our proprietary technology and intellectual property to maintain our competitive position. We protect a significant portion of our proprietary technology as trade secrets by relying on confidentiality agreements with our employees and some of our suppliers. We also control access to and distribution of confidential information concerning our proprietary information.

     We also have patents, which protect certain of our proprietary technology. We have been cautious in seeking to obtain patent protection for our products, since patents often provide only narrow protection that may not prevent competitors from developing products that function in a manner similar to those covered by our patents. In addition, some of the foreign countries in which we sell our products do not provide the same level of protection to intellectual property as the laws of the United States provide. We will continue to seek patent protection for our proprietary technology in those cases where we think it can be obtained and will provide us with a competitive advantage.

Employees

     As of December 31, 2002, we had 205 full-time employees, including four executive officers, 119 in engineering and manufacturing, 27 in sales and marketing, 20 in installation and customer service and 35 in administration. These figures include employees who are based outside the United States. A union does not represent our employees in their collective bargaining with us. We believe that our relationships with our employees are satisfactory.

Available Information

     Our website is http://www.radynecomstream.com. We make available, free of charge on our website, our annual, quarterly, and current reports, and any amendments to those reports, as soon as practicable after electronically filing the reports with the Securities and Exchange Commission. Information contained on our website is not a part of this report.

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Item 2. Properties

     We currently occupy approximately 40,000 square feet of building space in Phoenix, 16,000 square feet in Chandler and 36,000 square feet in our San Diego facility. The lease for our Phoenix facility expires in July 2008 and has an option to renew for two consecutive terms of five years each. The lease for our Chandler facility expires in October 2008 and has an option to renew for five years. The lease for our San Diego facility expires in March 2005 and has an option to renew for two consecutive terms of five years each. We also lease facilities for our regional sales and service offices in Boca Raton, Beijing, Singapore, London, Jakarta, and Amsterdam. We believe that our facilities are adequate to meet current and reasonably anticipated needs in the immediate future.

Item 3. Legal Proceedings

     From time to time, we are party to certain legal proceedings incidental to the conduct of our business. We believe that the outcome of pending legal proceedings will not, either individually or in the aggregate, have a material adverse effect on our business, financial position, results of operations, cash flows or liquidity.

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

     Not applicable.

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PART II

Item 5.  Market for Registrant’s Common Equity and Related Stockholder Matters

Market for Common Stock

     Our common stock and warrants are quoted on the Nasdaq National Market under the symbol “RADN” and “RADNW,” respectively. The following table sets forth the range of high and low trading prices for our common stock as reported by the Nasdaq National Market for the periods indicated.

		High		Low
2000:
	First Quarter	$	35.00	$	6.50
	Second Quarter		23.38		11.13
	Third Quarter		17.56		7.81
	Fourth Quarter		10.13		3.91
2001:
	First Quarter		8.63		4.88
	Second Quarter		7.36		4.44
	Third Quarter		6.17		3.60
	Fourth Quarter		6.10		3.54
2002:
	First Quarter		7.50		4.66
	Second Quarter		4.98		3.10
	Third Quarter		3.55		1.25
	Fourth Quarter		3.60		1.55

Holders of Record

     As of March 22, 2003, we had approximately 400 holders of record of our common stock.

Dividends

     We have not paid dividends on our common stock since inception and we do not intend to pay any dividends to our stockholders in the foreseeable future. We currently intend to reinvest earnings, if any, in the development and expansion of our business. The declaration of dividends in the future will be at the election of our Board of Directors and will depend upon our earnings, capital requirements and financial position, general economic conditions and other pertinent factors.

Sale of Unregistered Securities

     During fiscal 2002, we did not issue any equity securities that were not registered under the Securities Act of 1933, as amended.

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Item 6. Selected Financial Data

     The following selected statement of operations data for the years ended December 31, 2002, 2001, 2000, 1999 and 1998, and the selected balance sheet data at those dates, are derived from our consolidated financial statements and notes thereto audited by our independent auditors, KPMG LLP. The following data is not necessarily indicative of results of future operations and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included elsewhere in this 10-K Annual Report.

		Years Ended December 31,
(in thousands, except share data)		2002			2001			2000			1999			1998
STATEMENT OF OPERATIONS DATA:
Net sales		$	57,662		$	68,471		$	70,107		$	55,840		$	21,112
Cost of sales			38,041			39,559			38,280			29,971			15,808
Inventory write-down			431			—			—			—			—
Gross profit			19,190			28,912			31,827			25,869			5,304
Selling, general and administrative expense			13,471			15,307			13,573			12,355			5,531
Research and development expense			8,665			10,812			9,317			9,127			4,296
Stock option compensation expense			—			—			—			350			1,566
In-process research and development expense			—			—			—			—			3,909
Restructuring charge			1,102			—			—			—			3,100
Asset impairment charges(1)			995			—			—			—			263
Total operating expenses			24,233			26,119			22,890			21,832			18,665
Earnings (loss) from operations			(5,043	)		2,793			8,937			4,037			(13,361	)
Interest expense			62			54			492			1,910			1,199
Interest income			(236	)		(523	)		(1,076	)		(76	)		(23	)
Earnings (loss) before income taxes and extraordinary item			(4,869	)		3,262			9,522			2,203			(14,537	)
Income taxes (benefit)			(196	)		1,326			(2,919	)		85			—
Earnings (loss) before extraordinary item and cumulative effect of change in accounting principle			(4,673	)		1,936			12,441			2,118			(14,537	)
Cumulative effect of change in accounting principle			4,281			—			—			—			—
Extraordinary item			—			—			—			188			—
Net earnings (loss)		$	(8,954	)	$	1,936		$	12,441		$	2,306		$	(14,537	)
Basic earnings (loss) per share:
	Earnings (loss) before extraordinary item	$	(0.59	)	$	0.13		$	0.89		$	0.30		$	(2.45	)
	Extraordinary item		0.00			0.00			0.00			0.02			0.00
	Net earnings (loss)	$	(0.59	)	$	0.13		$	0.89		$	0.32		$	(2.45	)
Diluted earnings (loss) per share:
	Earnings (loss) before extraordinary item	$	(0.59	)	$	0.13		$	0.81		$	0.28		$	(2.45	)
	Extraordinary item		0.00			0.00			0.00			0.02			0.00
	Net earnings (loss)	$	(0.59	)	$	0.13		$	0.81		$	0.30		$	(2.45	)
Weighted average shares used in computation Basic			15,180,379			14,943,516			13,972,078			7,111,777			5,931,346
Diluted			15,180,379			15,411,568			15,426,297			7,571,425			5,931,346

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	Years Ended December 31,
(in thousands, except share data)	2002		2001		2000		1999			1998
BALANCE SHEET DATA:
Cash and cash equivalents	$	16,230	$	7,211	$	16,245	$	2,948		$	225
Working capital (deficit)		33,996		35,959		33,858		(2,555	)		(8,804	)
Total assets		44,407		53,241		51,844		28,236			29,191
Long-term liabilities		593		684		769		760			16,862
Total liabilities		7,118		7,893		10,030		23,909			44,428
Stockholders’ equity (deficiency)		37,288		45,347		41,814		4,327			(15,237	)

Notes: (1) Consists of the write down of designs and drawings in light of the introduction of replacement products in 1998 and the write down of purchased technologies relate to the 1998 ComStream acquisition in 2002.

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

General

     We design, manufacture, integrate, install and sell products, systems and software used in the ground-based portion of satellite communication systems to receive, and transmit data, video, audio and Internet over satellite, microwave and cable communications networks. Our products are used in applications for telephone, data, video and audio broadcast communications, private and corporate data networks, Internet applications, and digital television for cable and network broadcast. Through our network of international offices and service centers, we serve customers in over 80 countries, including customers in the television broadcast industry, international telecommunications companies, Internet service providers, private communications networks, network and cable television and the United States government.

     On December 8, 2000, we 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 $1.9 million. This purchase price consisted of $1.2 million in cash and 130,680 shares of our common stock. 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 innovative solutions for the integration and installation of turnkey satellite communications systems. This acquisition was recorded in accordance with the “purchase method” of accounting and, accordingly, the purchase price was 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 approximately $1.9 million and was recorded as goodwill, which was amortized on a straight-line basis over twelve years until the adoption of SFAS 142 on January 1, 2002, at which time amortization was suspended and new accounting rules took effect. The results of operations of the acquired operations have been included in the accompanying statements of operations from the acquisition date.

     On April 18, 2001, we completed the acquisition of all of the assets of Tiernan Communications, Inc. for an aggregate purchase price of $4.0 million. We manufacture the Tiernan products, which are used in the television broadcast industry. The 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 value at the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired was approximately $1.4 million and has been recorded as goodwill, which was amortized on a straight-line basis over seven years until the adoption of SFAS 142 on January 1, 2001.

     During the third quarter of 2002, we implemented a restructuring plan to reduce costs and address the economic slowdown and negative industry conditions. This plan included the reduction in force of approximately 10% of our workforce in the manufacturing, research and development and sales departments, the abandonment of certain non-performing and under-performing product lines and a provision for the excess space created as a result of these cost cutting measures. This effort resulted in a charge to our operating expenses of approximately $1.5 million; of which $430,826 was charged to cost of sales and the balance was charged to selling, general and administrative expenses. This amount included $170,000 in severance costs.

     As of December 31, 2002, we have reduced our workforce from 259 employees at December 31, 2001 to 205 employees, abandoned certain non-performing and under-performing product lines, reduced our utilized work space in the San Diego facility from approximately 66,000 square feet at December 31, 2001 to 36,000 square feet and paid all charges except for $644,960 in lease exit costs, which will be paid over the lease term expiring in February 2005.

Critical Accounting Policies and Estimates

     The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company’s management to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions also affect the reported amounts of

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revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to bad debts, inventories, intangible assets, income taxes, warranty obligations, and contingencies based upon historical results, anticipated future events and various other assumptions, factors, and circumstances. We believe that our estimates and assumptions are reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions.

     The Securities and Exchange Commission defines critical accounting polices as those that are, in management’s view, most important to the portrayal of the Company’s financial condition and results of operations and those that require significant judgments and estimates. We do not consider revenue recognition to be a critical accounting policy due to the nature of our business in which revenues are generally recognized upon the actual shipment of product and transfer of the risk of ownership to our customers in accordance with SEC Staff Bulletin No. 101, Revenue Recognition in Financial Statements,” as amended. Accordingly, other than for estimates related to warranty obligations, the recording of revenue does not require significant judgments or estimates.

Management believes the Company’s most critical accounting policies and estimates used in the preparation of its consolidated financial statements relate to:

• Valuation of Receivables. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Bad debt reserves are recorded based upon historic default averages as well as through the creation of reserves established for specific customers deemed marginal in their ability to pay based upon factors known at that time. In general, if the financial condition of a customer was to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

• Valuation and Impairment of Intangible Assets. In assessing our goodwill and other intangible assets for impairment in accordance with the Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets,” we are required to make significant assumptions about the future cash flows, overall performance, identity and allocation and valuation of the assets including goodwill and other intangibles of our reporting units. Market prices are not readily available for certain businesses, unique physical assets, and most intangible assets to be valued in goodwill impairment tests. Therefore, we estimate fair values using estimating techniques and assumptions that are matters of judgment. Our transitional impairment analysis of goodwill as of January 1, 2002, as required by SFAS 142, yielded an impairment charge of $4.3 million, recorded in fourth quarter 2002 as a cumulative effect of change in accounting principle. We have no remaining goodwill on our balance sheet as of December 31, 2002.

• Warranty Liability. We provide limited warranties on certain of our products and systems for periods generally not exceeding two years. Estimated warranty costs for potential product liability and warranty claims based on our claim experience are accrued as cost of sales at the time revenue is recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our vendors, our warranty liability is affected by product failure rates and material usage and service delivery costs incurred in correcting product failures. Should actual product failure rates, material usage or service delivery costs differ from the Company’s present estimates, additional warranty liabilities may be required.

• Valuation of Inventories. Inventories, consisting of satellite modems and related products, are valued at the lower of cost (first-in, first-out) or market. Our inventories include high-technology components and systems sold into rapidly changing and competitive markets, whereby such inventories may be subject to early technological obsolescence. We evaluate inventories for excess, obsolescence or other factors that may render inventories unmarketable at normal margins. Write-downs are recorded so that inventories reflect the approximate net realizable value. Assumptions about future demand,

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market conditions and decisions to discontinue certain product lines can impact the decision to write down inventories. If assumptions about future demand change or actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. In any case, actual amounts could be different from those estimated.

•

Accounting for Income Taxes. Management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and the valuation allowance recorded against net deferred tax assets. The carrying value of our net operating loss carry-forwards is dependent upon our ability to generate sufficient future taxable income. In addition, we consider historic levels of income, expectations and risk associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing a tax valuation allowance. Should we determine that we are not able to realize all or part of our deferred tax assets in the future, a valuation allowance is recorded against the deferred tax assets with a corresponding charge to income in the period such determination is made. Likewise, should we determine that we would be able to realize deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made.

Results of Operations

Year Ended December 31, 2002 Compared To The Year Ended December 31, 2001

     Our net sales decreased 16% to $ 57.7 million during the year ended December 31, 2002 from $68.5 million during the year ended December 31, 2001. This decrease is primarily attributable to the lingering effects of the economic slowdown over the last two years and was partially offset by full year sales of products from the Tiernan acquisition compared to approximately 8.5 months of those sales during 2001.

     Our cost of sales as a percentage of net sales increased by 9% to 67% during the year ended December 31, 2002 from 58% for the year ended December 31, 2001. The change in costs as a percent of sales is primarily due to changes in the mix of products shipped, namely, the typically lower margins on the Armer products and higher unabsorbed overhead from our core businesses due to the lower sales during the current year. Other factors include a $431,000 inventory write-down taken in the third quarter, which was a result of the abandonment of certain non-performing and under performing product lines and was related to the reduction of our workforce related to manufacturing activities to 77 employees at December 31, 2002 from 97 employees at December 31, 2001, and the abandonment of certain manufacturing facilities as is discussed further below.

     Selling, general and administrative costs decreased to $13.5 million, or 23% of sales, during the year ended December 31, 2002 from $15.3 million, or 22% of sales, for the year ended December 31, 2001. The decrease in expenses during the year is primarily attributed to the cost saving initiatives put in place during the year as a result of the continued depressed market place. These initiatives included the reduction of our workforce related to these activities to 205 employees at December 31, 2002 from 259 employees at December 31, 2001, the reduction of our utilized work space in the San Diego facility from approximately 66,000 square feet at December 31, 2001 to approximately 36,000 square feet at December 31, 2002. The decrease was partially offset by increased spending on our information technologies during the year of approximately $120,000 to upgrade our management information systems in our Phoenix facility. The increase as a percentage of sales was due to the lower sales amounts during the current year compared to the prior period.

     Research and development expenditures decreased to $8.7 million, or 15% of sales during the year ended December 31, 2002 from $10.8 million, or 16% of sales, during the year ended December 31, 2001. We remain committed to invest in our future through technological advances and our efforts to improve our older product lines for manufacturability and lower costs, however, we found it necessary, during the current year, to scale back on these expenditures, in light of the current market situation. Our efforts to reduce costs included the reduction of our

22

workforce related to our research efforts to 42 employees at December 31, 2002 from 57 employees at December 31, 2001. Our research and development personnel concentrate on technology for the satellite and microwave communications, telecommunications, and cable television industries, as well as the newly acquired Tiernan product lines, which target the digital television broadcast industry.

     We recorded an asset impairment charge of $995,000 related to the write down of “Purchased Technologies.” This intangible asset, which was originally valued at $2.5 million, was identified as the fair value of proprietary technologies purchased in the 1998 ComStream acquisition and was being amortized on a straight line basis over the expected life of the asset, which was originally estimated to be 6.25 years. It was determined during the third quarter restructuring effort, that this asset had been impaired because the products with which the technologies were associated have been slow moving and rendered low margins and, therefore, we determined to abandon the product lines in favor of newer technologies. This non-cash charge will eliminate the amortization expense related to the intangible asset, which amounted to approximately $400,000 per year.

     During the third quarter of 2002, we implemented a restructuring plan to reduce costs and address the economic slowdown and negative industry conditions. This restructuring plan included the reduction in force of approximately 10% of our workforce in the manufacturing, research and development and sales departments and a provision for the excess space created as a result of these cost cutting measures. This effort resulted in a charge to our operating expenses of approximately $1.1 million. The expense related to the reduction in force was $170,000. As of December 31, 2002, we have reduced our workforce from 259 employees at December 31, 2001 to 205 employees, reduced our utilized work space in the San Diego facility from approximately 66,000 square feet at December 31, 2001 to 36,000 square feet, and paid all charges except for $644,960 in lease exit costs, which will be paid over the lease term expiring in February 2005.

     As a result of the decrease in our gross profit and our higher operating costs, we recorded a loss from operations of $5 million during 2002 compared to earnings of $2.8 million in 2001.

     Interest expense increased to $62,000 in 2002 from $54,000 in 2001, due to higher capitalized lease obligations during the current fiscal year compared to the year ended December 31, 2001.

     Interest income decreased to $236,000 in 2002 from $523,000 in 2001. Though our average cash balance on hand during the year ended December 31, 2002 increased to $11.2 million from $10.9 million during 2001, the lower average interest rate earned during the year reduced to 2.0% compared to 4.8% average in the prior year.

     We recorded an income tax benefit in 2002 of $196,000, due to a tax refund, compared to an income tax expense of $1.3 million in 2001. The decrease in expense is due to the loss incurred in the current fiscal year compared to net income in the prior year. Due to the net loss experienced in 2002 and the priority in which net operating loss carryforwards are utilized, we provided a 100% valuation allowance against the net deferred tax assets arising in 2002.

     We adopted Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets” on January 1, 2002, the first day of fiscal 2002. Therefore, the amortization of goodwill, which was approximately $449,000 for the year ended December 31, 2001, was suspended effective on that date. We also performed our transitional impairment analysis of goodwill as of January 1, 2002, as required by

23

SFAS 142. This analysis yielded an impairment charge of $4.3 million, recorded in fourth quarter 2002 as a cumulative effect of change in accounting principle. We have no remaining goodwill on our balance sheet as of December 31, 2002.

     Including restructuring and asset impairment charges and the cumulative effect of change in accounting principle, the Company reported a net loss of $9.0 million, or $0.59 per share on a fully diluted basis for 2002. Net income was $1.9 million or $0.13 per fully diluted share for 2001. Excluding restructuring and asset impairment charges and the cumulative effect of change in accounting principle, we reported a net loss of $2.6 million or $0.17 per fully diluted share for 2002.

     New orders booked (bookings) decreased 15% to $56 million for the year ended December 31, 2002 from $65.6 million for the year ended December 31, 2001. This decrease is primarily due to the economic slowdown over the prior year. Our backlog of orders to be shipped, which are unshipped orders from the prior period plus new orders booked less orders shipped during the period, was $13.4 million as of December 31, 2002, a decrease of 10% from the $14.9 million in backlog as of December 31, 2001. This reduction is a direct result of the lower bookings compared to sales during the current period. Our backlog consists of orders as evidenced by written contracts and/or purchase orders from customers with fixed pricing and delivery dates. We charge cancellation charges for orders that cancel and the net difference between the backlog amount and the cancellation charge is recorded as a negative booking. There is no guarantee that cancellation charges will ultimately be paid to us.

Year Ended December 31, 2001 Compared To The Year Ended December 31, 2000

     Our net sales decreased 2% to $68.5 million during the year ended December 31, 2001 from $70.1 million during the year ended December 31, 2000. This decrease is primarily attributable to the economic slowdown over the last year and was offset by sales of products from the Tiernan and Armer acquisitions. The products attributable to these acquisitions accounted for approximately $18.0 million of sales during the current year compared to approximately $2.0 million of sales for the prior year. We experience margins on the Tiernan products that are comparable to our other products and lower margins on the Armer products and services.

     Our cost of sales as a percentage of net sales increased by 3% to 58% during the year ended December 31, 2001 from 55% for the year ended December 31, 2000. The change in costs as a percent of sales is primarily due to changes in the mix of products shipped, namely, the typically lower margins on the Armer products and higher unabsorbed overhead from our core businesses due to the lower sales during the current year.

     Selling, general and administrative costs increased to $15.3 million, or 22% of sales, during the year ended December 31, 2001 from $13.6 million, or 19% of sales, for the year ended December 31, 2000. The increase in expenses during the year is primarily attributed to the additional expenses associated with the Armer and Tiernan product lines, which were approximately $1.5 million and $2.0 million respectively.

     Research and development expenditures increased to $10.8 million, or 16% of sales, during the year ended December 31, 2001 from $9.3 million, or 13% of sales, during the year ended December 31, 2000. In addition to our continued commitment to invest in our future through technological advances and our efforts to improve our older product lines for manufacturability and lower costs, the increase in research and development expenses reflects added efforts for our Tiernan product lines and a significant effort to develop the IPSat related product lines. Our research and development personnel concentrate on technology for the satellite and microwave communications, telecommunications, and cable television industries, as well as the newly acquired Tiernan product lines, which target the digital television broadcast industry. We have reorganized to reduce research and development costs for the ensuing year by reducing personnel dedicated to the IPSat product lines as we believe we are nearing completion of the development phase of this product.

     As a result of the decrease in our gross profit and our higher operating costs as a percentage of sales, 38% in 2001 compared to 33% in 2000, we recorded earnings from operations of $2.8 million during 2001 compared to $8.9 million in 2000.

     Interest expense decreased to $54,000 in 2001, or 0.1% of sales, from $492,000 in 2000, or .7% of sales, due to the payoff of our credit line during the prior year.

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     Interest income decreased to $523,000 in 2001 from $1.1 million in 2000. The decrease is due to the reduced cash levels in 2001 compared to 2000. As discussed below, cash decreased primarily as a result of the acquisition in Tiernan in April 2001.

     We recorded an income tax expense in 2001 of $1.3 million (41% effective tax rate) compared to an income benefit in 2000 of $2.9 million (31% effective tax rate). The benefit recorded in the prior year was primarily due to a tax benefit of $4.3 million in the third quarter of 2000 resulting from the reduction of the valuation allowance pertaining to our net operating loss carryforward.

     Based on all of the above, we recorded net earnings of $1.9 million, or $0.13 per diluted weighted average share outstanding, during 2001 as compared to $12.4 million, or $0.81 per diluted weighted average share outstanding, during 2000.

     New orders booked (bookings) decreased 9% to $65.6 million for the year ended December 31, 2001 from $72.1 million for the year ended December 31, 2000. This decrease is primarily due to the economic slowdown over the prior year. Our backlog of orders to be shipped, which are unshipped orders from the prior period plus new orders booked less orders shipped during the period, was $14.9 million as of December 31, 2001, a decrease of 13% from the $17.0 million in backlog as of December 31, 2000. This reduction is a direct result of the lower bookings compared to sales during the current period. Our backlog consists of firm orders as evidenced by written contracts and/or purchase orders from customers.

Liquidity and Capital Resources

     We had working capital of $34.0 million at December 31, 2002, which represents a decrease of $2.0 million from $36.0 million at December 31, 2001. Our working capital decreased primarily as a result of a decrease in accounts receivable and inventory of $4.3 million and $7.2 million, respectively. The decreases were offset by an increase in cash of $9.0 million and a decrease in accounts payable of $0.6 million. See the discussion below of events related to this activity.

     Net cash provided by operating activities was $9.7 million for the year ended December 31, 2002 compared to cash used in operating activities of $3.7 million for the year ended December 31, 2001. The change is primarily due to a decrease in inventory of $7.2 million to $10.7 million for the year ended December 31, 2002, compared to an increase of $5.1 million during the year ended December 31, 2001. In addition, accounts receivable decreased by $4.3 million to $10.5 million for the year ended December 31, 2002, compared to an increase of $2.9 million during the year ended December 31, 2001. Accrued expense decreased by only $0.08 million during the year ended December 31, 2002 compared to a decrease of $1.8 million during the year ended December 31, 2001. This activity, which resulted in positive changes in the Company’s cash flow was partially offset by a net loss of $9.0 million for the year ended December 31, 2002 compared to net earnings of $1.9 million for the year ended December 31, 2001. However, the net loss during the current year included items that did not have an effect on cash, such as the cumulative effect of a change in accounting principle of $4.3 million which represented the impairment of the remaining goodwill related to prior year acquisitions, and an asset impairment charge of $1.0 million and depreciation and amortization of $2.5 million, which were included in the net loss for the year ended December 31, 2002 but had no effect on cash. Net cash provided by operating activities was $9.7 million for the year ended December 31, 2002 compared to cash used in operating activities of $3.7 million for the year ended December 31, 2001 and cash provided by operating activities of $5.9 million during the year ended December 31, 2000.

     Cash used in investing activities was $1.5 million for the year ended December 31, 2002 compared to $6.0 million and $2.9 million for the years ended December 31, 2001 and 2000, respectively. The decrease in cash used in investing activities is primarily due to assets, net of cash, acquired from Tiernan Communications in the amount of $4.0 million during the year ended December 31, 2001. In addition, capital expenditures were reduced to $1.5 million for the year ended December 31, 2002 compared to $2.1 million during the year ended December 31, 2001.

     We derived net cash from financing activities of $824,000, $773,000, and $10.2 million during the years ended December 31, 2002, 2001, and 2000, respectively. During the year ended December 31, 2002, net cash from financing activities was generated primarily through the exercise of stock options and stock purchased through our Employee Stock Purchase Plan, which provided net proceeds of $307,000 and $592,000 respectively. During the year ended December 31, 2000, net cash from financing activities was generated primarily through a public offering, which generated cash of $16.3 million, net of offering costs. The exercise of warrants, which were issued in connection with the public offering, provided additional proceeds of $5.4 million. These proceeds were partially offset by payments made on our line of credit of $12.3 million in fiscal 2000.

25

     We have a credit arrangement with a bank for up to $10 million, based upon 80% of eligible accounts receivable, as defined. The amount of credit available to us under the credit agreement at December 31, 2002 was $8 million. We pay a facility fee of 0.15% for the committed portion of the arrangement whether or not any amounts are actually drawn on the line of credit. At December 31, 2002 and 2001, we had no borrowings against the line of credit.

     The credit agreement expires on June 30, 2003 and prohibits mergers, consolidations, acquisitions, transfers of assets, liens, loans and investments in other entities and limits the use of proceeds, acquisitions of assets, indebtedness and capital expenditures without the bank's consent. To be eligible to draw funds under the line of credit, the credit agreement requires Singapore Technologies Pte Ltd, our controlling stockholder beneficially owning approximately 65% of our outstanding common stock, to maintain at least a 30% ownership interest in the Company and contains certain financial covenants requiring us to maintain specific levels of tangible net worth, earnings and other ratios. We were in material compliance with all covenants at December 31, 2002.

     We believe that cash and cash equivalents on hand, anticipated future cash receipts, and borrowings available under our credit facility will be sufficient to meet our obligations as they become due for the next twelve months. However, a decrease in our sales or demand for our products or services would likely affect our working capital amounts. Furthermore, failure to maintain compliance with any of the covenants in our credit facility agreement could cause us to lose the ability to draw down funds from the line of credit if we are unable to obtain a waiver or renegotiate the credit agreement. As part of our business strategy, we occasionally evaluate potential acquisitions of businesses, products and technologies. Accordingly, a portion of our available cash may be used at any time for the acquisition of complementary products or businesses. These potential transactions may require substantial capital resources, which, in turn, may require us to seek additional debt or equity financing. There are no assurances that we will be able to consummate any of these transactions. For more detailed information, see our Risk Factors contained in Exhibit 99.1 to this report.

Contractual Obligations and Commitments

We had the following contractual obligations and commitments outstanding as of December 31, 2002:

(in thousands)	Payments due by period
Contractual			Less than						More than
Obligations	Total		1 year		1-3 years		3-5 years		5 years
Long-Term Debt		—		—		—		—		—
Capital Lease Obligations *	$	60	$	40	$	20		—		—
Operating Leases	$	7,836	$	2,080	$	3,427	$	2,158	$	171
Purchase Obligations	$	2,345	$	2,345		—		—		—
Other Long-Term Liabilities Reflected on the Registrant’s Balance Sheet Under GAAP		501		501		—		—		—
Total	$	10,742	$	4,966	$	3,447	$	2,158	$	171

* Total lease amounts are stated less interest with rates of 2.26% to 12.96% calculated to be $2,597 for the life of the leases.

Impact Of Inflation

     We do not believe that inflation has had a material impact on revenues or expenses during the last five fiscal periods reported on herein.

Accounting Matters

     In July, 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Goodwill represents the excess of costs over fair value of assets of businesses acquired. Statement 141 required that the purchase method of accounting be used for all business

26

combinations initiated after June 30, 2001. Statement 141 also specifies criteria 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 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually with the provisions of Statement 142. Statement 142 also requires 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. 144, Accounting for Impairment or Disposal of Long-Lived Assets.

     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 continued to be amortized prior to the adoption of Statement 142.

     Statement 141 required, upon adoption of Statement 142, that we evaluate existing intangible assets and goodwill acquired in prior purchase business combinations, and 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, we were 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, we were required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period.

     The Company adopted Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets” on January 1, 2002, the first day of fiscal 2002. Therefore, the amortization of goodwill, which was approximately $449,000 for the year ended December 31, 2001, was suspended effective on that date. The Company also performed its transitional impairment analysis of goodwill as of January 1, 2002, as required by SFAS 142. This analysis yielded an impairment charge of $4.3 million, recorded in the fourth quarter 2002 as a cumulative effect of change in accounting principle. The Company has no remaining goodwill on its balance sheet as of December 31, 2002.

     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 supercedes Statement 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 supercedes 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 was effective for fiscal years beginning after December 15, 2001. The adoption of this statement on January 1, 2002 did not have a material impact on the Company’s financial position, results of operations or liquidity.

     In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 amends existing guidance on reporting gains and losses on the extinguishment of debt to prohibit the classification of the gain or loss as extraordinary, as the use of such extinguishments have become part of the risk management strategy of many companies. SFAS No. 145 also amends SFAS No. 13 to require sale-leaseback accounting for certain lease modifications that have economic effects similar to sale-leaseback transactions. The provisions of the Statement related to the rescission of Statement No. 4 is applied in fiscal years beginning after May 15, 2002. The adoption of the provisions related to the rescission of Statement No. 4 is not expected to have a material effect on the Company’s financial statements. Earlier application of these provisions is encouraged. The provisions of the Statement related to Statement No. 13 were effective for transactions occurring after May 15, 2002 and did not have a material effect on the Company’s financial statements.

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     In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of SFAS No. 146 is not expected to have a material effect on the Company’s financial statements.

     In November 2002, the FASB issued Interpretation No. 45 (FIN 45), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on the Company’s financial statements. The disclosure requirements are effective for financial statements of interim and annual periods ending after December 15, 2002. As of December 31, 2002 the Company had no guarantees which were required to be disclosed under FIN 45.

     In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the notes to these consolidated financial statements.

     In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. For a public entity with a variable interest in a variable interest entity created before February 1, 2003, the Interpretation is applied to the enterprise no later than the beginning of the first interim or annual reporting period beginning after June 15, 2003. The application of this Interpretation is not expected to have a material effect on the Company’s financial statements. The Interpretation requires certain disclosures in financial statements issued after January 31, 2003 if it is reasonably possible that the Company will consolidate or disclose information about variable interest entities when the Interpretation becomes effective.

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Item 7A.  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. The Company does not have any derivative financial instruments. As of December 31, 2002, a change in interest rates of 1% would, over a year’s period, have a potential pretax impact of $70,000 on our interest earnings, which is immaterial to our consolidated financial statements.

Item 8. Financial Statements and Supplementary Data

     Our consolidated financial statements as of December 31, 2002 and 2001 and for each of the years in the three-year period ended December 31, 2002, together with related notes and the report of KPMG LLP, independent auditors, are on the following pages. Other required financial information is more fully described in Item 14.

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Independent Auditors’ Report

The Board of Directors and Stockholders
Radyne ComStream Inc.:

     We have audited the accompanying consolidated balance sheets of Radyne ComStream Inc. and subsidiaries (the Company) (a majority-owned subsidiary of Singapore Technologies Pte Ltd) as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

     We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.

     As discussed in Note 2 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards SFAS No. 142, “Goodwill and Other Intangible Assets” which changed the Company’s method of accounting for goodwill and other intangible assets effective January 1, 2002.

/s/ KPMG LLP

Phoenix, Arizona
March 7, 2003

30

Radyne ComStream Inc.
 
Consolidated Balance Sheets

			December 31,
Assets			2002			2001
Current assets:
	Cash and cash equivalents		$	16,229,558			7,210,937
	Accounts receivable — trade, net of allowance for doubtful Accounts of $338,904, and $1,172,523, respectively			10,517,340			14,785,039
	Inventories, net			10,654,601			17,825,073
	Prepaid expenses and other assets			567,352			795,396
	Deferred tax assets			2,552,549			2,552,549
		Total current assets		40,521,400			43,168,994
Property and equipment, net				3,692,842			4,356,587
Other assets:
	Purchased technology, net of accumulated amortization of $1,305,000 at December 31, 2001			—			1,195,000
	Goodwill, net of accumulated amortization of $892,044 at December 31, 2001			—			4,204,986
	Deposits and other intangibles			192,530			314,933
		Total other assets		192,530			5,714,919
			$	44,406,772			53,240,500
Liabilities and Stockholders’ Equity
Current liabilities:
	Current installments of obligations under capital leases		$	37,808			77,385
	Accounts payable, trade			1,880,207			2,472,486
	Accrued expenses			3,899,676			3,979,084
	Taxes payable			—			78,900
	Customer advance payments			707,398			601,836
		Total current liabilities		6,525,089			7,209,691
Deferred rent				72,264			145,582
Obligations under capital leases, excluding current installments				19,861			36,195
Accrued stock option compensation				501,073			501,809
		Total liabilities		7,118,287			7,893,277
Stockholders’ equity:
	Common stock; $.001 par value — authorized, 20,000,000 shares; issued and outstanding, 15,308,832 and 15,020,676 shares at December 31, 2002 and 2001, respectively			15,309			15,021
	Additional paid-in capital			50,921,603			50,022,868
	Accumulated deficit			(13,625,485	)		(4,671,746	)
	Accumulated other comprehensive income (loss)			(22,942	)		(18,920	)
		Total stockholders’ equity		37,288,485			45,347,223
Commitments and contingent liabilities (note 7, 8, 13, and 17)			$	44,406,772			53,240,500

See accompanying notes to consolidated financial statements.

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Radyne ComStream Inc.
 
Consolidated Statements of Operations

			Years ended December 31,
			2002			2001			2000
Net sales			$	57,661,711			68,470,929			70,107,080
Cost of sales				38,040,715			39,558,792			38,279,830
Inventory write down				430,826			—			—
		Gross profit		19,190,170			28,912,137			31,827,250
Operating expenses:
	Selling, general and administrative			13,470,668			15,307,442			13,573,460
	Research and development			8,665,128			10,811,459			9,316,633
	Asset impairment charge			995,000			—			—
	Restructuring charge			1,101,889			—			—
		Total operating expenses		24,232,685			26,118,901			22,890,093
Earnings (loss) from operations				(5,042,515	)		2,793,236			8,937,157
Other (income) expense:
	Interest expense			61,979			54,186			491,717
	Other			(236,133	)		(522,527	)		(1,076,432	)
Earnings (loss) before income taxes and cumulative effect of change in accounting principle				(4,868,361	)		3,261,577			9,521,872
Income taxes (benefit)				(195,827	)		1,326,048			(2,918,735	)
Earnings (loss) before cumulative effect of change in accounting principle				(4,672,534	)		1,935,529			12,440,607
Cumulative effect of change in accounting principle				4,281,205			—			—
		Net earnings (loss)	$	(8,953,739	)		1,935,529			12,440,607
Basic net earnings per share:
		Net earnings (loss)	$	(0.59	)		0.13			0.89
Diluted net earnings per share:
		Net earnings (loss)	$	(0.59	)		0.13			0.81
Weighted average number of common shares outstanding — basic				15,180,379			14,943,516			13,972,078
Weighted average number of common shares outstanding — diluted				15,180,379			15,411,568			15,426,297

See accompanying notes to consolidated financial statements.

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Radyne ComStream Inc.
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)
Years ended December 31, 2002, 2001 and 2000

														Accumulated
		Common stock				Additional								other
						paid-in		Deferred			Accumulated			comprehensive
		Shares		Amount		capital		compensation			Deficit			income (loss)			Total
Balances, December 31, 1999			10,739,382		10,739		23,364,055		—			(19,047,882	)		—			4,326,912
Issuance of common stock for cash			2,828,220		2,828		16,729,599		—			—			—			16,732,427
Exercise of stock options			338,755		339		1,071,509		—			—			—			1,071,848
Exercise of stock warrants			616,463		617		5,393,434		—			—			—			5,394,051
Tax benefit of stock option exercises			—		—		1,044,000		—			—			—			1,044,000
Common stock issued in acquisition			300,000		300		1,647,402		—			—			—			1,647,702
Deferred compensation			—		—		—		(920,762	)		—			—			(920,762	)
Amortization of deferred compensation			—		—		—		76,730			—			—			76,730
Net earnings			—		—		—		—			12,440,607			—			12,440,607
Balances, December 31, 2000			14,822,820		14,823		49,249,999		(844,032	)		(6,607,275	)		—			41,813,515
Exercise of stock options			84,850		85		309,621		—			—			—			309,706
Issuance of common stock through Employee Stock Purchase Plan			113,006		113		463,248		—			—			—			463,361
Deferred compensation			—		—		—		844,032			—			—			844,032
	Comprehensive income:
Effects of exchange rate changes on cash and cash equivalents			—		—		—		—			—			(18,920	)		(18,920	)
Net earnings			—		—		—		—			1,935,529			—			1,935,529
	Comprehensive income																	1,916,609
Balances, December 31, 2001			15,020,676		15,021		50,022,868		—			(4,671,746	)		(18,920	)		45,347,223
Exercise of stock options			88,364		88		306,834		—			—			—			306,922
Issuance of common stock through Employee Stock Purchase Plan			199,792		200		591,901		—			—			—			592,101
	Comprehensive income (loss):
Effects of exchange rate changes on cash and cash equivalents					—		—		—			—			(4,022	)		(4,022	)
Net earnings (loss)					—		—		—			(8,953,739	)		—			(8,953,739	)
	Comprehensive income (loss)																	(8,957,761	)
Balances, December 31, 2002			15,308,832		15,309		50,921,603		—			(13,625,485	)		(22,942	)		37,288,485

See accompanying notes to consolidated financial statements.

33

Radyne ComStream Inc.
 
Consolidated Statements of Cash Flows

				Years ended December 31,
				2002			2001			2000
Cash flows from operating activities:
	Net earnings (loss)			$	(8,953,739	)		1,935,529			12,440,607
	Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:
		Asset impairment charge			995,000			—			—
		Cumulative effect of change in accounting principle			4,281,205			—			—
		Loss on disposal of assets			—			—			30,306
		Deferred income taxes			—			1,301,869			(2,810,418	)
		Depreciation and amortization			2,500,929			3,575,253			2,330,894
	Increase (decrease) in cash resulting from changes in:
		Accounts receivable, net			4,267,699			(2,861,062	)		(2,096,621	)
		Inventories			7,170,472			(5,107,508	)		(2,874,353	)
		Prepaid expenses and other current assets			228,044			(153,806	)		258,350
		Deposits and other intangibles			(115,168	)		—			176,870
		Accounts payable, trade			(592,279	)		247,123			(1,915,151	)
		Accrued expenses			(79,408	)		(1,763,885	)		135,229
		Taxes payable			(78,900	)		(201,100	)		(404,382	)
		Customer advance payments			105,562			(625,399	)		647,017
		Deferred rent			(73,318	)		(32,608	)		178,190
		Accrued stock option compensation			(736	)		(3,604	)		(190,020	)
			Net cash provided by (used in) operating activities		9,655,363			(3,689,198	)		5,906,518
Cash flows from investing activities:
	Capital expenditures				(1,471,558	)		(2,100,472	)		(1,227,811	)
	Proceeds from disposal of assets				14,400			1,720			200
	Investment in non-compete agreement				—			—			(500,000	)
	Acquisition, net of cash acquired				—			(3,999,663	)		(1,092,453	)
			Net cash used in investing activities		(1,457,158	)		(6,098,415	)		(2,820,064	)
Cash flows from financing activities:
	Net borrowings from notes payable under line of credit				—			—			(12,920,000	)
	Net proceeds from sale of common stock				—			—			16,340,453
	Net proceeds from sale of common stock to employees, net of costs				592,101			463,361			391,974
	Exercise of stock options				306,922			309,706			1,071,848
	Exercise of stock warrants				—			—			5,394,051
	Principal payments on capital lease obligations				(74,585	)		(50,188	)		(67,849	)
			Net cash provided by financing activities		824,438			772,879			10,210,477
Net increase (decrease) in cash and cash equivalents					9,022,643			(9,014,734	)		13,296,931
	Effects of exchange rate changes on cash and cash equivalents				(4,022	)		(18,920	)		—
Cash and cash equivalents, beginning of year					7,210,937			16,244,591			2,947,660
Cash and cash equivalents, end of year				$	16,229,558			7,210,937			16,244,591
Supplemental disclosures of cash flow information:
	Cash paid for interest			$	61,979			54,186			810,847
	Cash paid for taxes			$	—			201,100			475,036
Supplemental schedule of non-cash investing and financing activities:
	Acquisition of equipment through capital lease			$	18,674			—			—
	Acquisitions through issuance of stock and assumption of liabilities			$	—			—			1,384,786
	Deferred compensation			$	—			—			920,762
	Tax benefit of stock option exercise			$	—			—			1,044,000

See accompanying notes to consolidated financial statements.

34

Radyne ComStream Inc.
Notes to Consolidated Financial Statements

(1) Organization and Acquisition

Radyne ComStream Inc. (the Company) has locations in Phoenix, Arizona and San Diego, California. The Company designs, manufactures, and sells products, systems and software used for the transmission and reception of data over satellite, microwave and cable communication networks.

The Company operates primarily in North America in the satellite communications industry. ComStream, the Company’s San Diego manufacturing facility, designs, 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.

Radyne Corp., a Delaware corporation, (Radyne) was incorporated on November 25, 1980. On August 12, 1996, Radyne became a subsidiary of Singapore Technologies Pte Ltd (STPL), through its wholly-owned subsidiary, Stetsys US, Inc. (ST). In March 1999, Radyne changed its name to Radyne ComStream Inc. 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. This change has been reflected in the consolidated financial statements. STPL beneficially owned 9,676,800 shares of the Company’s common stock at December 31, 2002. These shares represent 63% of the Company’s voting shares outstanding.

Description of Acquisitions

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 $4.0 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 $1,355,000 and was recorded as goodwill, which was amortized on a straight-line basis over seven years, until January 1, 2002, the date of adoption of SFAS 142. The results of operations of the acquired operations have been included in the accompanying statements of operations from the acquisition date.

The following summary, prepared on a pro forma basis, combines the consolidated results of operations (unaudited) as if the acquisition had taken place on January 1, 2000. 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, 2000 (in thousands, except per share amounts):

	Year ended
	December 31, 2001		December 31, 2000
Net sales	$	71,259		82,925
Other income, net	$	523		169
Total revenues	$	71,782		83,094
Net earnings (loss)	$	137		(1,808	)
Basic earnings (loss) per share	$	0.01		(0.13	)
Diluted earnings (loss) per share	$	0.01		(0.12	)

35

Effective December 1, 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 approximately $1,943,892 and has been recorded as goodwill, which was amortized on a straight-line basis over twelve years until the adoption of SFAS No. 142 on January 1, 2002 at which time amortization was suspended and new accounting rules took effect. The results of operations of the acquired operations have been included in the accompanying statements of operations from the acquisition date.

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 which was based upon the fair value of the common stock at the date of issuance. Amortization of deferred compensation amounted to $844,032 in 2001 and $77,730 in 2000.

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 was amortized using the straight-line method over the term of the agreements. As of December 31, 2001, $270,833 of these costs had been amortized with the remaining balance amortized in 2002.

The following summary, prepared on a pro forma basis, combines the consolidated results of operations (unaudited) as if the acquisition had taken place on January 1, 2000. 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, 2000 (in thousands, except per share amounts):

	Year ended
	December 31, 2000
Net sales	$	72,893
Other income	$	1,076
Total revenues	$	73,969
Net earnings	$	10,841
Basic earnings per share	$	0.78
Diluted earnings per share	$	0.70

(2) Summary of Significant Accounting Policies

     (a)  Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make a number of

36

estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions affect the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. We believe that our estimates and assumptions are reasonable in the circumstances; however, actual results may differ from these estimates under different future conditions.

     (b)  Principles of Consolidation

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

     (c)  Cash Equivalents

The Company considers all money market accounts with original maturities of 90 days or less to be cash equivalents.

     (d)  Revenue Recognition

The Company recognizes revenue upon transfer of ownership and shipment of product on short-term orders and customer contracts.

     (e)  Inventories

Inventories, consisting of satellite modems and related products, are valued at the lower of cost (first-in, first-out) or market. The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based on assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

     (f)  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.

     (g)  Intangible Assets

Goodwill represents the excess of costs over fair value of assets of businesses acquired. The Company adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, as of January 1, 2002. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.

In connection with SFAS No. 142’s transitional goodwill impairment evaluation, the Statement required the Company to perform an assessment of whether there was an indication that goodwill is impaired as of the date of adoption. To accomplish this, the Company was required to identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of January 1, 2002. The Company was required to determine the fair value of each reporting unit and compare it to the carrying amount for each. To the extent the carrying amount of a reporting unit exceeded the fair value of the reporting unit, the Company would be required to

37

perform the second step of the transitional impairment test, as this is an indication that the reporting unit goodwill may be impaired.

     The second step was required for two reporting units. In this step, the Company compared the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill, both of which were measured as of the date of adoption. The implied fair value of goodwill was determined by allocating the fair value of the reporting unit to all of the assets (recognized and unrecognized) and liabilities of the reporting unit in a manner similar to a purchase price allocation, in accordance with SAS No. 141, Business Combinations. The residual value after this allocation was the implied fair value of the reporting unit goodwill. The implied fair value of these reporting units did not exceed their carrying amounts and the Company was required to recognize an impairment loss as further discussed below.

     The Company adopted Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets” on January 1, 2002, the first day of fiscal 2002. Therefore, the amortization of goodwill, which was approximately $449,000 for the year ended December 31, 2001, was suspended effective on that date. The Company determined that it had three reporting units under its one operating segment, largely due to the different profit margins and product base among its reporting units. Two of the Company’s reporting units had recorded goodwill. The Company performed its transitional impairment test on those two reporting units. A present value technique was utilized in determining the fair value of each of the Company’s two reporting units that had goodwill. The discount rate utilized in the present value calculation was 20%. The most significant fundamental assumptions utilized in the discounted cash flow were the cash flow to be generated, the life of the asset, the stage of the product life cycle curve, and the inherent risks in achieving the projected benefits of owning the asset. The forecasts utilized in this analysis were updated during the second quarter of 2002 to reflect the worsening economic environment in the telecommunications industry. The impairment analysis yielded an impairment charge of $4.3 million, recorded in fourth quarter 2002 as a cumulative effect of change in accounting principle. The Company has no remaining goodwill on its balance sheet as of December 31, 2002.

     Prior to the adoption of SFAS No. 142, goodwill was amortized on a straight-line basis over the expected periods to be benefited, generally 7 to 12 years, and assessed for recoverability by determining whether the amortization of the goodwill balance over its remaining life could be recovered through undiscounted future operating cash flows of the acquired operations. All other intangible assets were amortized on a straight-line basis from 3 to 8 years. The amount of goodwill and other intangible assets were amortized on a straight-line basis from 3 to 15 years. The amount of goodwill and other intangible asset impairment, if any, was measured based on projected discounted future operating cash flows using a discount rate reflecting the Company’s average cost of funds.

     As of the date of adoption of SFAS No. 142, the Company had unamortized goodwill with an of $4,204,986. Had SFAS No. 142 been in effect for the years ended December 31, 2001 and 2000 the Company’s net earnings would have been increased to the following pro forma amounts:

	2001		2000
Net earnings:
As reported	$	1,935,000	$	12,441,000
Pro forma	$	2,384,000	$	12,634,000
Diluted earnings per share, as reported	$	0.13	$	0.81
Diluted earnings per share, pro forma	$	0.15	$	0.82

     (h)  Purchased Technology

     In connection with the acquisition of ComStream in 1998, value was assigned to “Purchased technology”. Purchased technology was amortized on a straight-line basis over the expected period to be benefited of 6.25 years. The purchased technology was written-off during 2002.

     (i)  Impairment of Long-Lived Assets

     The Company 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.

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     (j)  Warranty Costs

The Company provides limited warranties on certain of its products and systems for periods generally not exceeding two years. Estimated warranty costs for potential product liability and warranty claims based on the Company’s claim experience are accrued as cost of sales at the time revenue is recognized. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its vendors, the Company’s warranty liability is affected by product failure rates and material usage and service delivery costs incurred in correcting product failures. Should actual product failure rates, material usage or service delivery costs differ from the Company’s estimates, revisions to the estimated warranty liability would be required.

     (k)  Research and Development

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

     (l)  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 amortization of certain intangible assets and 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.

     (m)  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 its customers and generally does not require collateral.

The Company maintains allowances for doubtful accounts for estimating losses resulting from the inability of its customers to make required payments and such losses have not exceeded management’s expectations. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Periodically during the year, the Company maintains cash in financial institutions in excess of the amounts insured by the federal government.

     (n)  Net Earnings (Loss) Per Share

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

     (o)  Fair Value of Financial Instruments

The fair value of accounts receivable and accounts payable approximates the carrying value due to the short-term nature of these instruments.

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     (p)  Employee Stock Options

The Company 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.

The Company applies APB Opinion 25 in accounting for its Plan. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company’s net earnings (loss) and earnings (loss) per share would have been reduced (increased) to the pro forma amounts indicated below:

		For the Year Ended December 31,
		2002			2001			2000
Net earnings (loss)	As reported	$	(8,953,739	)		1,935,529			12,440,607
	Pro forma		(14,136,677	)		(4,229,052	)		5,679,549
Earnings (loss) per share -
Basic	As reported		(0.59	)		0.13			0.89
Basic	Pro forma		(0.68	)		(0.28	)		0.41
Diluted	As Reported		(0.59	)		0.13			0.81
Diluted	Pro forma		(0.68	)		(0.27	)		0.37

The full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net earnings (loss) amounts presented above because compensation cost is reflected (increased) over the options’ vesting period of three years.

The fair value of options granted under the Plan was estimated on the date of grant with vesting periods ranging from one to three years using the Black-Scholes option-pricing model with the following weighted average assumptions used: no dividend yield, expected volatility of 80 percent — 184 percent, risk free interest rate of 4.25 percent — 6 percent, and expected lives of five — seven years. In addition, the Company anticipates that approximately 5% of exercisable shares will be forfeited in each year. The per share weighted average fair value of stock options granted under the Plan for the years ended December 31, 2002, 2001 and 2000 were $3.16, $6.53 and $10.65, respectively, using the Black-Scholes option-pricing model and the assumptions listed above.

     (q)  Segment Reporting

The Company has only one operating business segment, the sale, integration and installation of equipment for satellite, microwave and cable communications and television networks.

     (r)  Reclassifications

Certain reclassifications have been made to the prior years’ consolidated financial statement amounts to conform to the current year presentation.

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(3) Inventories

Inventories consist of the following at December 31:	2002		2001
Raw materials and components	$	8,012,011		11,163,147
Work-in-process		1,836,969		4,228,708
Finished goods		805,621		2,433,218
	$	10,654,601		17,825,073

(4) Property and Equipment

Property and equipment consist of the following at December 31:	2002			2001
Machinery and equipment	$	5,889,176			5,473,370
Furniture and fixtures		4,009,972			3,659,236
Leasehold improvements		678,567			786,648
Demonstration Units		586,378			—
Computers and software		889,319			747,087
		12,053,412			10,666,341
Less accumulated depreciation and amortization		(8,360,570	)		(6,309,754	)
Property and equipment, net	$	3,692,842			4,356,587

(5) Accrued Expenses

Accrued expenses consist of the following at December 31:	2002		2001
Wages, vacation and related payroll taxes	$	966,223		1,299,951
Professional fees		212,855		243,224
Warranty reserve		968,818		1,255,670
Restructuring costs		644,960		—
Other		1,106,820		1,180,239
Total accrued expenses	$	3,899,676		3,979,084

The following summarizes changes to restructuring related liabilities for the year ended December 31, 2002:

		Accrued Lease			Accrued
		Exit Costs			Severance			Total
Balance, December 31, 2001		$	—		$	—		$	—
	Accrual for new activities		791,000			170,000			961,000
	Cash payments		(146,040	)		(170,000	)		(316,040	)
Balance, December 31, 2002		$	644,960		$	—		$	644,960

     Lease exit costs will be paid over the lease term expiring in February 2005.

(6) Line of Credit

     We have a credit arrangement with a bank for up to $10 million, based upon 80% of eligible accounts receivable, as defined. The amount of credit available to us under the credit agreement at December 31, 2002 was $8 million. We pay a facility fee of 0.15% for the committed portion of the arrangement whether or not any amounts are actually drawn on the line of credit. At December 31, 2002 and 2001, we had no borrowings against the line of credit.

     The credit agreement expires on June 30, 2003 and prohibits mergers,

41

consolidations, acquisitions, transfers of assets, liens, loans and investments in other entities and limits the use of proceeds, acquisitions of assets, indebtedness and capital expenditures. To be eligible to draw funds under the line of credit, the credit agreement requires Singapore Technologies Pte Ltd (STPL), our controlling stockholder beneficially owning approximately 65% of our outstanding common stock, to maintain at least a 30% ownership interest in the Company and contains certain financial covenants requiring us to maintain specific levels of tangible net worth, earnings and other ratios. We were in material compliance with all covenants at December 31, 2002.

(7) Obligations Under Capital Leases

The Company leases machinery and equipment under capital leases. The cost and accumulated depreciation of the equipment was $252,440 and $151,073, respectively, at December 31, 2002 and $328,984 and $158,624, respectively, at December 31, 2001, and is included in property and equipment in the accompanying consolidated balance sheets and is being amortized over the estimated useful lives of the machinery and equipment. The reductions in amounts of equipment under capital leases is due to leases which expired in 2002.

     Payments on capital lease obligations due after December 31, 2002 are as follows:

2003	$	39,742
2004		15,023
2005		5,501
2006		—
Total minimum lease payments		60,266
Less amount representing interest at rates of 2.26% to 12.96%		2,597
Present value of minimum lease payments		57,669
Less current installments		37,808
Capital lease obligations due after one year	$	19,861

(8) Commitments

Rent expense was $1,778,557, $1,801,765 and $1,883,743 for the years ended December 31, 2002, 2001, and 2000, respectively. Future minimum rentals under leases after December 31, 2002 are as follows:

2003	$	2,080,645
2004		2,135,734
2005		1,290,856
2006		1,063,202
2007		1,094,901
Thereafter		170,633
Total commitments	$	7,835,971

The Company currently subleases a portion of its Phoenix facility to the University of Phoenix Online. Rent expense was offset by $267,098 for the year ended December 31, 2002 for rent payments received through this sublease. Future minimum rentals under leases after December 31, 2002 are also offset by $275,151, $283,204, $291,257, $299,311 and $255,018 for the years ended December 31, 2003, 2004, 2005, 2006 and 2007, respectively. This sublease agreement expires in 2007.

The Company generally has commitments with certain suppliers and subcontract manufacturers to supply certain components and estimates its non-cancelable obligations for these commitments to be approximately $2,345,000 at December 31, 2002.

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(9) Income Taxes

Income tax expense (benefit) amounted to $(195,827), $1,326,048 and ($2,918,735) for the years ended December 31, 2002, 2001 and 2000, respectively. The actual tax expense (benefit) for these periods differs from the “expected” tax expense for those periods as follows:

		Years ended December 31,
		2002			2001			2000
Computed “expected” tax expense		$	(3,110,822	)		1,108,936			3,237,436
State tax expense			(26,402	)		357,554			476,094
Change in federal valuation allowance			2,921,117			—			(7,790,223	)
Stock option exercises			—			—			1,044,000
Extra territorial income exclusion			—			(269,739	)		—
Research and development credits			—			(70,000	)		—
Other adjustments			20,280			199,297			113,958
	Total	$	(195,827	)		1,326,048			(2,918,735	)

The income tax benefit of $195,827 in 2002 results from the recovery of income tax payments made in previous periods.

     Components of income tax expense (benefit) for 2002, 2001 and 2000 follows:

			Current			Deferred			Total
2002:
	Federal		$	(155,824	)		—			(155,824	)
	State			(40,003	)		—			(40,003	)
		Total	$	(195,827	)		—			(195,827	)
2001:
	Federal		$	9,605			774,695			784,300
	State			14,574			527,174			541,748
		Total	$	24,179			1,301,869			1,326,048
2000:
	Federal		$	(273,278	)		(2,295,202	)		(2,568,480	)
	State			26,550			(376,805	)		(350,255	)
		Total	$	(246,728	)		(2,672,007	)		(2,918,735	)

Deferred tax assets consisted of the following at December 31:		2002			2001
Deferred tax assets:
	Cumulative tax effect of net operating loss carryforwards	$	7,940,778			6,504,004
	Tax credits		351,258			351,258
	Temporary differences		4,313,094			2,503,399
	Valuation allowance		(10,052,581	)		(6,806,112	)
		$	2,552,549			2,552,549

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The net change in the total valuation allowance for the years ended December 31, 2002 and 2001 was $3,246,469 and $0, respectively. At December 31, 2002, the Company has net operating loss carryforwards of approximately $20,195,000 expiring in various years through 2022, and federal tax credit of $351,000 for utilization against taxable income/taxes payable of future periods, if any. Management believes that its ability to utilize certain of its net operating loss and tax credit carryforwards to offset future taxable income within the carryforward periods under existing tax laws and regulations is more likely than not. However, due to the net loss incurred in 2002 and the priority in which net operating loss carryforwards are utilized, the Company provided a 100% valuation allowance against the net deferred tax assets arising in 2002. During the quarter ended September 2000, the Company evaluated the likelihood that it would utilize a portion of its net operating loss carryforwards. The Company reduced the valuation allowance relating to net operating loss carryforwards it expected to utilize creating a tax benefit of $4,332,000 for the quarter ended September 30, 2000.

(10) Significant Customers and Foreign and Domestic Sales

During 2002 and 2001, no customers represented greater than 10% of net sales. During 2000, one customer represented 12.4% of net sales.

Our sales in principal foreign and domestic markets as a percentage of total sales for the years ended December 31, 2002, 2001 and 2000:

	Years ended December 31,
	2002			2001			2000
Asia		27	%		20	%		25	%
Africa/Middle East		5			3			2
Latin America		3			7			3
Europe		11			15			13
Canada		1			1			1
Total foreign		47			46			44
Domestic		53			54			56
		100	%		100	%		100	%
Foreign assets	$	319,000			388,000			372,000

The Company has two primary product lines: 1) satellite modems and ‘earth stations’ (including services related to integration and installation of this type of equipment), and 2) broadcast products. The sales of satellite modems and earthstations accounted for approximately 63% of 2002, 73% of 2001 and 63.5% of 2000 net sales, respectively.

(11) Stockholders’ Equity

In February 2000, the Company completed an offering of 2,400,000 units, each consisting of one share of common stock and one five-year common stock purchase warrant, plus an additional 360,000 units sold pursuant to the underwriters’ over-allotment option, for a total of approximately $16,340,000 cash, net of issuance costs. Each warrant is exercisable to purchase one share of common stock at a price of $8.75, subject to adjustment in certain circumstances, at any time after the warrants are issued until February 7, 2005. Commencing February 7, 2001, the Company may redeem the warrants for $0.01 per warrant upon no less than 30 days or more than 60 days notice mailed within five days after the closing sales price of the common stock has equaled or exceeded $10.9375 for each of 20 consecutive trading days.

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(12) Earnings (Loss) Per Share

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

		Years ended December 31,
		2002			2001		2000
Earnings (loss) available to common stockholders		$	(8,953,739	)		1,935,529		12,440,607
Basic EPS-weighted average shares outstanding			15,180,379			14,943,516		13,972,078
Basic Earnings (loss) per share:
	Net earnings	$	(0.59	)		0.13		0.89
Basic EPS-weighted average shares outstanding			15,180,379			14,943,516		13,972,078
Effect of dilutive securities			—			468,052		1,454,219
Dilutive EPS-weighted average shares outstanding			15,180,379			15,411,568		15,426,297
Diluted Earnings (loss) per share:
	Net earnings (loss)	$	(0.59	)		0.13		0.81
Stock options not included in diluted EPS since antidilutive			3,322,461			1,692,527		1,452,997
Stock warrants not included in diluted EPS since antidilutive			2,143,537			1,183,166		781,675

(13) Employee Benefit Plan

We have a qualified contributory 401(k) plan that covers all employees who have attained the age of 18 and are employed at the enrollment date. We provided contributions of $266,881, $319,457 and $340,659 respectively, for the years ended December 31, 2002, 2001 and 2000. Each participant may elect to contribute any portion of his or her gross compensation up to the maximum amount allowed by the Internal Revenue Service. During the years ended December 31, 2002, 2001 and 2000, we matched 50% of each employee contribution to the plan up to a maximum annual match of $2,000.

(14) Stock Options

In June 2000, the Board of Directors adopted the 2000 Long-Term Incentive Stock Options Plan (the 2000 Plan), which was approved by the stockholders on June 29, 2000. The 2000 Plan provided for the grant of options to employees of the Company to purchase 2,500,000 shares of common stock. In May 2002, the shareholders approved an amendment to the plan that increased the shares available for issuance under the plan by 1,500,000 to 4,000,000 shares. The option price per share under the 2000 Plan may not be less than the fair market value of the stock (110 percent of the fair market value for an optionee who is a 10 percent stockholder) on the day the option is granted. At December 31, 2002, the Company had 2,288,635 options outstanding under this plan.

In November 1996, the Board of Directors adopted the 1996 Incentive Stock Option Plan (the Plan), which was approved by the stockholders on January 8, 1997. The Plan provided for the grant of options to employees of the Company to purchase up to 1,282,042 shares of common stock, of which 110,100 shares were used for a stock rights offering to employees in 1997. The option price per share under the Plan may not be less than the fair market value of the stock (110 percent of the fair market value for an optionee who is a 10 percent stockholder) on the day the option is granted. In November 1998, the Plan was amended to increase the options available by 900,000, providing a total of 2,071,942 options available to purchase shares of common stock. At December 31, 2002, the Company had 1,019,412 options outstanding under this plan.

At December 31, 2002, the Company had a total of 3,308,047 options outstanding at exercise prices ranging from $2.43 to $14.625 per share. Of the total options, the Company had 285,785 options

45

outstanding at an exercise price of $2.50 per share that carry the right to a cash bonus of $1.719 per purchased share, payable upon exercise. The stock option compensation accrual related to the bonus is $501,073 and $501,809 at December 31, 2002 and 2001, respectively. A summary of the aforementioned stock plan activity follows:

				Weighted
				Average
				Price Per
	Number			Share
Balance, December 31, 1999		1,535,206		$	3.09
Granted		1,626,465			12.27
Forfeited		(144,650	)		6.58
Exercised		(338,755	)		3.16
Balance, December 31, 2000		2,678,266			8.48
Granted		1,411,100			6.60
Forfeited		(434,814	)		9.61
Exercised		(84,850	)		4.23
Balance, December 31, 2001		3,569,702			7.71
Granted		432,000			4.27
Forfeited		(605,291	)		8.17
Exercised		(88,364	)		3.45
Balance, December 31, 2002		3,308,047		$	7.29

A summary of stock options granted at December 31, 2002 follows:

	Options Outstanding					Options Exercisable
			Weighted-
	Number		Average	Weighted-		Number		Weighted-
	Outstanding		Remaining	Average		Exercisable		Average
Range of	at		Contractual	Exercise		at		Exercise
Exercise Prices	12/31/02		Life	Price		12/31/02		Price
$2.43 to   3.125		696,687	5 years	$	2.75		678,312	$	2.75
$3.25 to   4.25		525,800	8 years		4.08		275,175		3.92
$4.49 to   6.00		455,125	9 years		5.73		233,677		5.73
$6.50 to   7.406		801,200	8 years		6.90		493,173		6.88
$8.25 to 14.625		829,235	7 years		14.38		730,611		14.40
$2.43 to 14.625		3,308,047	7.5 years	$	7.29		2,410,948	$	7.55

Non-Executive Employee Stock Option Exchange Offer

On December 23, 2002, the Company offered to exchange certain “out of the money” non-executive employee stock options. As a result of the volatility in the stock market reflecting the current economic climate, many employees held stock options with an exercise price that significantly exceeded the market price of the Company’s common stock. Because the Company believed that these options were not providing the appropriate level of performance incentives, it offered a voluntary option exchange program allowing eligible employees to cancel their current stock options with exercise prices ranging between $6.00 and $8.25 and between $14.00 and $14.63 per share in exchange for a lesser amount of new options that will be granted no earlier than six months and one day after the options are accepted for exchange and canceled by the Company. The participating employees are to receive an amount of new options in accordance with the following exchange ratio schedule, subject to

46

adjustments for any future stock splits, dividends and similar events:

Exercise Price Range	Exchange Ratio
$6.00 — $8.25	0.67 shares covered by a new option for every 1 share covered by a cancelled option
$14.00 — $14.63	0.40 shares covered by a new option for every 1 share covered by a cancelled option

Executive officers, directors, and non-employees were not eligible for this offer. Additionally, employees who received options within six months and a day of the commencement of the exchange offer were not permitted to participate. The offer expired on January 22, 2003. The Company accepted for exchange, options to purchase an aggregate of approximately 999,615 shares of the Company’s common stock, representing approximately 89% of the shares subject to options that were eligible to be exchanged under the offer. Subject to the terms and conditions of the offer, the Company will grant new options to purchase 557,228 shares of common stock no earlier than July 23, 2003.

(15) Employee Stock Purchase Plan

On June 15, 1999, our shareholders adopted the 1999 Employee Stock Purchase Plan (the Purchase Plan), as a means of rewarding and retaining existing employees. The purchase plan allows employees, including officers and directors who are employees, to purchase shares of our common stock at semi-annual intervals through periodic payroll deductions. The purchase price per share, in general will be 85% of the lower of the fair market value of the common stock on the participant’s entry date into the offering period or 85% of the fair market value on the semi-annual purchase date. The Board of Directors or a committee of two or more directors, none of whom will be officers or employees, have full authority to administer all aspects of the Purchase Plan. As of December 31, 2002, 1,000,000 shares are authorized for issuance under the plan while 619,052 shares remain unissued as of December 31, 2002.

(16) Related Party Transactions

Sales to Agilis Communication Technologies Pte Ltd (Agilis), an affiliate of ST, amounted to $ 96,655, $244,022 and $352,048 for the years ended December 31, 2002, 2001 and 2000, respectively.

(17) Contingencies

The Company is involved in litigation and claims arising in the normal course of operations. In the opinion of management based on consultation with legal counsel, losses, if any, from this litigation are covered by insurance or are immaterial; therefore, no provision has been made in the accompanying consolidated financial statements for losses, if any, which might result from the ultimate outcome of these matters.

(18) Supplemental Financial Information

A summary of additions and deductions related to the allowance for doubtful accounts for the years ended December 31, 2002, 2001 and 2000 follows:

47

		Balance at				Charged				Balance at
		Beginning				to Other				End of
		of Year		Additions		Accounts		Deductions		Year
Years ended December 31:
	2002	$	1,172,523		434,818		—		1,268,437		338,904
	2001	$	1,014,813		339,037		—		181,327		1,172,523
	2000	$	791,746		293,033		—		69,966		1,014,813

(19) Quarterly Financial Data — Unaudited

A summary of the quarterly data for the years ended December 31, 2002 and 2001 follows (in thousands):

		First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Total
2002:
	Total revenues	$	15,194			15,909			12,841			13,718			57,662
	Gross profit	$	6,069			3,554			4,003			5,565			19,190
	Operating expenses	$	6,398			5,699			6,912			5,224			24,233
	Earnings (loss) from operations	$	(329	)		(2,145	)		(2,909	)		340			(5,043	)
	Net earnings	$	(304	)		(1,905	)		(2,895	)		(3,850	)		(8,954	)
	Basic earnings (loss) per share	$	(0.02	)		(0.13	)		(0.19	)		(0.25	)		(0.59	)
	Diluted earnings (loss) per share	$	(0.02	)		(0.13	)		(0.19	)		(0.25	)		(0.59	)
2001:
	Total revenues	$	15,999			16,465			16,958			19,049			68,471
	Gross profit	$	6,611			7,715			7,206			7,380			28,912
	Operating expenses	$	5,535			7,228			6,591			6,765			26,119
	Earnings (loss) from operations	$	1,076			487			615			615			2,793
	Net earnings	$	856			293			428			359			1,936
	Basic earnings (loss) per share	$	0.06			0.02			0.03			0.03			0.13
	Diluted earnings (loss) per share	$	0.06			0.02			0.03			0.03			0.13

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

Not Applicable.

48

PART III

Item 10. Directors, Executive Officers and Key Employees

     Information regarding directors and executive officers of the Company is set forth under the captions “Election of Directors” and “Executive Officers and Compensation” in the Company’s Proxy Statement relating to its 2003 Annual Meeting of Stockholders (the “2003 Proxy Statement”) incorporated by reference into this Form 10-K, which has been filed with the Commission within 120 days after the end of the Company’s fiscal year ended December 31, 2002. The “Compensation Committee Report on Executive Compensation,” The Report of the Audit Committee” and the “Stock Price Performance Graph” contained in the 2003 Proxy Statement are not incorporated by reference in this Form 10-K.

Item 11. Director and Executive Compensation

     Information regarding director and executive compensation is set forth under the captions “Election of Directors” and “Executive Officers and Compensation” in the 2003 Proxy Statement, which information is incorporated in this Form 10-K by reference. The “Compensation Committee Report on Executive Compensation,” “The Report of the Audit Committee” and the “Stock Price Performance Graph” contained in the 2003 Proxy Statement are not incorporated by reference in this Form 10-K.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

     Information regarding security ownership of certain beneficial owners and management is set forth under the caption “Security Ownership of Principal Stockholders and Management” in the 2003 Proxy Statement, which information is incorporated in this Form 10-K by reference.

Disclosure with Respect to the Company’s Equity Compensation Plans
as of December 31, 2002

The Company maintains the 1996 Employee Incentive Stock Option Plan (the “1996 Plan”), the 2000 Long-Term Incentive Plan (the “2000 Plan”) and the 1999 Employee Stock Purchase Plan (the “ESPP”), pursuant to which it may grant equity awards to eligible persons.

The following table gives information about equity awards under the Company’s 1996 Plan, the 2000 Plan and the ESPP.

	(a)		(b)		(c)
					Number of
					securities
					remaining available
	Number of				for future issuance
	securities to be				under equity
	issued upon		Weighted-average		compensation plans
	exercise of		exercise price of		(excluding
	outstanding		outstanding		securities
	options, warrants		options, warrants		reflected in column
Plan category	and rights		and rights		(a))
Equity compensation plans approved by security holders [1]		3,308,047	$	7.294		2,583,206
Equity compensation plans not approved by security holders	None			N/A	None
Total		3,308,047	$	7.294		2,583,206

¹  Of the total options outstanding, 1,019,412 and 2,288,635 have been granted under the 1996 Plan and the

49

	2000 Plan, respectively.
2	Of these shares, 619,052 remain available for purchase under the ESPP.

Item 13. Certain Relationships and Related Transactions

     Information regarding certain relationships and related transactions of management is set forth under the caption “Certain Relationships and Related Transactions” in the 2003 Proxy Statement, which information is incorporated in this Form 10-K by reference.

Item 14. Disclosures and Controls

     We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports filed with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Commission and that such information is accumulated and communicated to our management. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based on their most recent evaluation, which was completed within 90 days of the filing of this Annual Report on Form 10-K, our chief executive officer and chief financial officer believe that our disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended) are effective. There were not any significant changes in internal controls or in other factors that could significantly affect these internal controls subsequent to the date of their most recent evaluation.

50

PART IV

Item 15.  Exhibits, Financial Statement Schedules And Reports On Form 8-K

     (a)  (1) The following consolidated financial statements of Radyne ComStream Inc. and subsidiaries are included in Part II, Item 8:

Independent Auditors’ Reports

Consolidated Balance Sheets as of December 31, 2002 and 2001

Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000

Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) for the Years Ended December 31, 2002, 2001 and 2000

Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000

Notes to Consolidated Financial Statements

     (a)  (2) All financial statement schedules have been omitted because they are not applicable, not required, or the information has been disclosed in the consolidated financial statements or notes thereto or otherwise in this Form 10-K report.

(a) (3) See Exhibit Index

(b) Registrant did not file any reports on Form 8-K during the period of October 1 through December 31, 2002

51

SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

RADYNE COMSTREAM INC.
By:	/s/ Robert C. Fitting
	Robert C. Fitting, Chief Executive Officer (Principal Executive Officer)
By:	/s/ Richard P. Johnson
	Richard P. Johnson, Vice President and Chief Financial Officer (Principal Financial Officer)
By:	/s/ Garry D. Kline
	Garry D. Kline, Vice President and Corporate Controller (Principal Accounting Officer)

Dated: March 31, 2003

KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints, jointly and severally, Robert C. Fitting and Richard P. Johnson, his true and lawful attorney-in-fact and agents, with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact or his substitute, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Name	Title	Date
/s/ Lim Ming Seong Lim Ming Seong	Chairman of the Board of Directors	March 31, 2003
/s/ Robert C. Fitting Robert C. Fitting	Chief Executive Officer and Director	March 31, 2003
/s/ Richard P. Johnson Richard P. Johnson	Vice President and Chief Financial Officer (Principal Financial Officer)	March 31, 2003
/s/ Garry D. Kline Garry D. Kline	Vice President and Corporate Controller (Principal Accounting Officer)	March 31, 2003
/s/ C.J. Waylan C.J. Waylan	Director	March 31, 2003
/s/ Lee Yip Loi Lee Yip Loi	Director	March 31, 2003
/s/ Dennis Elliott Dennis Elliott	Director	March 31, 2003
/s/ Tang Kum Chuen Tang Kum Chuen	Director	March 31, 2003

52

I, Robert C. Fitting, certify that:

1.     I have reviewed this annual report on Form 10-K of Radyne ComStream Inc.;

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

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

4.     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

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

     b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

     c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.     The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

     a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

     b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.     The registrant’s other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: March 31, 2003
 
 
/s/ Robert C. Fitting

Robert C. Fitting, Chief Executive Officer
(Principal Executive Officer)

53

I, Richard P. Johnson, certify that:

1.     I have reviewed this annual report on Form 10-K of Radyne ComStream Inc;

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

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

4.     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

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

     b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

     c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.     The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

     a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

     b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.     The registrant’s other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: March 31, 2003
 
 
/s/ Richard P. Johnson

Richard P. Johnson, Chief Financial Officer
(Principal Financial Officer)

54

EXHIBIT INDEX

Exhibit No.	Exhibit
3.1 (1)	Restated Certificate of Incorporation
3.2 (2)	By-Laws, as amended and restated
10.1(a)(3)	1996 Incentive Stock Option Plan
10.1(b)(4)	Amendment to 1996 Incentive Stock Option Plan
10.2 (5)	1999 Employee Stock Purchase Plan
10.3(a) (6)	2000 Long-Term Incentive Plan
10.3(b) (7)	Amendment to 2000 Long-Term Incentive Plan
10.4(a)(8)	Lease between ADI Communication Partners, L.P. and ComStream dated April 23, 1997
10.4(b)(8)	First Amendment to lease between ADI Communication Partners L.P. and ComStream dated July 16, 1997
10.4(c)(8)	Second Amendment to Lease between Kilroy Realty, L.P. and ComStream dated November 18, 1998
10.5(9)	Lease for facility in Phoenix, Arizona
10.6(10)	Credit Agreement by and between the Registrant and Wells Fargo HSBC Trade Bank, N.A.
10.7(11)	Change of Control Agreement, dated as of March 20, 2002, by and between Registrant and Robert C. Fitting
10.8(12)	Change of Control Agreement, dated as of March 20, 2002, by and between Registrant and Steven Eymann
10.9(13)	Change of Control Agreement, dated as of March 20, 2002, by and between Registrant and Brian Duggan
21.1*	Subsidiaries of the Registrant
23.1*	Consent of KPMG LLP
99.1*	Cautionary Statement Regarding Forward-Looking Statements and Risk Factors
99.2*	Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code—Principal Executive Officer
99.3*	Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code—Principal Financial Officer

* filed herewith

(1)	Incorporated by reference from exhibit 3.1 to Registrant’s description of capital stock on Form 8-A12G, filed on July 13, 2000.
(2)	Incorporated by reference from exhibit 3.2 to Registrant’s description of capital stock on Form 8-A12G, filed on July 13, 2000.
(3)	Incorporated by reference to Exhibit 4.1 to Registrant’s Registration Statement on Form S-8, dated and declared effective on March 12, 1997 (File No. 333-23159).
(4)	Incorporated by reference to Exhibit 4.1 to Registrant’s Registration Statement on Form S-8, dated and declared effective on November 18, 1998 (File No. 333-67469).
(5)	Incorporated by reference to Exhibit 4.1 to Registrant’s Registration Statement on Form S-8, dated and declared effective on November 5, 1999 (File No. 333-90383).
(6)	Incorporated by reference to Exhibit 4.1 to Registrant’s Registration Statement on Form S-8, dated and declared effective on July 19, 2000 (File No. 333-41704)
(7)	Incorporated by reference to Exhibit 4.1 to Registrant’s Registration Statement on Form S-8, dated and declared effective on May 29, 2002 (File No. 333-89316).
(8)	Incorporated by reference from Registrant’s Registration Statement on Form S-2, filed January 11, 1999 (File No. 333-70403).

55

(9)	Incorporated by reference to Exhibit 10.3 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 1997, as filed with the SEC on March 27, 1998 (File No. 000-11685).
(10)	Incorporated by reference to Exhibit 10.6 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001, as filed with the SEC on April 1, 2002 (File No. 000-11685).
(11)	Incorporated by reference to Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, as filed with the SEC on May 15, 2002 (File No. 000-11685).
(12)	Incorporated by reference to Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, as filed with the SEC on May 15, 2002 (File No. 000-11685).
(13)	Incorporated by reference to Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, as filed with the SEC on May 15, 2002 (File No. 000-11685).

56 EX-21.1 3 p67635exv21w1.htm EX-21.1

Exhibit 21.1

List of Subsidiaries

Name	Place of Incorporation
ComStream Corporation	Delaware
ComStream UK Limited	England and Wales
ComStream Israel Ltd.	Israel
Armer Communications Engineering Services, Inc.	Delaware
Tiernan Radyne ComStream Inc.	Delaware

EX-21.1

exv21w1

EX-23.1

Exhibit 23.1

INDEPENDENT AUDITORS’ CONSENT

The Board of Directors
Radyne ComStream Inc.:

We consent to the incorporation by reference in the registration statements of Radyne ComStream Inc. on Form S-8 (File No. 333-23159) filed as of March 12, 1997, Form S-8 (File No. 333-67469) filed as of November 19, 1998 and amended as of May 5, 1999, Form S-8 (File No. 333-90383) filed as of November 5, 1999 and Form S-8 (file No. 333-41704) filed as of July 19, 2000, of our report dated March 7, 2003, on the consolidated balance sheets of Radyne ComStream Inc. as of December 31, 2002 and 2001 and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss) and cash flows for each of the years in the three-year period ended December 31, 2002, which report appears in the December 31, 2002 annual report on Form 10-K of Radyne ComStream Inc.

As discussed in Note 2 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” which changed the Company’s method of accounting for goodwill and other intangible assets effective January 1, 2002.

/s/ KPMG LLP
 
Phoenix, Arizona
March 31, 2003 EX-99.1 5 p67635exv99w1.htm EX-99.1

EXHIBIT 99.1

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTORS

     In passing the Private Securities Litigation Reform Act of 1995 (the “Reform Act”), Congress encouraged public companies to make “forward-looking statements” by creating a safe harbor to protect companies from securities law liability in connection with forward-looking statements. Radyne ComStream intends to qualify both its written and oral forward-looking statements for protection under the Reform Act and any other similar safe harbor provisions.

     “Forward-looking statements” are defined by the Reform Act. Generally, forward-looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. The words “believe,” “expect,” “anticipate,” “intends,” “forecast,” “project,” and similar expressions identify forward-looking statements. This Annual Report on Form 10-K for the year ended December 31, 2002 contains forward-looking statements” that involve risks and uncertainties. Such statements may include, but not are limited to: (i) continued growth in demand for satellite system ground-based equipment and satellite-delivered communications services, (ii) continued global deregulation and privatization of telecommunications carriers, (iii) continued growth in worldwide demand for Internet over Satellite connectivity and communications serves in general, (iv) an increase in total foreign sales, and (v) sufficient cash reserves and cash from operations to fund planned future operations and capital requirements through the end of 2003. Such forward-looking statements are within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All forward-looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties that could cause actual events or result to differ materially from those projected. Due to those and other uncertainties and risks, the investment community is urged not to place undue reliance on written or oral forward-looking statements of Radyne ComStream. Radyne ComStream undertakes no obligation to update or revise this Cautionary Statement Regarding Forward-Looking Statements to reflect future developments. In addition, Radyne ComStream undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, or changes to future operating results over time.

     Radyne ComStream provided the following risk factor disclosure in connection with its continuing effort to qualify its written and oral forward-looking statements under the safe harbor protection of the Reform Act and any other similar safe harbor provisions. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include the disclosures contained in the Company’s Annual Report on Form 10-K to which this statement is appended as an exhibit and also include the following:

RISK FACTORS

     You should carefully consider the following risks before you decide to buy our securities. If any of the following risks actually occur, our business, financial condition or results of operations would likely suffer. As a result, the trading price of our securities could decline, and you may lose all or part of the money you paid to buy our securities.

We Have A History Of Operating Losses, And Could Suffer Further Losses In The Future.

     As a result of operating losses during the past year and prior to 1999, we had an accumulated deficit of $13.7 million at December 31, 2002. Our earnings in fiscal 2001 deteriorated significantly compared to the prior year and due to further sales declines during 2002, we experienced further losses. Furthermore, there can be no assurance that we will regain profitability in the future. Future losses would adversely affect our stock price.

Our Quarterly Operating Results Have Fluctuated Significantly In The Past, And We Anticipate That They Could Do So In The Future, Which Could Adversely Affect Our Stock Price.

     We may continue to experience significant quarter to quarter fluctuations in our operating results, which

may result in volatility in the price of our common stock. These fluctuating operating results derive from a variety of factors, including the following:

• timing of the initiation and completion of our purchase orders;

• demand for our products;

• introduction of new or enhanced products by us or our competitors;

• growth of demand for Internet-based products and services in developing countries;

• timing of significant marketing programs we may implement;

• extent and timing of hiring additional personnel;

• competitive conditions in our industry; and

• general economic conditions in the United States and abroad.

     The factors described above are difficult to forecast and could harm our business, financial condition and results of operations. Furthermore, the last two years have been challenging for the telecommunication and Internet industries, thereby resulting in longer sales cycles and delays in the purchase decision-making process of existing and potential customers of our products and services. Accordingly, we may have difficulty in accurately forecasting our revenues for any future quarter.

We Depend On International Sales, Which Could Cause Our Sales Levels To Be Volatile.

     We are dependent on sales to customers outside the United States. We expect that international sales will continue to account for a significant portion of our revenues for the foreseeable future. For example, sales to our foreign customers were approximately 44% for the year ended December 31, 2000, 46% for the year ended December 31, 2001 and 47% for the year ended December 31, 2002. Additionally, we estimate that approximately 60% of our domestic sales are eventually exported. Moreover, the growth in the use of satellites for Internet traffic in recent years has been centered on connecting Internet service providers, or ISPs, with Internet servers. U.S. based ISPs rarely use satellites to provide point-to-point infrastructure for the Internet. Accordingly, we expect that our sales to the Internet Service Provider market will be primarily to customers located outside the United States. As a result of our dependence on foreign markets, the occurrence of any negative international political, economic or geographic events could result in significant revenue shortfalls. These shortfalls could cause our business, financial condition and results of operations to be harmed. Some of the risks of doing business internationally include:

• changing regulatory requirements;

• fluctuations in the exchange rate for the United States dollar;

• the availability of export licenses;

• political and economic instability;

• difficulties in staffing and managing foreign operations, tariffs and other trade barriers;

• changes in diplomatic and trade relationships;

• complex foreign laws and treaties;

• acts of terrorism; and

• difficulty of collecting foreign account receivables.

     In addition, we are subject to the Foreign Corrupt Practices Act, which prohibits us from making payments to government officials and others in order to influence the granting of contracts we may be seeking. Our non-U.S. competitors are not subject to this law and this may give them a competitive advantage over us.

Fluctuations in the Valuations of Foreign Currencies Could Decrease the Purchasing Power of our Foreign Customers, Reduce Sales and Decrease our Earnings.

     Our foreign sales are denominated in United States dollars. As a result, any decrease in the value of foreign currencies relative to the United States dollar may materially adversely affect the demand for our products by increasing their costs in the currency of those countries. For example, the value of the Mexican Peso, Venezuelan Bolivar and the Brazilian Real have deteriorated against the Dollar over the last two years and these markets have experienced decreased bookings and adversely affected our results of operations in 2002.

We Depend On Developing Markets And Their Uncertain Growth Potential Could Result In A Reduction In Revenues And Even Losses.

     We believe a substantial portion of the growth in demand for our products will depend upon customers in developing countries. We cannot provide assurance that such increases in demand will occur or that prospective customers will accept our products. The degree to which we are able to penetrate potential markets in developing countries will be affected to a large extent by the speed with which other competing elements of the communications infrastructure, such as other satellite-delivered solutions, telephone lines, television cable, and land-based solutions, are installed in these developing countries.

The Sales And Implementation Cycles for our Products are Long And Have Recently Increased, and We May Incur Substantial, Non-Recoverable Expenses or Devote Significant Resources To Sales That May Not Occur When Anticipated, If At All.

     A customer’s decision to purchase our products involves a significant commitment of its resources and a lengthy evaluation and product qualification process. After a customer decides to purchase our products, the timing of their deployment and implementation depends on a variety of factors specific to each customer. Further, prospective customers may delay purchasing our products in order to evaluate new technologies and develop and implement new wireless systems. Throughout the sales cycle, we spend considerable resources educating and providing information to prospective customers regarding the use and benefits of our products. Our sales cycle for new customers is lengthy, typically from four to five months, which is an increase from the two to three months we experienced in the past couple of years.

The Continuing Downturn In The Rapidly Evolving Telecommunications And Internet Industries Could Harm Our Business.

     Our success depends upon the continued growth of the telecommunications industry, particularly with regard to the Internet. The rapid growth and evolution in the global telecommunications and Internet industries and the need for high-speed or enhanced telecommunications products has been slowed by recent economic conditions in the United States and elsewhere. The potential growth in these areas is unpredictable. We cannot provide assurance that the deregulation, privatization and economic globalization of the worldwide telecommunications market that has resulted in historical demand for technologies and services will resume in a manner favorable to us or our business strategies.

Competition In Our Industry Is Intense And Can Lead To Reduced Sales And Market Share.

     The markets for ground segment systems are highly competitive. We have a number of major competitors in the satellite communications equipment field. These include large companies, such as Hughes Network Systems, Inc., NEC, and Comtech Telecommunications Corp., which have significantly larger and more diversified operations and greater financial, marketing, personnel and other resources than we possess. As a result, these competitors may develop and expand their products more quickly, adapt more quickly to new or emerging technologies and changes in customer requirements, take advantage of acquisition and other opportunities more readily, and devote greater resources to the marketing and sale of their products than we can.

     Competition from current competitors or future entrants in the markets in which we compete could cause us to lose orders or customers or could force us to lower the prices we charge for our products, all of which would have a material adverse impact on our business, financial condition, and results of operations.

Our Products May Become Obsolete Due To Rapid Technological Change.

     The telecommunications industry, including the ground-based satellite communications systems business, is characterized by rapid and continuous technological change. Future technological advances in the telecommunications industry may result in the introduction of new products or services that compete with our products or render them obsolete. Our success depends in part on our ability to respond quickly to technological

changes through the improvement of our current products and the development of new products. Accordingly, we believe that we will need to allocate a substantial amount of capital to research and development activities in the future. We may not generate cash flow from operations or have access to outside financing in amounts that are sufficient to adequately fund the development of new products. Even if we are able to obtain the required funding to develop new products, we cannot assure you that we will be able to develop products that we will be able to sell successfully. Our inability to improve our existing products and develop new products could have a material adverse effect on our business, financial condition, and results of operations.

Our Research And Development Efforts Are Costly And The Results Are Uncertain, Which May Reduce Our Profitability And Could Result In Losses.

     Our continued growth depends on penetrating new markets, adapting existing satellite communications products to new applications, and introducing new communications products that achieve market acceptance and benefit from our established international distribution channels. Accordingly, we are actively applying our communications expertise to design and develop new hardware and software products and enhance existing products. These efforts are costly. We expended $8.7 million, or 15% of our net sales, in fiscal 2002 on research and development activities. This was an increase from the prior year in which we spent $10.8 million, or 16% of our net sales for the year. Additionally, our research and development program may not produce successful results, which would have a material adverse effect on our business, financial condition, and results of operations.

Continued Growth Through Acquisition Could Prove Unsuccessful And Strain Our Personnel And Systems And Divert Our Resources.

     We have pursued, and will continue to pursue, growth opportunities through internal development and acquisition of complementary businesses, products and technologies. Our operations have expanded significantly as a result of our acquisitions of ComStream, Armer, and Tiernan. We are unable to predict whether or when any other prospective acquisition will be completed. However, in order to pursue successfully the opportunities presented by the ground segment and emerging satellite-delivered communications and Internet/intranet-infrastructure markets, we will be required to continue to expand our operations. This expansion could entail various risks, including the following:

• difficulty of assimilating the operations and personnel of acquired businesses or products due to unforeseen circumstances;

• the necessity to attract, train, motivate, and manage a significantly larger number of employees;

• the use of a disproportionate amount of our management’s attention or our resources;

• substantial cash expenditures, potentially dilutive issuances of equity securities, the incurrence of additional debt and contingent liabilities, and amortization expenses related to goodwill and other intangible assets;

• potential disruption of our ongoing business;

• our inability, once integrated, to achieve comparable levels of revenues, profitability or productivity as our existing business or otherwise perform as expected; and

• our potential inability to obtain the desired financial and strategic benefits from the acquisition or investment.

     Moreover, we cannot assure you that we will be able to successfully identify suitable acquisition candidates, complete acquisitions, or expand into new markets. The occurrence of any of the risks described above or any failure to manage further growth in an efficient manner and at a pace consistent with our business could have a material adverse effect on our growth and our business, financial condition, and results of operations.

Our Competitive Position Relies Heavily On Our Proprietary Technology And Intellectual Property.

     We rely on our proprietary technology and intellectual property to maintain our competitive position. Unauthorized parties could attempt to copy aspects of our technologies or to obtain information that we regard as

proprietary. We may not be able to police unauthorized use of our intellectual property. Our failure to protect our proprietary technology and intellectual property could adversely affect our competitive position.

     We generally rely on confidentiality agreements with our employees and some of our suppliers to protect our proprietary technology. We also control access to and distribution of confidential information concerning our proprietary technology. We cannot guarantee that the other parties to these agreements will not disclose or misappropriate the confidential information concerning our proprietary technology, which could have a material adverse effect on our business.

     We rely on patents to protect certain of our proprietary technology. Patents, however, often provide only narrow protection that may not prevent competitors from developing products that function in a manner similar to those covered by our patents. In addition, some foreign countries in which we sell our products do not provide the same level of protection to intellectual property as the laws of the United States provide. We cannot assure you that any patents we currently own or control, or that we may acquire in the future, will prevent our competitors from independently developing products that are substantially similar or superior to ours.

     We may find it necessary to take legal action in the future to enforce or protect our intellectual property rights. Litigation can be very expensive and can distract our management’s time and attention, which could adversely affect our business. In addition, we may not be able to obtain a favorable outcome in any intellectual property litigation.

Our Products Could Infringe On The Intellectual Property Of Others.

     Third parties may in the future assert that our technology violates their intellectual property rights. As a result of such claims, we could be required to enter into licensing arrangements or develop non-infringing products, which could be prohibitively expensive or could divert a significant amount of resources from other aspects of our business.

     We may find it necessary to take legal action in the future to defend against claims that our products or technologies infringe the rights of third parties. Litigation can be very expensive and can distract our management’s time and attention, which could adversely affect our business. In addition, we may not be able to obtain a favorable outcome in any intellectual property litigation.

We Depend Upon Certain Suppliers And Subcontractors, The Loss Of Which Could Cause An Interruption In The Production Of Our Products.

     We rely on subcontractors to assemble and test some of our products. Additionally, our products use a number of specialized chips and customized components or subassemblies produced by a limited number of suppliers. We maintain limited inventories of these products and do not have long-term supply contracts with our vendors. In the event our subcontractors or suppliers are unable or unwilling to fulfill our requirements, we could experience an interruption in product availability until we are able to secure alternative sources of supplies. We are also subject to price increases by suppliers that could increase the cost of our products or require us to develop alternative suppliers, which could interrupt our business. It may not be possible to obtain alternative sources at a reasonable cost. Supply interruptions could cause us to lose orders or customers, which would result in a material adverse impact on our business, financial condition, and results of operations.

The Ownership Interest Of Our Controlling Shareholder May Make Our Stock Less Attractive To Investors And Potential Acquirers.

     Stetsys Pte Ltd, or ST, owns a majority of our outstanding common stock. ST will, therefore, continue to have the ability to elect all of our directors and to control the outcome of all issues submitted to a vote of our stockholders. It also would be impossible for a third party to acquire us without the consent or participation of ST.

Our Outstanding Options And Warrants May Dilute Our Stockholders’ Interests And Could Hinder Us From Obtaining Additional Financing.

     We grant options and warrants to purchase shares of common stock to employees, directors and others with business relationships with us. To the extent that outstanding options and warrants are exercised, our stockholders’ interests will be diluted. Also, we may not be able to obtain additional equity capital on acceptable terms, because the holders of the outstanding options and warrants will likely exercise them at a time when we may be able to obtain such capital on better terms than those under the options and warrants.

Our Redemption Of Redeemable Warrants May Have An Adverse Effect On The Holders Of The Warrants.

     We have the right to redeem all, but not less than all, of the redeemable warrants under certain conditions. Redemption of the redeemable warrants could encourage holders to exercise them and pay the exercise price at a time when it may be disadvantageous for the holders to do so, to sell the redeemable warrants at the current market price when they might otherwise wish to hold the redeemable warrants or to accept the redemption price, which may be substantially less than the market value of the redeemable warrants at the time of redemption. The holders of the redeemable warrants will automatically forfeit their rights to purchase the shares of common stock issuable upon exercise of those warrants unless the warrants are exercised before they are redeemed. The holders of redeemable warrants will not possess any rights as stockholders unless and until the redeemable warrants are exercised.

Stock Prices Of Technology Companies Have Declined Precipitously And The Trading Price Of Our Common Stock And Redeemable Warrants Is Likely To Be Volatile, Which Could Result In Substantial Losses To Investors.

     The trading price of our common stock and redeemable warrants have fallen over the past couple of years and could continue to be volatile in response to factors including the following, some of which are beyond our control:

• decreased demand in the Internet-services sector;

• variations in our operating results;

• announcements of technological innovations or new services by us or our competitors;

• changes in expectations of our future financial performance, including financial estimates by securities analysts and investors;

• changes in operating and stock price performance of other technology companies similar to us;

• conditions or trends in the technology industry;

• additions or departures of key personnel; and

• future sales of our common stock.

     Domestic and international stock markets often experience significant price and volume fluctuations. These fluctuations, as well as general economic and political conditions unrelated to our performance, may adversely affect the price of our common stock and redeemable warrants.

The Large Number Of Shares Eligible For Future Sale May Adversely Affect The Market Price Of Our Common Stock.

     A large number of our issued and outstanding shares of common stock are eligible for future sale. The sale, or availability for sale, of a substantial number of shares of common stock in the public market could materially adversely affect the market price of our common stock and could impair our ability to raise additional capital through the sale of our equity securities.

Nasdaq Could Delist Our Common Stock Or Redeemable Warrants, Which Could Make It More Difficult For You To Sell Or Obtain Quotations As To The Price Of Our Common Stock Or Redeemable Warrants.

     We are currently in compliance with Nasdaq’s continued listing requirements. However, the price of our common stock and warrants is currently below $3. Accordingly, if our stockholder’s equity falls below $10 million, our number of non-affiliated shares falls below 750,000, the market value of our non-affiliated shares falls below $5 million, or if we are not otherwise able to demonstrate to Nasdaq our ability to comply with its other listing

standards, our shares of common stock or redeemable warrants might be delisted.

     If we cannot satisfy Nasdaq’s continued listing criteria in the future, Nasdaq could delist our common stock or redeemable warrants. In the event of delisting, trading, if any, would be conducted only in the over-the-counter market in the so-called “pink sheets” or the NASD’s Electronic Bulletin Board. As a result, an investor would likely find it more difficult to sell or obtain quotations as to the price of our common stock or redeemable warrants.

     A delisting could also subject our common stock to the rules of the Securities and Exchange Commission relating to “penny stocks.” These rules require broker-dealers to make special suitability determinations for purchasers other than established customers and certain institutional investors, and to receive the purchasers’ prior written consent for a purchase transaction prior to sale. Consequently, these penny-stock rules may adversely affect the ability of broker-dealers to sell our common stock and may adversely affect an investor’s ability to purchase or sell shares quickly or inexpensively. This lack of liquidity also could make it more difficult for us to raise capital in the future.

The Failure To Maintain Compliance With Our Credit Facility Agreement Could Prevent Us From Being Able To Draw Down Needed Funds From Our Credit Line.

     We have a credit arrangement with a bank for up to $10 million, based upon 80% of eligible accounts receivable. To be eligible to draw funds under the line of credit, the credit agreement requires our controlling stockholder, Singapore Technologies Pte Ltd., to maintain at least a 30% ownership interest in the Company and contains certain financial covenants requiring us to maintain specific levels of tangible net worth, earnings and other ratios. A failure to maintain compliance with any of the covenants in the credit agreement could prevent us from being able to draw down funds from the line of credit if we are unable to negotiate a waiver of the noncompliance or an amendment to the credit agreement.

We Have Provisions In Our Certificate Of Incorporation That Substantially Eliminate The Personal Liability Of Members Of Our Board Of Directors For Violations Of Their Fiduciary Duty Of Care As A Director And That Allow Us To Indemnify Our Officers And Directors. This Could Make It Very Difficult For You To Bring Any Legal Actions Against Our Directors For Such Violations Or Could Require Us To Pay Any Amounts Incurred By Our Directors In Any Such Actions.

     Pursuant to our certificate of incorporation, members of our Board of Directors will have no liability for violations of their fiduciary duty of care as a director, except in limited circumstances. This means that you may be unable to prevail in a legal action against our directors even if you believe they have breached their fiduciary duty of care. In addition, our certificate of incorporation allows us to indemnify our directors from and against any and all expenses or liabilities arising from or in connection with their serving in such capacities with us. This means that if you were able to enforce an action against our directors or officers, in all likelihood we would be required to pay any expenses they incurred in defending the lawsuit and any judgment or settlement they otherwise would be required to pay.

The Loss Of The Services Of Certain Members Of Our Senior Management Or The Inability To Attract Or Retain Additional Technical Personnel Could Impair Our Ability To Conduct And Expand Our Business.

     Our future performance depends significantly on Robert C. Fitting, our Chief Executive Officer, and Steve Eymann, our Executive Vice President and Chief Technical Officer. The loss of either of these key employees would adversely affect our operations. Mr. Fitting is 65 years old and we may eventually need to effect an appropriate transition to a new Chief Executive Officer. Any such transition may disrupt our business, customers and employees.

     Our continued ability to attract and retain highly skilled personnel also is critical to the operation and expansion of our business. The market for skilled engineers and other technical personnel is extremely competitive, and recruitment and retention costs are high. Although we have been able to attract and retain the personnel necessary to operate our business, we may not be able to do so in the future, particularly as we continue to expand our business into Internet-related products and other markets. The failure to attract and retain personnel with the necessary skills when needed could materially and adversely affect our business and expansion plans.

Since Some Members Of Our Board Of Directors Are Not Residents Of The United States And Certain Of Our Assets Are Located Outside Of The United States, You May Not Be Able To Enforce Any U.S. Judgment For Claims You May Bring Against Such Directors Or Assets.

     Two members of our board of directors are residents of Singapore, and an immaterial portion of our assets and a substantial portion of the assets of these directors are located outside the United States. As a result, it may be more difficult for you to enforce a lawsuit within the United States against these non-U.S. residents than if they were residents of the United States. Also, it may be more difficult for you to enforce any judgment obtained in the United States against our assets or the assets of our non-U.S. resident directors located outside the United States than if

these assets were located within the United States. We cannot assure you that foreign courts would enforce liabilities predicated on U.S. federal securities laws in original actions commenced in such foreign jurisdiction or judgments of U.S. courts obtained in actions based upon the civil liability provisions of U.S. federal securities laws.

Anti-Takeover Effect Of Delaware Law And Our Charter.

     Under the Delaware general Corporation Law, which we are subject to, it will be more difficult for a third party to take control of the Company and may limit the price some investors are willing to pay for shares of our common stock. Furthermore, our certificate of incorporation authorizes the issuance of up to 10,000,000 shares of preferred stock without a vote or other stockholder approval.

Terrorist Attacks and War May Negatively Impact All Aspects of Our Operations, Revenues, Costs and Stock Price.

     Recent terrorist attacks in the United States, as well as future events occurring in response or connection to them, including, without limitation, future terrorist attacks against United States targets, actual conflicts involving the United States or its allies or military or trade disruptions impacting our domestic or foreign suppliers of merchandise, may impact our operations, including, among other things, causing delays or losses in the delivery of wafer supplies to us and decreased sales of our products. More generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the United States and worldwide financial markets and economy. They also could result in economic recession in the United States or abroad. Any of these occurrences could have a significant impact on our operating results, revenues and costs. EX-99.2 6 p67635exv99w2.htm EX-99.2

Exhibit 99.2

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     I, Robert C. Fitting, the CEO of Radyne ComStream Inc., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Radyne ComStream Inc. on Form 10-K for the year ended December 31, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial condition and results of operations of Radyne ComStream Inc.

Dated: March 31, 2003

/s/ Robert C. Fitting
Robert C. Fitting
Chief Executive Officer

EX-99.3 7 p67635exv99w3.htm EX-99.3

Exhibit 99.3

CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     I, Richard P. Johnson, the CFO of Radyne ComStream Inc., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Radyne ComStream Inc. on Form 10-K for the year ended December 31, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial condition and results of operations of Radyne ComStream Inc.

     Dated: March 31, 2003

/s/ Richard P. Johnson
Richard P. Johnson
Chief Financial Officer

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