10-Q

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

Form 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 1, 2002
Commission File Number 1-16541

REMEC, INC.
(Exact name of registrant as specified in its charter)

CALIFORNIA
(State of other jurisdiction of
Incorporation or organization) 95-3814301
I.R.S. Employer Identification Number

3790 VIA DE LA VALLE DEL MAR, CALIFORNIA (Address of principal executive offices)	92014 (Zip Code)
(858) 505-3713 (Registrant's telephone number, including area code)

        Indicate by check 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 month (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 ý    No o

        Indicate number of shares outstanding of each of the issuer's classes of common stock, at the latest practicable date:

ClassCommon shares, $.01 par value Outstanding as of: November 1, 200245,677,721

REMEC, Inc.
Form 10-Q
For The Quarterly and Nine Month Periods Ended November 1, 2002

Index		Page No.
PART I	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Unaudited Financial Statements:
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Qualitative and Quantitative Disclosures About Market Risk	18
Item 4.	Controls and Procedures	18
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	19
Item 6.	Exhibits and Reports on Form 8-K	19
SIGNITURES		20
CERTIFICATIONS		21
EXHIBITS
Exhibit 99.1
Exhibit 99.2

2

PART I—FINANCIAL INFORMATION

Item 1

REMEC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

		November 1, 2002		January 31, 2002
		(unaudited)
ASSETS
Current assets:
	Cash and cash equivalents	$	30,026	$	49,438
	Accounts receivable, net		37,670		33,765
	Inventories, net		42,902		44,314
	Deferred income taxes		25,201		34,582
	Other current assets		6,586		2,767
Total current assets			142,385		164,866
	Property, plant and equipment, net		84,926		90,786
	Goodwill, net		36,407		34,909
	Restricted cash		17,049		17,049
	Intangibles assets, net		7,140		8,774
	Other assets		5,144		8,354
		$	293,051	$	324,738
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
	Accounts payable	$	14,435	$	11,039
	Accrued expenses and other current liabilities		24,525		28,562
Total current liabilities			38,960		39,601
Deferred income taxes and other long-term liabilities			1,433		3,268
Shareholders' equity			252,658		281,869
		$	293,051	$	324,738

See accompanying notes.

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REMEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share data)

	Three months ended						Nine months ended
	November 1, 2002			October 26, 2001			November 1, 2002			October 26, 2001
Net sales	$	59,448		$	52,472		$	171,999		$	171,786
Cost of sales		52,597			45,111			151,197			153,381
Gross profit		6,851			7,361			20,802			18,405
Operating expenses:
Selling, general and administrative		10,499			12,919			31,637			37,413
Research and development, including in-process		8,846			6,493			24,457			19,241
Impairment of long-lived assets		659			—			659			—
Total operating expenses		20,004			19,412			56,753			56,654
Loss from operations		(13,153	)		(12,051	)		(35,951	)		(38,249	)
Write-down of investment		—			—			—			(9,400	)
Gain on sale of subsidiary		—			—			—			7,614
Interest income and other, net		1,185			1,010			2,012			4,467
Loss before income taxes		(11,968	)		(11,041	)		(33,939	)		(35,568	)
Credit for income taxes		—			(4,796	)		(5,932	)		(13,900	)
Net loss	$	(11,968	)	$	(6,245	)	$	(28,007	)	$	(21,668	)
Net loss per common share:
Basic	$	(0.26	)	$	(0.14	)	$	(0.62	)	$	(0.48	)
Diluted	$	(0.26	)	$	(0.14	)	$	(0.62	)	$	(0.48	)
Shares used in computing net loss per common share:
Basic		45,489			44,980			45,342			44,834
Diluted		45,489			44,980			45,342			44,834

See accompanying notes.

4

REMEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)

		Nine months ended
		November 1, 2002			October 26, 2001
OPERATING ACTIVITIES
Net loss		$	(28,007	)	$	(21,668	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization			15,103			14,912
Gain on sale of facilities			(1,800	)		—
Impairment of long-lived assets			659			—
Write-down of investment			—			9,400
Gain on sale of subsidiary			—			(7,614	)
Changes in operating assets and liabilities:
	Accounts receivable		(3,904	)		17,263
	Inventories		1,412			9,075
	Deferred taxes and other current assets		9,393			(1,392	)
	Accounts payable		3,395			(10,805	)
	Accrued expenses, deferred income taxes and other long-term liabilities		(10,425	)		(15,628	)
Net cash used by operating activities			(14,174	)		(6,457	)
INVESTING ACTIVITIES
Additions to property, plant and equipment			(12,347	)		(16,037	)
Payment for acquisitions, net of cash acquired			—			(27,944	)
Proceeds from sale of subsidiary			—			13,782
Proceeds from sale of facilities			5,300			—
Other assets			(1,432	)		3,467
Net cash used by investing activities			(8,479	)		(26,732	)
FINANCING ACTIVITIES
Proceeds from sale of common stock			1,880			2,550
Debt repayments			—			(2,204	)
Net cash provided by financing activities			1,880			346
Effect of exchange rate changes on cash			1,361			—
Decrease in cash and cash equivalents			(19,412	)		(32,843	)
Cash and cash equivalents at beginning of period			49,438			138,526
Cash and cash equivalents at end of period		$	30,026		$	105,683

See accompanying notes.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited)

1.    Quarterly Financial Statements

        The interim condensed consolidated financial statements included herein have been prepared by REMEC, Inc. (the "Company" or "REMEC") without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures, normally included in annual financial statements, have been condensed or omitted pursuant to such SEC rules and regulations; nevertheless, the management of REMEC believes that the disclosures herein are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended January 31, 2002, included in REMEC's Annual Report on Form 10-K/A. In the opinion of management, the interim condensed consolidated financial statements included herein reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the consolidated financial position of REMEC as of November 1, 2002, and the results of its operations for the three and nine month periods ended November 1, 2002 and October 26, 2001. The results of operations for the interim periods ended November 1, 2002, are not necessarily indicative of the results which may be reported for any other interim period or for the entire fiscal year.

        The statements in this report on Form 10-Q that relate to future plans, events or performance are forward-looking statements. Actual results could differ materially due to a variety of factors, including REMEC's success in penetrating the commercial wireless market, risks associated with the cancellation or reduction of orders by significant commercial or defense customers, trends in the commercial wireless and defense markets, risks of cost overruns and product nonperformance, and other risk factors and considerations described in REMEC's Annual Report on Form 10-K/A, and the other documents REMEC files from time to time with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. REMEC undertakes no obligation to publicly release the result of any revisions to these forward-looking statements, other than as required by applicable law, that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

2.    Net Loss Per Share

        REMEC calculates earnings per share in accordance with SFAS No. 128, "Earnings per Share." Basic earnings per share is computed using the weighted average shares outstanding for each period presented. Diluted earnings per share is computed using the weighted average shares outstanding plus potentially dilutive common shares using the treasury stock method at the average market price during the reporting period.

        Dilutive securities may include options, warrants, and preferred stock as if converted and restricted stock subject to vesting. Potentially dilutive securities (consisting of stock options) totaling 43,000 and 157,000 shares for the three and nine months ended November 1, 2002, and 591,000 and 608,000 shares for the three and nine months ended October 26, 2001, respectively, were excluded from the calculation of diluted earnings per share because of their anti-dilutive effect.

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3.    Inventories

        Inventories consist of the following (in thousands):

	November 1, 2002		January 31, 2002
Raw materials	$	30,895	$	30,068
Work in progress		12,007		14,246
	$	42,902	$	44,314

        Inventories related to contracts with prime contractors to the U.S. Government included capitalized general and administrative expenses of $800 and $1,067 at November 1, 2002, and January 31, 2002, respectively. REMEC had a reserve for obsolete and unusable inventory of $20,031 and $23,221 as of November 1, 2002, and January 31, 2002, respectively.

4.    Comprehensive Income (loss)

        Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Net income (loss) and other adjustments included in comprehensive income (loss), including foreign currency translation adjustments and unrealized gains and losses on investments, are reported, net of their related tax effect, to arrive at comprehensive income (loss).

        The components of comprehensive loss, net of tax, are as follows (in thousands):

	Three months ended						Nine months ended
	November 1, 2002			October 26, 2001			November 1, 2002			October 26, 2001
Net loss	$	(11,968	)	$	(6,245	)	$	(28,007	)	$	(21,668	)
Change in net unrealized loss on investment		(217	)		—			(4,884	)		3,665
Foreign currency translation adjustment		(216	)		95			1,797			475
Comprehensive loss	$	(12,401	)	$	(6,150	)	$	(31,094	)	$	(17,528	)

5.    Acquisition Transactions

ADC Mersum Oy ("Solitra")

        On October 26, 2001, REMEC acquired Solitra in Oulu, Finland from ADC Telecommunications, Inc. The Company acquired the assets and assumed all of the obligations of Solitra's radio frequency (RF) division and 100% of the shares of Solitra in exchange for cash consideration of $51.6 million. Solitra specializes in supplying RF equipment to the leading OEMs in the mobile wireless infrastructure industry. The addition of Solitra expanded our product portfolio and global footprint, and furthered our engineering expertise within products currently developed and already supplied for 2.5G and 3G cellular systems. Solitra further expands our presence in Europe and strengthens our relationship with key strategic customers, especially those located in Scandinavia. The acquisition has been accounted for as a purchase, and accordingly, the total purchase price has been allocated to the acquired assets and liabilities assumed at their estimated fair values in accordance with the provisions of SFAS 141. The estimated excess of the purchase price over the net tangible assets acquired of approximately $29.6 million is being carried as intangible assets, including goodwill of $24.8 million. REMEC's consolidated financial statements include the results of Solitra from the date of acquisition.

7

Pacific Microwave Corporation ("PMC")

        On March 7, 2001, REMEC acquired substantially all of the assets and assumed all of the obligations of PMC, a privately held microwave electronics manufacturing company located in the Philippines, in exchange for cash consideration of approximately $23.1 million. PMC specializes in the assembly, manufacture and test of RF, microwave and millimeter wave gallium arsenide devices, components, subsystem and systems for broadband voice, and data transmission over wireless communications networks. The addition of PMC provided an increase in our millimeter wave manufacturing capacity. The acquisition has been accounted for as a purchase, and accordingly, the total purchase price has been allocated to the acquired assets and liabilities assumed at their estimated fair values. REMEC's consolidated financial statements include the results of PMC from the date of acquisition.

Humphrey, Incorporated

        On February 26, 2001, REMEC sold substantially all of the operating assets and operations of its wholly owned subsidiary Humphrey, Inc. in exchange for cash consideration of $13.8 million. The sale of Humphrey resulted in a gain of $7.6 million in the fiscal 2002.

Pro Forma Information

        The following unaudited pro forma summary presents the consolidated results of operations of the Company assuming that the acquisition's of Solitra and PMC and the disposition of Humphrey had occurred on the first day of REMEC's fiscal year ended January 31, 2002. The pro forma condensed consolidated results of operations would be as follows (in thousands, except per share data):

		Nine Months Ended
		November 1, 2002			October 26, 2001
Net sales		$	171,999		$	182,472
Net loss		$	(28,007	)	$	(21,883	)
Net loss per share:
	Basic	$	(0.62	)	$	(0.49	)
	Diluted	$	(0.62	)	$	(0.49	)

6.    Information by Segment

        During the third quarter of fiscal 2003, we divided our business into two groups for financial reporting purposes: Commercial Wireless (which encompasses our former Mobile Wireless, Broadband Wireless and Global Manufacturing groups) and Defense and Space. Not included in the above groups are certain non-operating subsidiaries of REMEC and Nanowave, Inc., a majority owned subsidiary which designs and produces critical modules and integrated subassemblies for fiber optic and other wireless communications. The Company's reportable segments have been determined based on the nature of the customers for the products offered. The Company evaluates performance and allocates resources based on profit or loss from operations before interest, other income and income taxes. Historical segment data has been restated to reflect these changes.

8

Segment Data (in thousands):

		Three months ended						Nine months ended
		November 1, 2002			October 26, 2001			November 1, 2002			October 26, 2001
Sales:
Commercial Wireless		$	39,602		$	34,280		$	112,985		$	116,470
Defense and Space			18,334			15,940			53,347			46,621
All other			1,512			2,252			5,667			8,695
	Consolidated net sales	$	59,448		$	52,472		$	171,999		$	171,786
Income (loss) from operations:
Commercial Wireless		$	(13,167	)	$	(10,913	)	$	(36,585	)	$	(35,964	)
Defense and Space			2,204			1,105			6,382			2,992
All other			(2,190	)		(2,243	)		(5,748	)		(5,277	)
	Consolidated loss from operations	$	(13,153	)	$	(12,051	)	$	(35,951	)	$	(38,249	)
Depreciation and amortization:
Commercial Wireless		$	3,588		$	3,569		$	11,054		$	10,376
Defense and Space			878			675			2,489			2,111
All other			446			856			1,560			2,425
	Consolidated depreciation and amortization	$	4,912		$	5,100		$	15,103		$	14,912

		November 1, 2002		January 31, 2002
Identifiable assets:
Commercial Wireless		$	245,703	$	272,498
Defense and Space			29,648		30,354
All other			17,700		21,886
	Consolidated identifiable assets	$	293,051	$	324,738

7.    Restructuring

        During the fourth quarter of fiscal 2002, the Company announced that it was undertaking various actions to restructure its operations to improve its overall financial performance. The Company's restructuring plan included reductions in its overall cost structure, realignment of manufacturing capacity to current levels of demand and the transition of manufacturing operations to low cost, low tax offshore locations. Part of the restructuring effort also included a reduction in force of approximately 1,100 employees. As a result of this plan, restructuring related charges of approximately $17.3 million were recognized as operating expenses in fiscal 2002.

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        The following table (in thousands) summarizes the balance of the accrued restructuring reserve, which has been included in accrued liabilities at November 1, 2002:

		Severance Costs for Involuntary Employee Terminations			Costs to Exit Certain Lease Obligations			Other Costs Related to Consolidation of Facilities			Total
Balance at January 31, 2002		$	707		$	2,208		$	250		$	3,165
Restructuring charge activity:
	Cash		(707	)		(1,034	)		(220	)		(1,961	)
Balance at November 1, 2002		$	—		$	1,174		$	30		$	1,204

        The Company completed the disposal of redundant assets, the facility consolidation and the remaining workforce reductions associated with its restructuring during the third quarter of fiscal 2003. As of November 1, 2002, the Company continues to believe that its estimates of accrued restructuring costs remain appropriate and adequate to complete these efforts.

8.    Goodwill and Other Intangible Assets—Adoption of Statement 142

        In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No.141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. SFAS 141 requires that the purchase method of accounting be used for all business combinations closed after June 30, 2001. SFAS 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. SFAS 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. SFAS 142 requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. Additionally, SFAS 142 requires that goodwill included in the carrying value of equity method investments no longer be amortized.

        The Company has implemented SFAS 141 and SFAS 142 and began applying the new rules on accounting for goodwill and other intangible assets effective February 1, 2002. The net book value assigned to our assembled workforce intangible asset at November 1, 2002, which totaled approximately $0.5 million has been reclassed and reported as goodwill and will no longer be amortized effective February 1, 2002.

        The following table presents a roll-forward of goodwill from February 1, 2002 to November 1, 2002 (in thousands):

	Goodwill, net
Balance at January 31, 2002	$	34,909
Reclassification of assembled workforce intangible		500
Revaluation of acquisition goodwill		998
Balance at November 1, 2002	$	36,407

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        The following table presents reconciliation's of net loss and per share data to what would have been reported had the new rules been in effect for the three and nine months ended October 26, 2001. (in thousands, except per share data):

	Three Months Ended						Nine Months Ended
	November 1, 2002			October 26, 2001			November 1, 2002			October 26, 2001
Net loss as reported	$	(11,968	)	$	(6,245	)	$	(28,007	)	$	(21,668	)
Add back goodwill amortization, net of tax		—			581			—			1,743
Adjusted net loss	$	(11,968	)	$	(5,664	)	$	(28,007	)	$	(19,925	)
Basic and diluted net loss per share:
Reported net loss per share	$	(0.26	)	$	(0.14	)	$	(0.62	)	$	(0.48	)
Goodwill amortization per share, net of tax		—			0.01			—			0.04
Adjusted net loss per share	$	(0.26	)	$	(0.13	)	$	(0.62	)	$	(0.44	)

Other Intangible Assets

        Acquired intangible assets subject to amortization at November 1, 2002 were as follows (in thousands):

	Gross Carrying Value		Accumulated Amortization		Net Carrying Value
Core technology	$	9,800	$	3,462	$	6,338
Patents and trademark		1,574		772		802
	$	11,374	$	4,234	$	7,140

        Amortization expense for intangible assets was $448 and $1,151 for the three months and nine months ended November 1, 2002, respectively, and $244 and $732 for the three and nine months ended October 26, 2001, respectively.

9.    Newly Issued Accounting Standards

        In July 2002, FASB issued SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities." The statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a liability for costs associated with an exit or disposal activity be recognized when a liability is incurred. Under Issue 94-3, a liability for an exit cost as generally defined in Issue 94-3 was recognized at the date of an entity's commitment to an exit plan. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, however, earlier adoption is permissible. We do not intend to early adopt SFAS 146, and we do not believe adoption will have a material impact on our operations or financial position.

10.  Income Taxes

        The credit for income taxes recorded reflects the recognition of the tax benefit associated with REMEC's net operating losses. The Company continued to record tax benefit for these operating losses through the end of the second quarter of fiscal 2003 on the basis of its forecast which assumes attaining revenue levels and related margins, continuing with cost cutting measures and implementing tax planning strategies all of which, will ensure the realization of the recorded tax benefits. The

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Company did not record any income tax benefit to its third quarter fiscal 2003 operating results pending an assessment of its ability to realize future tax benefits based on the tax implications of its planned acquisition of Spectrian. If the Company is unable to achieve its forecasted operating results and complete the implementation of its tax planning strategies, the Company will be required to review and may need to reduce the carrying value of its deferred tax assets.

11.  Pending Business Combination

        On October 29, 2002, REMEC and Spectrian Corporation, a publicly-held designer and manufacturer of single-carrier and multi-carrier high-power RF amplifiers, announced that the two companies had entered into an amended definitive merger agreement. Pursuant to the terms of the revised merger agreement, each share of Spectrian common stock will be exchanged for one share of REMEC common stock. This transaction is subject to the approval of REMEC and Spectrian shareholders', as well as customary closing conditions and regulatory approvals. Spectrian is located in Sunnyvale, California and the transaction is expected to close during REMEC's fourth quarter. As of November 1, 2002, the Company has deferred approximately $1.3 million of costs incurred in connection with this transaction. Such costs have been included in the balance sheet as other assets, and would have to be written off to other expense in the event the transaction is not completed.

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Item 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations as a Percentage of Net Sales

        The following table sets forth, as a percentage of total net sales, certain consolidated statement of income data for the periods indicated.

	Three months ended				Nine months ended
	November 1, 2002		October 26, 2001		November 1, 2002		October 26, 2001
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	88.5		86.0		87.9		89.3
Gross profit	11.5		14.0		12.1		10.7
Operating expenses:
Selling, general & administrative	17.6		24.6		18.4		21.8
Research and development	14.9		12.4		14.2		11.2
Impairment of long-lived assets	1.1		—		0.4		—
Total operating expenses	33.6		37.0		33.0		33.0
Loss from operations	(22.1	)	(23.0	)	(20.9	)	(22.3	)
Write-down of investment	—		—		—		(5.5	)
Gain on sale of subsidiary	—		—		—		4.4
Interest income and other, net	2.0		2.0		1.1		2.7
Loss before income taxes	(20.1	)	(21.0	)	(19.8	)	(20.7	)
Credit for income taxes	—		(9.1	)	(3.5	)	(8.1	)
Net loss	(20.1	)%	(11.9	)%	(16.3	)%	(12.6	)%

Overview

        During the third quarter of fiscal 2003, we divided our business into two groups for financial reporting purposes. The Commercial Wireless group, which encompasses our former Mobile Wireless, Broadband Wireless and Global Manufacturing groups, develops and manufactures high frequency subsystems used in the transmission of voice, video and data traffic over fixed access and mobile wireless communications networks. The Defense and Space group provides a broad spectrum of RF, microwave and guidance products for systems integrated by prime contractors in military and space applications. Not included in the above groups are certain non-operating subsidiaries of REMEC and Nanowave, Inc., a majority owned subsidiary which designs and produces critical modules and integrated subassemblies for fiber optic and other wireless communication systems. Historical segment data has been restated to reflect these changes.

Results of Operations

        Net Sales and Gross Profit.    Net sales were $59.4 million and $172.0 million for the three and nine months ended November 1, 2002, respectively, representing increases of $6.9 million (13.3%) and $0.2 million (0.1%), respectively, from the comparable prior year periods. The increase in net sales for both periods presented reflects additional sales of filter products associated with operations acquired in the fourth quarter of the prior fiscal year, the growth in sales at our Defense and Space segment and contract termination settlements which offset decreased sales of other commercial products owing to continued weak demand from telecommunications infrastructure customers.

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        Gross profit was $6.9 million and $20.8 million for the three and nine months ended November 1, 2002, respectively, as compared to $7.4 million and $18.4 million for the comparable prior year periods. For the three months ended November 1, 2002, consolidated gross margin as a percentage of sales decreased to 11.5% from 14.0% in the comparable prior year period principally as a result of the additional manufacturing overhead costs associated with operations acquired in the prior fiscal year and $1.0 million of inventory obsolescence charges recorded in the current fiscal year. On a year-to-date basis, gross margin as a percentage of sales increased to 12.1% from 10.7% in the prior year. Prior year results included reserves for excess inventory of approximately $17.3 million as compared to $1.8 million recorded in the current fiscal year. Excluding the impact of inventory reserves, gross margins as a percentage of sales has decreased during the current fiscal year as a result of additional manufacturing overhead costs associated with acquired operations.

        Segment Information.    The following segment information should be read in conjunction with the financial results of each reporting segment as detailed in Note 6 of the Condensed Consolidated Financial Statements. Results within each of our business segments were as follows:

        Commercial Wireless.    Net sales were $39.6 million and $113.0 million for the three and nine months ended November 1, 2002, respectively, representing an increase of $5.3 million (15.5%) and a decrease of $3.5 million (3.0%) from the comparable prior year periods. The increase in commercial sales during the third quarter of fiscal 2003 resulted from additional sales of filter products associated with operations acquired in the fourth quarter of the prior fiscal year, increased revenue from manufacturing services and $2.1 million of contract termination settlements, which offset decreased sales of other commercial products. The decline in fiscal 2003 year-to-date sales reflects continued weak demand from telecommunications infrastructure customers. Gross margin as a percentage of sales decreased to 7.9% and 7.0% for the three and nine months ended November 1, 2002, respectively from 12.3% and 7.3% in the comparable prior year period as a result of the additional manufacturing overhead costs associated with operations acquired in the prior fiscal year.

        Defense and Space.    Net sales were $18.3 million and $53.3 million for the three and nine months ended November 1, 2002, representing increases of $2.4 million (15.0%) and $6.7 million (14.4%), respectively, from the comparable prior year periods. Gross margin as a percentage of sales increased to 24.5% and 24.8% for the three and nine months ended November 1, 2002, respectively, from 22.8% and 22.2% for the comparable prior year period. The increase in sales is mainly attributable to increased delivery rates based on customer contract requirements. The increase in gross margins as a percentage of net sales reflects the transitioning of several programs from the development and low-rate production phase to the higher gross margin full-rate production phase and improved overhead absorption resulting from the overall increase in production volumes.

        Other Sales.    Other sales, which are primarily generated at our majority owned Nanowave subsidiary, were $1.5 million and $5.7 million for the three and nine months ended November 1, 2002, representing decreases of $0.7 million (32.9%) and $3.0 million (34.8%), respectively, from the comparable prior year periods. The sales decline is attributable to decreased demand for microwave modules for the fiber optic market. For the three and nine months ended November 1, 2002, gross margin as a percentage of net sales decreased to a negative 51.5% and a negative 6.5%, respectively, from a negative 22.7% and a negative 5.3% in the comparable prior year periods as a result of the impact on overhead absorption of the decline in production volume and reserves for inventory obsolescence of $1.0 million.

        Selling, General and Administrative Expenses.    Selling, general and administrative expenses, or SG&A, were $10.5 million and $31.6 million for the three and nine months ended November 1, 2002, respectively, as compared to $12.9 million and $37.4 million during the comparable prior year periods. The decrease in SG&A for the three months ended November 1, 2002, reflects the impact of the Company's cost savings initiatives, consisting primarily of headcount and other payroll related

14

reductions, and a $0.6 million reduction of goodwill amortization due to the implementation of FAS 142, which eliminates the requirement to amortize goodwill. The $5.8 million decrease in SG&A on a year-to-date basis is primarily attributable to the reversal of approximately $1.7 million of accrued employee compensation and professional fees accruals, a $1.7 million reduction of goodwill amortization due to the accounting change discussed above and the impact of the Company's cost cutting initiatives.

        Research and Development Expenses.    Research and development expenses were $8.8 million and $24.5 million for the three and nine months ended November 1, 2002, respectively, as compared to $6.5 million and $19.2 million during the comparable prior year periods. As a percentage of net sales, research and development expenses increased from 12.4% and 11.2% to 14.8% and 14.2% for the three and nine months ended November 1, 2002, respectively. These expenditures are almost entirely attributable to operations acquired during the fourth quarter of the preceding fiscal year by REMEC's Commercial Wireless group and reflects increased development activity associated with new wireless communications product development initiatives that the Company believes are required to meet current and future market and customer requirements.

        Impairment of long-lived assets.    Results of operations for the three and nine months ended November 1, 2002 include an asset impairment charge of $0.7 million related to the write-off of leasehold improvements at a facility abandoned by the Company during the third quarter of fiscal 2003.

        Write-Down of Investment.    Results of operations for the nine months ended October 26, 2001 include a $9.4 million charge to operations representing the write-down of our investment in Allgon AB common stock, which had been acquired in conjunction with our proposed merger with Allgon, to its market value. Subsequent increases and decreases have been recorded as unrealized gains and losses in other comprehensive income. There was no similar write-down in the current period.

        Gain on Sale of Subsidiary.    Results of operations for the nine months ended October 26, 2001 include the gain of $7.6 million from the sale of our Humphrey, Inc. subsidiary. There was no similar gain in the current period.

        Other Income and Expense, Net.    Other income and expense, net, was $1.2 million and $2.0 million for the three and nine months ended November 1, 2002, respectively, as compared to $1.0 million and $4.5 million during the comparable prior year periods. Other income and expense for the three and nine months ended November 1, 2002, includes gains of $1.2 million and $1.8 million from the sale of facilities. Excluding this item, other income, consisting principally of interest income, has decreased during the current year due to the combination of a reduction in the amount funds available for investment and reduced yields on our investments due to the decline in short-term interest rates from their levels a year ago.

        Credit for Income Taxes.    The Company did not record any income tax benefit related to its third quarter fiscal 2003 operating loss as compared to a credit for income taxes of $4.8 million recorded in the comparable prior year period. For the nine months ended November 1, 2002, the Company recorded a credit for income taxes of $5.9 million as compared to a credit for income taxes of $13.9 million recorded in the comparable prior year period. Pending an assessment of its ability to realize future tax benefits based on the tax implications of its planned acquisition of Spectrian, the Company will not record any additional tax assets. The credit for income taxes recorded prior to the third quarter of fiscal 2003 reflected the recognition of the tax benefit associated with REMEC's net operating losses. Realization of this tax asset is conditioned on the return to profitability assumed in the Company's operating forecast. The operating forecast assumes attaining profitability, and utilizing the previously recorded tax assets, through improving revenues and gross margins, continuing cost cutting measures and the implementation of certain tax planning strategies. If the Company is unable

15

to achieve its forecasted operating results and complete its tax planning efforts, the Company will need to reduce the carrying value of its deferred tax assets.

Liquidity and capital resources

        At November 1, 2002, REMEC had $103.4 million of working capital, which included cash and equivalents totaling $30.0 million. REMEC leases certain office and production facilities under noncancelable agreements classified as operating leases. In accordance with generally accepted accounting principles, obligations under these long-term leases are not recorded on the balance sheet as liabilities until payment is due. For further discussion of REMEC's lease obligations, see our Annual Report on Form 10-K/A for the year ended January 31, 2002. During fiscal 2001, REMEC entered into a security agreement with a bank whereby REMEC agreed to pledge approximately $17.0 million in connection with the collateralization of one of our facility leases with an affiliate of the bank. The collateral for this lease is included in our balance sheet as restricted cash.

        During the nine months ended November 1, 2002, operations used cash of approximately $14.2 million. The negative operating cash flow during this period was principally the result of the Company's operating losses and cash used to fund working capital requirements including a $3.9 million increase in accounts receivable arising primarily as a result of difficulties encountered in converting to our new accounting system.

        During the nine months ended November 1, 2002, $8.5 million was used by investing activities. Investing activities consisted of $12.3 million of capital expenditures, a net cash inflow of approximately $5.3 million resulting from the cash proceeds received from the sale of certain real property and a net cash outflow of $1.4 million associated with other assets.

        Financing activities provided approximately $1.9 million during the nine months ended November 1, 2002, primarily as a result of proceeds from the issuance of common stock by REMEC under its Employee Stock Purchase Plan.

        Our future capital requirements will depend upon many factors, including the nature and timing of orders by OEM customers, the progress of our research and development efforts, expansion of our marketing and sales efforts, and the status of competitive products. REMEC believes that available capital resources will be adequate to fund its operations for at least twelve months.

CRITICAL ACCOUNTING POLICIES

        The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of any contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.

        Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially may result in materially different results under different assumptions or conditions. We consider the following accounting policies to be those that are both most important to the portrayal of our financial results and that require the most subjective judgment.

        Revenue Recognition.    We derive the majority of our revenue from product sales and we recognize revenue from these sales upon transfer of title to the product, which generally occurs upon shipment to the customer. We generally ship to our customers "Free on Board" shipping point. The Securities and Exchange Commission's Staff Accounting Bulletin No. 101, "Revenue Recognition," provides guidance on the application of generally accepted accounting principles to selected revenue recognition issues. We believe that our revenue recognition policy is consistent with this guidance and in accordance with

16

generally accepted accounting principles. If our shipping policies, including the point of title transfer, were to change, materially different results could occur.

        Inventory Adjustments.    Inventories are stated at the lower of weighted average cost or market. We review the components of our inventory on a regular basis for excess, obsolete and impaired inventory based on estimated future usage and sales. As a general rule, stock levels in excess of one year's expectation of usage or sales are fully reserved. The likelihood of any material inventory write-down is dependent on customer demand, competitive conditions or new product introductions by us or our customers that vary from our current expectations. If future demand were significantly less favorable than projected by management, increases to the reserve would be required. At November 1, 2002, inventories totaled $42.9 million, net of reserves for excess and obsolete inventory of $20.0 million and contract losses of $2.1 million.

        Valuation of Goodwill, Intangible and Other Long-Lived Assets.    In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets and (SFAS) No. 144, Accounting for Impairment or Disposal of Long-Lived Assets, we periodically assess the impairment of goodwill, intangible and other long-lived assets, which require us to make assumptions and judgments regarding the carrying value of these assets. The assets are considered to be impaired if we determine that the carrying value may not be recoverable based upon our assessment of the following events or changes in circumstances: the asset's ability to continue to generate income from operations and positive cash flow in future periods; any volatility or significant decline in our stock price and market capitalization compared to our net book value; loss of legal ownership or title to the asset; significant changes in our strategic business objectives and utilization of the asset(s); and the impact of significant negative industry or economic trends. In accordance with the provisions of SFAS 142, we discontinued amortization of goodwill and will perform impairment tests at least annually.

        If assets are considered to be impaired, the impairment we recognize is the amount by which the carrying value of the assets exceeds the fair value of the assets. In addition, we base the useful lives and related amortization or depreciation expense on our estimate of the period that the assets will generate revenues or otherwise be used by us. If a change were to occur in any of the above-mentioned factors or estimates, the likelihood of a material change in our reported results would increase.

        Accrued Restructuring Related Costs.    To the extent that exact amounts are not determinable, we have estimated amounts for the direct costs and liabilities related to our restructuring in accordance with the Emerging Issues Task Force ("EITF") Issue 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)." We recorded a charge for restructuring related costs of $17.3 million during fiscal 2002. At November 1, 2002, the remaining balance of accrued restructuring costs was $1.2 million. Materially different reported results would be likely if any of the estimated costs or expenses were different from our estimations or if the approach, timing and extent of the restructuring plans adopted by management were different.

        Valuation of Deferred Income Taxes.    Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. Management is implementing tax strategies in the current year that are expected to provide for the realization of the deferred tax assets recorded by the Company. The likelihood of a material change in our expected realization of these assets depends on: future taxable income allowing us to deduct tax loss carry-forwards against such future taxable income, the effectiveness of our tax planning and strategies among the various tax jurisdictions in which we operate and any significant changes in the tax treatment received in the foreign jurisdictions in which we operate. If the Company is unable to generate taxable income in accordance with its forecast or is not able to complete its tax planning strategies it will be required to review and may need to reduce the carrying value of its net deferred tax asset.

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Item 3. Qualitative and Quantitative Disclosures About Market Risk

        Interest Rate Risk.    REMEC is exposed to changes in interest rates to the extent of its investments in certain held-to-maturity securities. Under current REMEC policies, REMEC does not use interest rate derivative instruments to manage exposure to interest rate changes. A hypothetical 100 basis point increase in interest rates in REMEC cash equivalent securities would not materially affect the fair value of these securities at November 1, 2002.

        Foreign Currency Exchange Rate.    REMEC's earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. To a certain extent, foreign currency exchange rate movements also affect REMEC's competitive position, as exchange rate changes may affect business practices and/or pricing strategies on non-U.S. based competitors. The primary foreign currency risk exposure is related to U.S. dollar to British pound and U.S. dollar and British pound to Euro conversions. Considering both the anticipated cash flows from firm sales commitments and anticipated sales for the next quarter, a hypothetical 10% weakening of the U.S. dollar relative to all other currencies would not materially adversely affect expected third quarter earnings or cash flows. This analysis is dependent on actual export sales during the next quarter occurring within 90% of budgeted forecasts. The effect of the hypothetical change in exchange rates ignores the effect this movement may have on other variables including competitive risk. If it were possible to quantify this competitive impact, the results could well be different than the sensitivity effects described above. In addition, it is unlikely that all currencies would uniformly strengthen or weaken relative to the U.S. dollar. In reality, some currencies may weaken while others may strengthen. REMEC reviews its position each month for expected currency exchange rate movements

Item 4. Controls and Procedures

        Evaluation of disclosure controls and procedures.    Based on their evaluation as of a date within 90 days of the filing date of this Report, the Company's principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the "Exchange Act")) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

        Changes in internal controls.    There have been no significant changes in our internal controls or in other factors that could significantly affect our disclosure controls and procedures subsequent to the date of the previously-mentioned evaluation.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings

        On September 24, 2002 a purported shareholder derivative lawsuit was filed against REMEC, naming the current directors of the Company as defendants (and the Company as a nominal defendant), in Superior Court of the State of California, County of San Diego. The lawsuit was filed by the law firm Robbins, Umeda & Fink, LLP as counsel for David Szalay. The complaint asserts, among other things, that the directors of the Company breached their fiduciary duties by allegedly failing to renegotiate and/or terminate the agreement and plan of merger and reorganization entered into between Spectrian Corporation and the Company dated as of May 19, 2002. Szalay is seeking an injunction and unspecified damages.

        REMEC believes that the lawsuit is without merit and intends to defend against it vigorously.

        Other than the shareholder derivative lawsuit described above, neither REMEC nor any of its subsidiaries is presently subject to any material litigation, nor to REMEC's knowledge, is such litigation threatened against REMEC or its subsidiaries, other than routine actions and administrative proceedings arising in the ordinary course of business. The resolution of all the litigation and threatened litigation including the shareholder derivative lawsuit, is not anticipated to have a material adverse effect on the business, results or operations or financial condition of REMEC.

Item 6. Exhibits and Reports on Form 8-K

(a)

The following exhibits are filed herewith:



•

Exhibit 99.1—Certification by the Chairman and Chief Executive Office under Section 906 of the Sarbanes-Oxley Act of 2002



•

Exhibit 99.2—Certification by the Chief Financial and Accounting Officer under Section 906 of the Sarbanes-Oxley Act of 2002




(b)

There were no reports on Form 8-K filed by the registrant during the quarter ended November 1, 2002.

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SIGNATURES

        Pursuant to the requirements of the Securities and Exchange Act of 1934, as amended, the registrant duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

REMEC, Inc.
(Registrant)

By:	/s/  RONALD E. RAGLAND Ronald E. Ragland Chairman and Chief Executive Officer
By:	/s/  DAVID L. MORASH David L. Morash Chief Financial and Accounting Officer
Date:	December 16, 2002

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CERTIFICATIONS

        I, Ronald E. Ragland, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of REMEC, Inc.;



2.

Based on my knowledge, this quarterly 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 quarterly report;



3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 we 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 quarterly 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 quarterly report (the "Evaluation Date"); and



C)

Presented in this quarterly 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 function):



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 quarterly report whether or not 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: December 16, 2002 /s/  RONALD E. RAGLAND Ronald E. Ragland
Chairman and Chief Executive Officer

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CERTIFICATIONS

        I, David L. Morash, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of REMEC, Inc.;



2.

Based on my knowledge, this quarterly 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 quarterly report;



3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 we 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 quarterly 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 quarterly report (the "Evaluation Date"); and



C)

Presented in this quarterly 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 function):



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 quarterly report whether or not 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: December 16, 2002
	/s/  DAVID L. MORASH David L. Morash Chief Financial and Accounting Officer

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PART I—FINANCIAL INFORMATION

Item 1

REMEC, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
REMEC, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited, in thousands, except per share data)
REMEC, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, in thousands)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data) (unaudited)

Item 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Item 3. Qualitative and Quantitative Disclosures About Market Risk
Item 4. Controls and Procedures

PART II—OTHER INFORMATION

Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K

SIGNATURES
CERTIFICATIONS
CERTIFICATIONS

EX-99.

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Exhibit 99.1

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

        The undersigned, in his capacity as an officer of REMEC, Inc. (the "Registrant"), hereby certifies that:

1.

The quarterly report of the Registrant on Form 10-Q for the period ended November 1, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934.



2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

/s/  RONALD E. RAGLAND Ronald E. Ragland
Chairman and Chief Executive Officer

Date: December 16, 2002

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Exhibit 99.1

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

EX-99.2

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Exhibit 99.2

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

        The undersigned, in his capacity as an officer of REMEC, Inc. (the "Registrant"), hereby certifies that:

1.

The quarterly report of the Registrant on Form 10-Q for the period ended November 1, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934.



2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

/s/  DAVID L. MORASH David L. Morash
Chief Financial and Accounting Officer

Date: December 16, 2002

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Exhibit 99.2

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