10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

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

For the quarterly period ended October 29, 2004

OR

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

For the transition period from              to              .

Commission File Number 1-16541

REMEC, INC.

(Exact name of registrant as specified in its charter)

CALIFORNIA	95-3814301
(State of other jurisdiction of incorporation or organization)	I.R.S. Employer Identification Number
3790 VIA DE LA VALLE, SUITE 311 DEL MAR, CALIFORNIA	92014
(Address of principal executive offices)	(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  x    NO  ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    YES  x    NO   ¨

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

Class	Outstanding as of: December 3, 2004
Common Stock, $.01 par value	62,078,679

REMEC, Inc.

Form 10-Q

For The Quarterly Period Ended October 29, 2004

Index		Page No.
PART I	FINANCIAL INFORMATION
Item 1.	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	16
Item 3.	Qualitative and Quantitative Disclosures About Market Risk	25
Item 4.	Controls and Procedures	26
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	27
Item 5.	Other Information	27
Item 6.	Exhibits	27
SIGNATURES		28

CERTIFICATIONS

EXHIBITS

Exhibit 10.1

Exhibit 10.2

Exhibit 31.1

Exhibit 31.2

Exhibit 32.1

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

REMEC, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

	October 29, 2004		January 31, 2004
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	40,517	$	44,783
Short-term investments		2,589		10,296
Accounts receivable, net		76,061		64,194
Notes and other receivables		7,271		7,708
Inventories, net		67,746		75,850
Net assets of discontinued operations (Note 8)		—		10,905
Other current assets		3,432		3,481
Total current assets		197,616		217,217
Property, plant and equipment, net		67,359		75,503
Restricted cash		571		569
Goodwill, net		3,018		65,275
Intangible assets, net		2,653		3,257
Other assets		2,047		2,576
	$	273,264	$	364,397
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	54,532	$	59,855
Accrued expenses and other current liabilities		47,461		47,401
Total current liabilities		101,993		107,256
Deferred income taxes and other long-term liabilities		4,328		3,999
Shareholders’ equity		166,943		253,142
	$	273,264	$	364,397

See accompanying notes.

3

REMEC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except per share data)

	Three months ended						Nine months ended
	October 29, 2004			October 31, 2003			October 29, 2004			October 31, 2003
Net sales	$	104,369		$	98,575		$	323,058		$	252,369
Cost of sales		85,094			76,672			275,827			194,056
Gross profit		19,275			21,903			47,231			58,313
Operating expenses:
Selling, general and administrative		13,781			11,505			41,432			35,849
Research and development		9,049			11,439			31,274			35,099
Impairment of goodwill		—			—			62,400			—
Restructuring and impairment of other long-lived assets (reversals)/charges		(17	)		—			(888	)		378
Total operating expenses		22,813			22,944			134,218			71,326
Loss from continuing operations		(3,538	)		(1,041	)		(86,987	)		(13,013	)
Gain on sale of facility		—			—			—			945
Interest income and other, net		(504	)		(1,954	)		(193	)		846
Loss before income taxes		(4,042	)		(2,995	)		(87,180	)		(11,222	)
Income taxes		9			(31	)		19			24
Loss from continuing operations	$	(4,051	)	$	(2,964	)	$	(87,199	)	$	(11,246	)
Income (loss) from discontinued operations including gain/(loss) on disposal, net of tax		567			(1,120	)		144			(3,507	)
Net loss	$	(3,484	)	$	(4,084	)	$	(87,055	)	$	(14,753	)
Basic net loss per common share:
Loss from continuing operations	$	(0.07	)	$	(0.05	)	$	(1.41	)	$	(0.19	)
Income (loss) from discontinued operations		0.01			(0.02	)		0.00			(0.06	)
	$	(0.06	)	$	(0.07	)	$	(1.41	)	$	(0.25	)
Diluted net loss per common share:
Loss from continuing operations	$	(0.07	)	$	(0.05	)	$	(1.41	)	$	(0.19	)
Income (loss) from discontinued operations		0.01			(0.02	)		0.00			(0.06	)
	$	(0.06	)	$	(0.07	)	$	(1.41	)	$	(0.25	)
Shares used in computing net loss per common share:
Basic		62,153			59,260			61,974			58,382
Diluted		62,153			59,260			61,974			58,382

See accompanying notes.

4

REMEC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

	Nine months ended
	October 29, 2004			October 31, 2003
OPERATING ACTIVITIES
Net loss from continuing operations	$	(87,199	)	$	(11,246	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization from continuing operations		14,732			13,400
Impairment of goodwill		62,400			—
Unrealized gain/(loss) on foreign currency hedges		(1,416	)		294
Gain on sale of facilities		—			(945	)
Restructuring and impairment of other long-lived assets (reversals)/charges		(888	)		10
Changes in operating assets and liabilities:
Accounts and other receivables		(10,889	)		(16,844	)
Inventories		7,879			(32,174	)
Other current assets		49			2,452
Accounts payable		(5,323	)		18,672
Accrued expenses, deferred income taxes and other long-term liabilities		1,075			(13,305	)
Net cash used by operating activities		(19,580	)		(39,686	)
INVESTING ACTIVITIES
Additions to property, plant and equipment		(11,244	)		(10,139	)
Change in restricted cash		(2	)		16,480
Payment for acquisition, net of cash acquired		—			(1,847	)
Short-term investments, net		7,823			(540	)
Proceeds from sale of property, plant & equipment		5,145			6,190
Other assets		387			273
Net cash provided by investing activities		2,109			10,417
FINANCING ACTIVITIES
Proceeds from issuance of long term debt		—			—
Proceeds from sale of common stock		2,643			5,655
Net cash provided by financing activities		2,643			5,655
Decrease in cash from continuing operations		(14,828	)		(23,614	)
Net cash provided by discontinued operations		11,049			4,711
Effect of exchange rate changes on cash		(487	)		246
Decrease in cash and cash equivalents		(4,266	)		(18,657	)
Cash and cash equivalents at beginning of period		44,783			64,396
Cash and cash equivalents at end of period	$	40,517		$	45,739

See accompanying notes.

5

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(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. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended January 31, 2004, included in REMEC’s Annual Report on Form 10-K. In the opinion of management, the condensed consolidated financial statements included herein reflect all adjustments, consisting only of normal recurring adjustments, except for impairment of goodwill of $62.4 million which was recorded in the quarter ending July 30, 2004 (See Note 10), necessary to present fairly the consolidated financial position of REMEC as of October 29, 2004, and the results of its operations for the three and nine month periods ended October 29, 2004 and October 31, 2003. The results of operations for the interim period ended October 29, 2004, are not necessarily indicative of the results, which may be reported for any other interim period or for the entire fiscal year.

2. Loss Per Share

The Company calculates net loss per share in accordance with SFAS No. 128, Earnings per Share. Basic net loss per share is computed using the weighted average shares outstanding for each period presented. The diluted net loss 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. As the Company has incurred net losses for all reporting periods presented, there is no difference between basic and diluted net loss per share.

Dilutive securities may include options, warrants, and preferred stock as if converted and restricted stock subject to vesting. Potentially dilutive securities (which include options) totaling 292,000 and 575,000 shares for the three and nine months ended October 29, 2004, respectively, and 894,000 and 506,000 shares for the three and nine months ended October 31, 2003, respectively, were excluded from the calculation of diluted loss per share because of their anti-dilutive effects.

3. Stock-Based Compensation

In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (“SFAS”) No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, which (i) amends SFAS No. 123, Accounting for Stock-Based Compensation to add two new transitional approaches when changing from the Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees intrinsic value method of accounting for stock-based employee compensation to the SFAS No. 123 fair value method and (ii) amends APB Opinion No. 28, Interim Financial Reporting to call for disclosure of SFAS No. 123 pro forma information on a quarterly basis. The Company has elected to adopt the disclosure only provisions of SFAS No. 148 and will continue to follow APB Opinion No. 25 and related interpretations in accounting for the stock options granted to its employees and directors. Accordingly, employee and director compensation expense is recognized only for those options whose price is less than fair market value at the measurement date.

Pro forma information regarding net loss and net loss per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The pro forma effects of stock-based compensation on net loss and net loss per common share have been estimated at the date of grant using the Black-Scholes option pricing model based on the following weighted average assumptions for the three and nine months ended October 29, 2004 and October 31, 2003: risk-free interest rates of 4% and 6%, respectively, dividend yields of 0%, expected volatility of 56.9%, 63.6%, 57.3% and 83.9%, and a weighted average expected life of the option of five and seven years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options and rights under the employee stock purchase plan have characteristics significantly different from those of traded options, and because changes in the subjective assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair market value of its employee stock options or the rights granted under the employee stock purchase plan. The Company has issued 4,000 and 131,000 shares respectively, upon the exercise of stock options during the three and nine months ended October 29, 2004.

The following is a summary of the pro forma effects on reported net loss and loss per share for the periods indicated as if the Company had elected to recognize compensation expense based on the fair value of the options at their grant date as prescribed by SFAS No. 123. For purposes of the pro forma disclosures, the estimated fair value of the options and the shares granted under the employee stock purchase plan is amortized to expense over their respective vesting period.

6

Pro forma information is as follows (in 000’s, except per share data):

	Three months ended						Nine months ended
	October 29, 2004			October 31, 2003			October 29, 2004			October 31, 2003
Net loss applicable to common shareholders, as reported	$	(3,484	)	$	(4,084	)	$	(87,055	)	$	(14,753	)
Deduct: Stock-based employee compensation expense determined under fair value based method, for all awards, net of related tax effects		(1,728	)		(3,665	)		(5,057	)		(11,868	)
Pro forma net loss	$	(5,212	)	$	(7,749	)	$	(92,112	)	$	(26,621	)
Net loss per share:
As reported – Basic and diluted	$	(0.06	)	$	(0.07	)	$	(1.41	)	$	(0.25	)
Pro forma – Basic and diluted	$	(0.08	)	$	(0.13	)	$	(1.49	)		(0.46	)

4. Short-term investments

Statement of Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments in Debt and Equity Securities requires companies to record certain debt and equity security investments at market value. Investments with maturities greater than three months are classified as short-term investments. All of the Company’s short-term investments are classified as available-for-sale and are reported at fair value with any material unrealized gains and losses, net of tax, recorded as a separate component of accumulated other comprehensive income (loss) within shareholders’ equity. The Company manages its cash equivalents and short-term investments as a single portfolio of highly marketable securities, all of which are intended to be available for the Company’s current operations. The carrying value of these securities approximates their fair value due to the short maturities of these instruments. As of October 29, 2004 and January 31, 2004, the Company had short-term investments of $2.6 million and $10.3 million, respectively. Gross realized and unrealized losses on short-term investments were not significant in either of the periods ended October 29, 2004 and October 31, 2003.

5. Inventories, net

Inventories, net consist of the following (in 000’s):

	October 29, 2004		January 31, 2004
Raw materials	$	45,882	$	44,431
Work in progress		9,623		17,485
Finished goods		12,241		13,934
	$	67,746	$	75,850

The Company had a reserve for excess and obsolete inventory of $15.4 million and $19.5 million as of October 29, 2004, and January 31, 2004, respectively. The Company also had additional reserves for anticipated contract losses of $6.4 million as of October 29, 2004 and January 31, 2004.

7

6. Commitments and Contingencies

Legal Matters

On September 29, 2004 three class action lawsuits were filed against the Company and current and former officers in the United States District Court for the Southern District of California alleging violations of federal securities laws between September 8, 2003 and September 8, 2004. The complaints assert, among other things, that during that time period, false and misleading statements were made and material information was not disclosed regarding the Company’s financial condition and performance, growth, operations, financial statements, markets, management, earnings and present and future business prospects. The Company believes that these lawsuits are without merit and intends to defend against them vigorously.

Other than the lawsuits described above, neither the Company nor any of its subsidiaries is presently subject to any material litigation, nor to the Company’s knowledge, is such litigation threatened against the Company or its subsidiaries, other than routine actions and administrative proceedings arising in the ordinary course of business, all of which collectively are not anticipated to have a material adverse effect on the business or financial condition, cash flows or results of operations of the Company.

Tax Matters

In the ordinary course of doing business, tax authorities regularly issue notices that require the Company to address certain tax matters. These notices are not indicative of an ongoing audit, but are the result of certain discrepancies that occur in various income tax, payroll tax or other tax-related matters. The Company anticipates that the result of these notices will not have a material adverse effect on results of operations, financial condition or cash flows of the Company. The Company believes that it has established sufficient reserves to offset any potential impact that might occur as a result of these notices.

Indemnifications and Guarantees

Effective January 1, 2003, the recognition provisions of FASB Interpretation No. 45 (“FIN 45”) were adopted, which expands previously issued accounting guidance for certain guarantees. Indemnifications issued or modified during the nine months ended October 29, 2004 did not have a material effect on the consolidated financial statements. A description of the Company’s indemnifications as of October 29, 2004 is provided below. The Company is unable to reasonably estimate the maximum amount that it could be required to pay under these arrangements due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made under these agreements have not had a material effect on the Company’s results of operation, financial condition or cash flows other than certain guarantee payments made in connection with the customer financing arrangements discussed below.

The Company often designs, develops and manufactures products to a customer’s specification and may provide the customer with an indemnification against any liability arising from third-party claims of patent, copyright or trademark infringement. The Company cannot determine the maximum amount of losses that it could incur under this type of indemnification because it often may not have enough information about the nature and scope of an infringement claim until it has been submitted to the Company and, to date, no claims have been made.

The Company indemnifies its directors and certain of its current and former officers against third party claims against them in their capacity as directors or officers. Certain of the costs incurred for providing such indemnification may be recovered under various insurance policies.

The Company has guaranteed the performance of one of its wholly owned subsidiaries under a bank agreement to purchase accounts receivable from the subsidiary. This guarantee provides that if the customer does not pay the accounts receivable due to the subsidiary’s failure to perform the underlying contract, the Company guarantees that its subsidiary will repay the funds received from the bank. There have been no uncollected accounts receivable to date and none are anticipated. The total amount of the potential obligation at October 29, 2004 is $15.0 million. Management believes that the likelihood of a payment associated with this guarantee is remote as the failure of the customer to make their required payments to the Company would be a breach of the underlying contract and would subject them to a claim for damages from the Company.

8

Warranty

Warranty reserves are established for costs that are expected to be incurred after the sale and delivery of a product or service for deficiencies under specific product or service warranty provisions. The warranty reserves are determined as a percentage of revenues based on the actual trend of historical charges incurred over various periods, excluding any significant or infrequent issues that are specifically identified and reserved.

The following table summarizes the activity related to warranty reserves (in 000’s):

	Three months ended					Nine months ended
	October 29, 2004			October 31, 2003		October 29, 2004			October 31, 2003
Balance at beginning of period	$	8,446		$	7,874	$	8,867		$	8,791
Additions to reserve		495			786		774			790
Usage and release of warranty reserves		(33	)		—		(733	)		(921	)
Balance at end of period	$	8,908		$	8,660	$	8,908		$	8,660

7. 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 comprehensive income (loss), including foreign currency translation adjustments and unrealized gains and losses on investments, shall be reported, net of their related tax effects, to arrive at comprehensive income (loss).

The components of comprehensive income (loss), net of tax, are as follows (in 000’s):

	Three months ended						Nine months ended
	October 29, 2004			October 31, 2003			October 29, 2004			October 31, 2003
Net loss from continuing operations	$	(4,051	)	$	(2,964	)	$	(87,199	)	$	(11,246	)
Net income (loss) from discontinued operations		567			(1,120	)		144			(3,507	)
Net loss		(3,484	)		(4,084	)		(87,055	)		(14,753	)
Change in net unrealized gain (loss) on short-term investments		671			(500	)		116			(2	)
Change in cumulative foreign currency translation adjustment		1,540			504			(487	)		(246	)
Change in unrealized gain (loss) on foreign currency hedges		(2,811	)		—			(1,416	)		—
Comprehensive loss	$	(4,084	)	$	(4,080	)	$	(88,842	)	$	(15,001	)

8. Acquisition Transactions and Discontinued Operations

Paradigm Wireless Systems, Inc. (“Paradigm”)

In November 2003, the Company acquired all of the assets and assumed all of the obligations of Paradigm, a private merchant supplier of RF power amplifiers to the telecommunications infrastructure industry, in a stock-for-stock merger. The addition of Paradigm expands the Company’s amplifier product portfolio. Paradigm stockholders received 1,892,107 shares of REMEC common stock. The board of directors of both companies unanimously approved the acquisition, which was valued at $22.1 million (based upon the average closing price of the Company’s stock for the period of two days before and two days after the date the terms of the purchase agreement were agreed to, or $11.03 per share). The Company has accounted for this transaction as a purchase in accordance with SFAS No. 141, Business Combinations. The results of Paradigm are included in the Company’s Wireless Systems segment and have been included in the Company’s condensed consolidated financial statements from the date of acquisition forward.

9

Himark Telecom Group Limited (“Himark”)

In May 2003, the Company acquired the business of the Himark group, a group of companies in the private sales distribution and value-added telecommunications sector which are headquartered in Beijing, People’s Republic of China. The Company paid consideration of approximately $12.1 million, including 1,391,650 shares of REMEC common stock with a value of $7.0 million (based on the average closing price of the Company’s stock for the period of two days before and two days after the date the terms of the purchase agreement were agreed to, or $5.03 per share), as well as cash, a note payable and Class A Preferred Stock of REMEC International, Inc. The Class A Preferred Stock of REMEC International, Inc. may be converted in certain circumstances into securities granting a 10% ownership interest of REMEC’s combined Chinese operations. Prior to the acquisition, the Himark group jointly provided sales and distribution services for REMEC since its entry into the China telecom market. The purpose of the Himark acquisition is to accelerate the Company’s penetration into the China telecom market. The Company has accounted for this transaction as a purchase in accordance with SFAS No. 141. The results of Himark are included in the Company’s Wireless Systems segment and have been included in the Company’s condensed consolidated financial statements from the date of acquisition forward, as the Company controls the Himark group through the acquisition of certain assets and liabilities as well as direct ownership of a Hong Kong entity in addition to an option, an exclusive services agreement and a pledge over the equity of a People’s Republic of China entity.

Discontinued Operations

The management of REMEC has engaged the services of financial advisors to facilitate the sale or divestiture of certain of its non-core business operations. Pursuant to its decision, the Company completed the sale of its Canadian subsidiary, REMEC Nanowave Technologies Inc. on August 18, 2004, which had net assets of $2.9 million as of October 29, 2004. Terms of the agreement included an upfront cash payment of $3.0 million and the assumption of notes payable and resulted in a net loss on disposal of $0.2 million. The Company also completed the sale of its Components product line on October 15, 2004, which had net assets of $5.6 million at the time of the sale. This product line sold for $8 million in cash and resulted in a net gain on disposal of $1.4 million. The operations for these businesses in prior periods have been reclassified as assets held for sale in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

Operating results of the discontinued operations are shown, net of tax, separately in the accompanying condensed consolidated statements of operations. The businesses included in discontinued operations had sales aggregating $2.4 million and $14.1 million for the three and nine month ended October 29, 2004, respectively, and $5.5 million and $19.3 million for the three and nine months ended October 31, 2003, respectively.

Pro Forma Information

The following unaudited pro forma summary presents the consolidated results of operations of the Company assuming that the acquisitions of Paradigm and Himark and dispositions of Nanowave and Components occurred on February 1, 2003. The pro forma condensed consolidated results of operations would be as follows (in 000’s, except per share data):

	Three months ended						Nine months ended
	October 29, 2004			October 31, 2003			October 29, 2004			October 31, 2003
Net sales	$	104,369		$	103,261		$	323,058		$	270,794
Net loss from continuing operations		(4,051	)		(10,599	)		(87,199	)		(22,789	)
Net loss from discontinued operations		567			(1,120	)		144			(3,507	)
Net loss		(3,484	)		(11,719	)		(87,055	)		(26,296	)
Loss per share:
Basic and diluted	$	(0.06	)	$	(0.19	)	$	(1.41	)	$	(0.45	)

10

9. Information by Segment

The Company operates in two reportable segments, Wireless Systems and Defense & Space. The Wireless Systems segment was created as the result of the reorganization of the Commercial segment announced on May 10, 2004. The Wireless Systems segment, which includes the recently acquired operations of Paradigm and Himark, develops and manufactures high frequency subsystems used in the transmission of voice, video and data traffic over fixed access and mobile wireless communication networks. The Defense & Space segment provides a broad spectrum of RF, microwave and guidance products for systems integrated by prime contractors in military and space applications. The Company evaluates performance and allocates resources based on profit or loss from operations before interest, other income and income taxes. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.

Segment and Geographic Area Data (in 000’s):

	Three months ended						Nine months ended
	October 29, 2004			October 31, 2003			October 29, 2004			October 31, 2003
Net sales:
Wireless Systems	$	78,805		$	77,623		$	249,740		$	192,056
Defense & Space		25,564			20,952			73,318			60,313
Consolidated net sales	$	104,369		$	98,575		$	323,058		$	252,369
Net sales to external customers:
United States	$	54,561		$	55,110		$	155,818		$	138,163
Canada		11			—			81			—
Europe		26,890			39,331			109,819			87,350
Asia		20,171			4,138			51,826			24,638
All other geographic regions		2,736			(4	)		5,514			2,218
Total net sales to external customers	$	104,369		$	98,575		$	323,058		$	252,369
Income (loss) from continuing operations:
Wireless Systems	$	(8,426	)	$	(7,062	)	$	(98,969	)	$	(22,338	)
Defense & Space		4,375			4,098			11,770			11,092
Consolidated loss from continuing operations	$	(4,051	)	$	(2,964	)	$	(87,199	)	$	(11,246	)
Depreciation and amortization:
Wireless Systems, net of discontinued operations	$	3,735		$	3,720		$	11,386		$	10,861
Defense & Space, net of discontinued operations		1,111			797			3,346			2,539
Consolidated depreciation and amortization, net of discontinued operations	$	4,846		$	4,517		$	14,732		$	13,400
Wireless Systems, discontinued operations	$	52		$	18		$	88		$	54
Defense & Space, discontinued operations		39			356			394			1,032
Consolidated depreciation and amortization, discontinued operations	$	91		$	374		$	482		$	1,086
Wireless Systems	$	3,787		$	3,738		$	11,474		$	10,915
Defense & Space		1,150			1,153			3,740			3,571
Consolidated depreciation and amortization	$	4,937		$	4,891		$	15,214		$	14,486

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	October 29, 2004		January 31, 2004
Identifiable assets:
Wireless Systems, net of discontinued operations	$	230,202	$	316,584
Defense & Space, net of discontinued operations		43,062		36,908
Consolidated identifiable assets, net of discontinued operations	$	273,264	$	353,492
Wireless Systems, discontinued operations	$	—	$	7,519
Defense & Space, discontinued operations		—		3,386
Consolidated identifiable assets, discontinued operations	$	—	$	10,905
Wireless Systems	$	230,202	$	324,103
Defense & Space		43,062		40,294
Consolidated identifiable assets	$	273,264	$	364,397
Long-lived assets by area:
United States, net of discontinued operations	$	37,536	$	69,398
Canada, net of discontinued operations		—		—
Europe, net of discontinued operations		4,424		37,096
Costa Rica, net of discontinued operations		11,604		9,625
Asia, net of discontinued operations		21,514		30,493
Consolidated long-lived assets by area, net of discontinued operations	$	75,078	$	146,612
United States, discontinued operations	$	—	$	—
Canada, discontinued operations		—		—
Europe, discontinued operations		—		—
Costa Rica, discontinued operations		—		—
Asia, discontinued operations		—		—
Consolidated long-lived assets by area, discontinued operations	$	—	$	—
United States	$	37,536	$	69,398
Canada		—		—
Europe		4,424		37,096
Costa Rica		11,604		9,625
Asia		21,514		30,493
Consolidated long-lived assets by area	$	75,078	$	146,612

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10. Goodwill

During the fiscal quarter ending July 30, 2004, the Company determined there were indicators of impairment for the Wireless Systems reporting segment as a result of changes in management’s assumptions with respect to revenue growth and gross margins. The Company tested the goodwill of the reporting segment for impairment in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. The performance of the test required a two-step process. The first step of the test involved comparing the fair value of the affected reporting unit with the reporting segment’s aggregate carrying value, including goodwill. The Company estimated the fair value of the Wireless Systems reporting segment as of July 2004 using the income approach methodology of valuation. The assumptions used in this impairment test included sales growth rates ranging from 4%-8%, gross profit margins ranging from 14%-24%, and a discount rate of 18.6%. The estimates used reflected the Company’s inability to gain market segment share or attain the level of profitability previously anticipated. As a result of this comparison, the Company determined that the carrying value of the Wireless Systems business unit exceeded its implied fair value as of July 2004. The Company had to issue financial statements for the fiscal quarter ended July 30, 2004 before completing the second step of the impairment test that allows management to measure the actual amount of the impairment loss. Using the guidance included in SFAS No. 5, Accounting for Contingencies the Company determined that an impairment loss was probable and that this impairment loss could be reasonably estimated. The Company’s management made its best estimate of the goodwill impairment loss for the Wireless Systems reporting segment to be $62.4 million. In accordance with SFAS No. 142, the Company recorded an estimated charge to write down the value of its goodwill in the fiscal quarter ended July 30, 2004. During the Company’s fiscal quarter ending October 29, 2004, the Company completed the second step of the goodwill impairment test, which required the Company to compare the implied fair value of the reporting segment goodwill with the carrying amount of that goodwill. Based on this assessment, there was no adjustment required to the loss recorded in the second fiscal quarter.

The primary factors that contributed to the impairment assessment of the Wireless Systems reporting segment in the three months ended July 30, 2004 were continued projected losses resulting from industry overcapacity resulting in lower profit margins, and manufacturing cost reductions lagging market price decreases.

The changes in the carrying amount of goodwill, net for the nine months ended October 29, 2004 are as follows:

	Goodwill, net
	(In thousands)
Balance as of January 31, 2004	$	65,275
Goodwill increase related to Paradigm acquisition (Note 8)		143
Impairment losses		(62,400	)
Balance as of October 29, 2004	$	3,018

All of the remaining goodwill relates to the Defense & Space segment for which there are no indicators of impairment.

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11. Restructuring and Impairment of Other Long-lived Assets

2004 Restructuring:

During the fourth quarter of fiscal 2004, the Company announced that as a result of continued operating losses, it was discontinuing production in Finland, eliminating a significant number of positions in its Finnish, Canadian and U.S. workforce and disposing of other non-strategic assets and operations. As a result, the Company recorded a restructuring charge of $2.7 million during the fourth quarter related to its fiscal 2004 restructuring plan. The restructuring charge included $2.1 million in employee severance and related costs for approximately 200 employees, all of whom were identified as of January 31, 2004. The majority of these employees worked in the Company’s Wireless Systems segment and left the Company by the end of April 2004.

The following table (in 000’s) summarizes the balance of the accrued restructuring reserve, which has been included in accrued expenses in the accompanying Condensed Consolidated Balance Sheets related to the 2004 restructuring:

	Severance Costs for Involuntary Employee Terminations
Balance at July 30, 2004	$	74
Activity:
Cash		(57	)
Reversal		(17	)
Balance at October 29, 2004	$	—

2004 Impairment:

The Company tested the long-lived assets of the Wireless Systems reporting segment for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This Statement requires you to recognize an impairment loss only if the carrying amount of the long-lived assets is not recoverable by its undiscounted cash flows, and to measure an impairment loss as the difference between the carrying amount and fair value of the assets. The Company completed this analysis and determined that there was no impairment to its long-lived assets of the Wireless Systems reporting segment as of October 29, 2004.

During the second quarter of fiscal 2005, the Company completed the sale of both of its buildings in Finland. The Company initially recorded a charge of $1.0 million, however, based on higher than expected selling prices, the Company has reversed $0.8 million of the amount originally recorded. This amount is included in the caption Restructuring and Impairment of other Long-lived assets in the statement of operations.

2002 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, which is primarily associated with its Wireless Systems segment, 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. A component of its restructuring charge included the estimated cost of exiting certain leased locations. The facilities leases on these properties expire at various dates through February 2010.

The following table summarizes the balance of the accrued restructuring reserve, which has been included in accrued expenses and other current liabilities in the accompanying Condensed Consolidated Balance Sheet at October 29, 2004 (in 000’s):

	Costs to Exit Certain Lease Obligations
Balance at July 30, 2004	$	189
Activity:
Cash		(158	)
Reversal		—
Balance at October 29, 2004	$	31

The remaining balance of the accrued restructuring reserve, related to the fiscal 2002 restructuring, relates to the Company’s contractual obligations and other charges associated with the consolidation of certain facilities within its Wireless Systems segment.

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12. Intangible Assets

Acquired intangible assets subject to amortization at October 29, 2004 were as follows (in 000’s):

	Gross Carrying Value		Accumulated Amortization			Net Carrying Value
Core technology	$	4,800	$	(2,147	)	$	2,653
Trademark and trade name		110		(110	)		0
	$	4,910	$	(2,257	)	$	2,653

Amortization expense for intangible assets was $0.2 million and $0.5 million for the three months and nine months ended October 29, 2004, respectively, and $0.3 million and $0.7 million for the three and nine months ended October 31, 2003, respectively.

13. Amended Credit Agreement

On July 6, 2004, the Company extended the term of its existing revolving working capital line of credit with its senior lender, Silicon Valley Bank, to July 5, 2005, and increased the maximum amount of the credit facility to $30.0 million of which, $15.8 million was available and $7.0 million has been used under letter of credit arrangements and $7.2 million has been utilized in connection with foreign currency forward contracts and other banking cash management products as of October 29, 2004. The credit facility is secured by the Company’s domestics trade receivables and inventory.

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

Overview

REMEC designs and manufactures microwave and millimeter wave subsystems used in the transmission of voice, video and data traffic over wireless communications networks and provides advanced integrated microwave subsystem solutions for defense and space electronics applications. We manufacture our products at our own plants in Heredia, Costa Rica; Laguna, Philippines; Shanghai, China; Tijuana, Mexico; and Kearny Mesa and Escondido, California. We sell our Wireless Systems products primarily to original equipment manufacturers (OEMs), which in turn integrate our products into wireless infrastructure equipment solutions sold to network service providers. In addition, we sell certain niche products directly to network service providers. Our Defense & Space RF and microwave equipment is sold to major U.S. defense prime contractors for integration into larger systems, primarily radar electronic warfare, communications and navigation. Our net revenue consists principally of sales of our Defense & Space microwave and RF products. Such sales represent most of our total net revenue in fiscal 2005.

The management of REMEC has engaged the services of financial advisors to facilitate the sale or divestiture of certain of its non-core business operations. Pursuant to its decision, the Company completed the sale of its Canadian subsidiary, REMEC Nanowave Technologies Inc. on August 18, 2004, which had net assets of $2.9 million as of October 29, 2004. Terms of the agreement included an upfront cash payment of $3.0 million and the assumption of notes payable. The Company also completed the sale of its Components product line on October 15, 2004, which had net assets of $5.6 million at the time of the sale. This product line sold for $8 million in cash. The operations for these businesses have been reclassified as assets held for sale for all effected periods presented in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

Operating results of the discontinued operations are shown, net of tax, separately in the accompanying condensed consolidated statements of operations. The businesses included in discontinued operations had sales aggregating $2.4 million and $14.1 million for the three and nine months ended October 29, 2004, respectively, and $5.5 million and $19.3 million for the three and nine months ended October 31, 2003, respectively.

The demand for our products has been affected in the past, and may continue to be affected in the future, by various factors, including, but not limited to, the following:

• the economic and market conditions in our markets and excess industry capacity in commercial wireless markets;

• uncertainty regarding the timing of orders and the continuance of a strong defense market;

• the timing, rescheduling or cancellation of significant customer orders and our ability, as well as the ability of our customers, to manage inventory;

• our ability to specify, develop or acquire, complete, introduce, market and transition to volume production new products and technologies in a timely manner;

• the qualification, availability and pricing of competing products and technologies and the resulting effects on sales and pricing of our products; and

• the rate at which our present and future customers and end-users adopt our products and technologies in our target markets.

From time to time, our key customers place large orders causing our quarterly net revenue to fluctuate significantly. We expect these fluctuations to continue. For these and other reasons, our net revenue results in the current period may not be indicative of our future net revenue potential.

Despite risks that could negatively impact our sales, we believe volume opportunities exist in our Wireless Systems and Defense & Space markets. The emerging economies of China, India and other developing nations are creating strong demand for new wireless network installations. Investment in improved weapons systems by the U.S. Government in response to worldwide terrorist threats is expected to continue strong, benefiting sales prospects for our Defense & Space operations. Growth in next generation digital broadband 3G networks, which improve the quality of wireless voice, video and data transmission to levels comparable to that of dedicated broadband networks, is stimulating demand for new 3G-compatible signal transmission components. The eventual replacement of analog networks with all-digital broadband technology is resulting from consumers’ growing acceptance of a new generation of voice, video and data compatible cell phones, PDAs, laptop computers and portable communication devices. The widespread use of digitally based wireless communications products reflects consumers’ growing acceptance of wireless communications as an essential, timesaving “go anywhere” technology that has become an integral part of today’s lifestyles.

Although we believe significant volume growth opportunities exist in the markets we serve, we also believe that excess capacity in the commercial marketplace will continue to exert downward pressure on pricing. We believe these pricing conditions will continue for sometime and we cannot predict when or if they will improve. This condition places considerable downward pressure on our product gross margins. We have major cost improvement initiatives underway which we believe will reduce manufacturing and operating costs and are necessary for us to continue to provide high quality products at competitive prices to our customers; however, gross margins on our products may not be improved as a result of these actions due to industry pricing pressures.

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The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and the related notes included elsewhere herein. 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 from those discussed in forward-looking statements due to a variety of factors, including REMEC’s success in penetrating the wireless systems market, risks associated with the cancellation or reduction of orders by significant wireless systems or defense customers, trends in the wireless systems and defense markets, risks of cost overruns and product nonperformance and other factors and considerations described in REMEC’s Annual Report on Form 10-K, 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.

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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 operations data for the periods indicated:

	Three months ended				Nine months ended
	October 29, 2004		October 31, 2003		October 29, 2004		October 31, 2003
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	81.5		77.8		85.4		76.9
Gross profit	18.5		22.2		14.6		23.1
Operating expenses:
Selling, general and administrative	13.2		11.7		12.8		14.2
Research and development	8.7		11.6		9.7		13.9
Impairment of goodwill	—		—		19.3		—
Restructuring and impairment of other long-lived assets (reversals)/charges	—		—		(0.3	)	0.2
Total operating expenses	21.9		23.3		41.5		28.3
Loss from continuing operations	(3.4	)	(1.1	)	(26.9	)	(5.2	)
Gain on sale of facility	—		—		—		0.4
Interest income and other, net	(0.5	)	(1.9	)	(0.1	)	0.3
Loss before income taxes	(3.9	)	(3.0	)	(27.0	)	(4.5	)
Income taxes	—		—		—		—
Loss from continuing operations	(3.9	)	(3.0	)	(27.0	)	(4.5	)
Loss from discontinued operations, net of tax	0.5		(1.1	)	0.0		(1.4	)
Net loss	(3.4	)%	(4.1	)%	(27.0	)%	(5.9	)%

Results of Operations

Three Months Ended October 29, 2004 as Compared to Three Months Ended October 31, 2003

Net Sales And Gross Profit. Net sales for the three months ended October 29, 2004 increased 5.9% over the comparable prior year period primarily in our Defense & Space segment. Our Wireless Systems products sales were up during this period as well. Continued downward pricing pressures in our Wireless Systems markets combined with start-up and ramp-up costs on new tower mounted amplifier and filter products resulted in a decline in our gross margin as a percentage of net sales from 22.2% for the third quarter of fiscal 2004 to 18.5% in the comparable period of fiscal 2005.

Segment Information. The following segment information should be read in conjunction with the financial results of each reporting segment as detailed in Note 9 of the Condensed Consolidated Financial Statements. Results within each of our business segments were as follows:

Wireless Systems. Net sales increased 1.5%, from $77.6 million for the three months ended October 31, 2003 to $78.8 million for the three months ended October 29, 2004. Increased sales of the Company’s original equipment manufacturer (OEM) amplifier products and high frequency point-to-point outdoor radios and transceivers (ODUs) were partially offset by reduced filters and tower mounted amplifier product sales.

Gross profit as a percentage of net sales decreased from 19.5% for the three months ended October 31, 2003 to 15.7% for the three months ended October 29, 2004. The decline was the result of price reductions on certain products and start up costs required to begin production on new filter and tower mounted amplifier products. Results for the third quarter of fiscal 2005 included a favorable impact totaling $2.6 million of low cost basis inventory obtained in our acquisition of Spectrian versus $1.9 million in the third quarter of fiscal 2004. Sales relative to these Spectrian products were up slightly quarter over quarter.

Operating expenses as a percentage of sales of 25.7% decreased from 26.1% in the comparable year earlier quarter. For the three months ended October 29, 2004 operating expenses increased by $0.1 million, or 0.5%, from $20.2 million for the three months ended October 31, 2003 to $20.3 million for the three months ended October 29, 2004. Sarbanes-Oxley implementation costs were the primary reasons for the dollar increase.

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Excluding the impact of discontinued operations, the net loss of the Wireless Systems segment was $(8.4) million for the three months ended October 29, 2004 versus $(7.1) million for the three months ended October 31, 2003.

Defense & Space. Net sales increased 22.0% from $21.0 million for the three months ended October 31, 2003 to $25.6 million for the three months ended October 29, 2004. The increase is primarily attributable to increased delivery rates on production programs based on customer contract requirements. Gross profit as a percentage of net sales decreased from 32.4% for the three months ended October 31, 2003 to 26.9% for the three months ended October 29, 2004. The decrease is primarily a result of increased direct materials content in the current production programs, as well as reclassification of certain customer funded development costs from operation expenses to cost of goods. Operating expenses as a percentage of net sales decreased from 12.9% for the three months ended October 31, 2003 to 9.9% for the three months ended October 29, 2004. The reduction in operating expenses was mostly attributable to the reclassification of certain customer funded development costs from operating expenses to cost of goods. The operating profit of the Defense & Space segment increased from $4.1 million for the three months ended October 31, 2003 to $4.4 million for the three months ended October 29, 2004 primarily due to a higher revenue during the quarter.

Selling, General and Administrative Expenses. Selling, general and administrative expenses, or SG&A, increased from 11.7% of sales for the three months ended October 31, 2003 to 13.2% of sales for the three months ended October 29, 2004. SG&A costs totaled $13.8 million for the three months ended October 29, 2004 as compared to $11.5 million for the comparable prior year quarter, an increase of $2.3 million. The increase was primarily due to Sarbanes-Oxley implementation costs, higher consulting costs, and additional support staff acquired from the Paradigm and Himark acquisitions.

Research And Development Expenses. Research and development expenses decreased $2.4 million or 20.9% for the three months ended October 29, 2004 as compared to the comparable prior year quarter. Expenses were $11.4 million in the comparable prior year period as compared to $9.0 million for the three months ended October 29, 2004. The decrease was primarily due to the sale of our Fixed Wireless product line in May 2004 and the result of improved discretionary cost controls. As a percentage of net sales, research and development expenses decreased to 8.7% for the three months ended October 29, 2004 compared to 11.6% in the comparable prior year.

Interest income and other, net. Interest income and other, net, were $0.5 million for the three months ended October 29, 2004. This resulted primarily from foreign exchange losses on working capital balances in the Company’s foreign entities totaling $0.6 million. These were partially offset by interest and other miscellaneous expenses tolling $(0.1) million.

Provision For Income Taxes. During the third quarter of fiscal 2003, the Company elected to discontinue its prior practice of recording a tax benefit for its operating losses. Accordingly, no tax benefit has been recorded during fiscal 2005. Income tax payments for the three months ended October 29, 2004 and the comparable year earlier period reflect tax payments to various state tax entities and were nominal.

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Nine months Ended October 29, 2004 as Compared to Nine months Ended October 31, 2003

Net Sales And Gross Profit. Net sales for the nine months ended October 29, 2004 increased 28.0% over the comparable prior year period primarily as a result of increased sales of Wireless Systems amplifier products to OEM’s as discussed below. Pricing pressures in the Wireless Systems markets we operate in, combined with additional costs to begin production on new amplifier, filter, and tower mounted amplifier products and to relocate our manufacturing operations from Finland to China and Costa Rica resulted in a decline in our gross margin as a percentage of net sales from 23.1% for the nine months ended October 31, 2003 to 14.6% in the comparable period of fiscal 2005.

Segment Information. The following segment information should be read in conjunction with the financial results of each reporting segment as detailed in Note 9 of the Condensed Consolidated Financial Statements. Results within each of our business segments were as follows:

Wireless Systems. Net sales increased 30.0%, from $192.1 million for the nine months ended October 31, 2003 to $249.7 million for the nine months ended October 29, 2004. OEM amplifier products were up as a result of strong customer demand, new customer business, new programs, and the Paradigm acquisition. Tower mounted amplifiers, filters, and high frequency point-to-point outdoor radios and transceivers (ODUs) have also increased year over year. These increases were partially offset by decreased Fixed Wireless product sales as a result of their divestiture and slower penetration into the China network optimization market.

Gross profit as a percentage of net sales decreased from 20.4% for the nine months ended October 31, 2003 to 10.8% for the nine months ended October 29, 2004. The decline was the result of competitive price pressures, production start-up cost in the filters and tower mounted amplifier product lines, and costs related to relocating our manufacturing operations from Finland to China and Costa Rica. Results for the nine months ended October 31, 2003 included a favorable impact totaling $5.8 million of low cost basis inventory obtained in our acquisition of Spectrian. This favorable impact declined to $4.4 million during the comparable period of fiscal 2005.

For the nine months ended October 29, 2004, operating expenses (including the impairment of goodwill and restructuring charges) totaled $125.7 million, an increase of $62.3 million as compared to the nine months ended October 31, 2003. The charge for the impairment of goodwill was $62.4 million in the second quarter of this fiscal year. The remaining increase in operating expenses is attributable to the Paradigm and Himark acquisitions, increases in bad debt reserves, and Sarbanes-Oxley implementation expenses.

Excluding the impact of discontinued operations, noted earlier, the net loss of the Wireless Systems segment was $(99.0) million for the nine months ended October 29, 2004 and was $(22.3) million for the nine months ended October 31, 2003.

Defense & Space. Net sales increased 21.6% from $60.3 million for the nine months ended October 31, 2003 to $73.3 million for the nine months ended October 29, 2004. The increase is primarily attributable to increased delivery rates on production programs based on customer contract requirements. Gross profit as a percentage of net sales decreased from 31.6% for the nine months ended October 31, 2003 to 27.5% for the nine months ended October 29, 2004. The decrease is primarily a result of increased direct labor and direct materials content in the current production programs. Operating expenses as a percentage of net sales decreased from 13.3% for the nine months ended October 31, 2003 to 11.7% for the nine months ended October 29, 2004. This decrease in the operating costs as a percentage of sales is mostly attributable to higher revenues for the nine months ended October 29, 2004 compared the nine months ended October 31, 2003, and lower indirect labor costs. The operating profit of the Defense & Space segment increased from $11.1 million for the nine months ended October 31, 2003 to $11.8 million for the nine months ended October 29, 2004 primarily due to the increase in net sales during the nine months ended October 29, 2004.

Selling, General and Administrative Expenses. Selling, general and administrative expenses, or SG&A, decreased as a percentage of sales from 14.2% for the nine months ended October 31, 2003 to 12.8% for the nine months ended October 29, 2004. In absolute dollars, SG&A increased from $35.9 million for the nine months ended October 31, 2003 to $41.4 million for the nine months ended October 29, 2004. The increase was primarily due to Sarbanes-Oxley implementation costs, increases of bad debt reserves, additional expenses for strategic and other consulting, and additional support staff acquired from the Paradigm and Himark acquisitions.

Research And Development Expenses. Research and development expenses decreased from $35.1 million in the comparable prior year period to $31.3 million for the nine months ended October 29, 2004. The decrease was primarily due to the sale of the Fixed Wireless product line in May 2004, function consolidations, and the result of improved discretionary cost controls. As a percentage of sales, research and development expenses decreased from 13.9% in the comparable prior year period to 9.7% for the nine months ended October 29, 2004.

20

Impairment of Goodwill. During the nine months ended October 29, 2004, the Company determined there were indicators of impairment for the Wireless Systems reporting segment. The Company tested the goodwill of the reporting segment for impairment in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. The performance of the test required a two-step process. The first step of the test involved comparing the fair value of the affected reporting unit with the reporting segment’s aggregate carrying value, including goodwill. The Company estimated the fair value of the Wireless Systems reporting segment as of July 2004 using the income approach methodology of valuation. As a result of this comparison, the Company determined that the carrying value of the Wireless Systems business unit exceeded its implied fair value as of July 2004. Based on this assessment, the Company recorded a charge of $62.4 million to write down the value of goodwill associated with the Wireless Systems reporting segment during the second quarter of this fiscal year. The Company completed the second step of the goodwill impairment test, which required the Company to compare the implied fair value of the reporting segment goodwill with the carrying amount of that goodwill during the current fiscal quarter. Based on this assessment, there was no adjustment required to the loss previously recorded in the second fiscal quarter.

Restructuring Charges. Results for the nine months ended October 31, 2003 include a restructuring charge of $0.4 million related to the sub-lease of two facilities closed as part of the Company’s fiscal 2002 restructuring plan. For the nine months ended October 29, 2004, the Company recognized a credit in the amount of $0.9 million related to the reversal of reserves intended for the sale of two buildings in Finland, one during the first quarter and another during the second quarter of fiscal 2005.

Interest income and other, net. Interest income and other, net, were $0.2 million for the nine months ended October 29, 2004 primarily due to foreign exchange losses on working capital balances in the Company’s foreign entities.

Provision For Income Taxes. During the third quarter of fiscal 2003, the Company elected to discontinue its prior practice of recording a tax benefit for its operating losses. Accordingly, no tax benefit has been recorded during fiscal 2004. Income tax payments for the nine months ended October 29, 2004 and the comparable year earlier period reflect tax payments to various state tax entities.

Liquidity and capital resources

At October 29, 2004, we had $95.6 million of working capital, which included cash and cash equivalents totaling $40.5 million and short-term investments totaling $2.6 million. During the second quarter, we renegotiated our credit facility and now have a $30.0 million revolving working capital line of credit with a bank, that expires in July 2005. The borrowing rate under this credit facility is based on prime + 1%, with prime being defined as “the bank’s most recently announced per annum ‘prime rate’.” Through October 29, 2004, we have not had any borrowings under this credit facility; approximately $15.8 million of this facility was available and $7.0 million of our credit line was utilized as security for the issuance of standby letters of credit while an additional $7.2 million has been utilized in connection with certain foreign currency forward contracts and other banking cash management products. We are required to meet certain financial covenants for quick ratio and tangible net worth. This facility is also subject to a “Material Adverse Change” clause whereby the bank can subjectively determine that the Company is in default under the credit agreement.

During the current fiscal quarter, the Company entered into a banking arrangement with Nordea bank in Finland giving us access to 6 million Euros. As of October 29, 2004, the Company had utilized approximately one-third of this facility.

During the nine months ended October 29, 2004, net cash used by operations totaled $19.6 million. The negative operating cash flow during this period was principally the result of cash used to fund our loss (net of non-cash items including depreciation and amortization expense, goodwill impairment and restructuring costs) of $11.1 million, $10.8 million of accounts receivable increases due to higher business activity; reductions in accounts payable and accrued expenses of $4.2 million, partially offset by a reduction in inventory of $7.9 million.

During the nine months ended October 29, 2004, we generated $2.1 million of cash from investing activities. Cash inflows from investing activities included the sale of a building in Finland and proceeds from other short-term investments which more than offset $11.2 million of cash outflows related to the purchase of capital expenditures.

Financing activities provided approximately $2.6 million during the nine months ended October 29, 2004, primarily as a result of proceeds from the issuance of common stock under our Employee Stock Purchase Plan and stock option exercises. The sale of discontinued operations generated an additional $10.9 million in cash, net of current period activity.

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Our future cash requirements will depend upon many factors, including the nature and timing of orders by OEM customers, competitive pricing pressures, the status of competitive products, our ability to achieve timely anticipated product cost reductions, the progress of our research and development efforts, and the success of our marketing and sales efforts. Currently our principal source of liquidity consists of our existing cash balances and our bank line of credit. We regularly review our cash funding requirements and attempt to meet those requirements through a combination of cash on hand and cash provided by operations. We are evaluating alternatives that will provide liquidity that will be additive to the current credit facility. We believe that our existing working capital and that available under our existing bank credit line will be adequate to fund our operations through at least October 31, 2005. Our ability to increase revenues and generate profits is subject to numerous risks and uncertainties and any significant decrease in our revenues or product gross margins would reduce our operating cash flows and erode our existing cash balances. No assurances can be given that we will be able to generate positive operating cash flows in the future, be able to secure the anticipated increase to our credit facilities, or maintain and/or grow our existing cash balances.

We are continuing to explore a number of strategic and financing alternatives, including the sale of additional business units. We have engaged multiple financial advisors to assist in the analysis and exploration of these alternatives. We cannot predict when any of these alternatives will be consummated, if at all.

Off-Balance Sheet Arrangements

As of October 29, 2004, we did not have any other relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Obligations and Commitments

The following table summarizes our contractual payment obligations and commitments as of October 29, 2004:

	Payment Obligations by Year (in 000’s)
	Total		2005		2006		2007		2008		2009		Thereafter
Operating leases	$	71,093	$	2,061	$	7,487	$	7,325	$	6,126	$	5,425	$	42,669
Purchase obligations		40,388		40,388		—		—		—		—		—
Restructuring liabilities		31		31		—		—		—		—		—
	$	111,512	$	42,480	$	7,487	$	7,325	$	6,126	$	5,425	$	42,669

We lease certain office and production facilities under non-cancelable agreements classified as operating leases. In accordance with accounting principles generally accepted in the United States, obligations under these long-term leases are not recorded on the balance sheet as liabilities until payment is due.

We incur various purchase obligations with other vendors and suppliers for the purchase of inventory, as well as other goods and services, in the normal course of business. Our purchase obligations are comprised of active and passive components as well as custom-machined parts and castings, manufacturing and test equipment, computer hardware and information system infrastructure and other purchase commitments made in the ordinary course of business. These obligations are generally evidenced by purchase orders with delivery dates from four to six weeks from the purchase order date, and in certain cases, supply agreements that contain the terms and conditions associated with these purchase arrangements. We are committed to accept delivery of such materials pursuant to such purchase orders subject to various contract provisions which may allow us to delay receipt of such order or allow us to cancel orders beyond certain agreed lead times. Such cancellations may or may not include cancellation costs payable by us.

Our restructuring liabilities consist primarily of estimated future lease and operating costs on restructured facilities, less offsetting sublease income.

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Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our Condensed 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 management 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. On an ongoing basis, we evaluate our estimates, including those related to bad debts, inventories, intangible assets, restructuring costs and income taxes. We base our estimates on historical experience and current developments and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. 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, although in a growing number of instances, after transfer to our customers through an intermediary warehouse. We generally ship to our customers “Free on Board” shipping point except in the circumstances described above. The SEC’s Staff Accounting Bulletin (SAB) No. 101, as amended by SAB No. 104, “Revenue Recognition,” provides guidance on the application of accounting principles generally accepted in the United States to selected revenue recognition issues. Revenues associated with the performance of non-recurring engineering and development contracts are recognized when earned under the terms of the related contract; and revenues for cost-reimbursement contracts are recorded as costs are incurred and include estimated earned fees in the proportion that costs incurred to date bears to estimated costs. We believe that our revenue recognition policy is consistent with this guidance and in accordance with accounting principles generally accepted in the United States. If our shipping policies were to change, including the point of title transfer, materially different reported results would be likely. Prospective losses on contracts, which are accrued for, are based upon the anticipated excess of manufacturing costs in inventory over the selling price of the remaining units to be delivered. Actual losses could differ from those estimated due to changes in the ultimate manufacturing costs and contract terms.

Allowance for Doubtful Accounts. Allowances for doubtful accounts are estimated at the segment level based on estimates of losses related to customer’s receivable balances. In establishing the appropriate provisions for customer receivables balances, the Company makes assumptions with respect to their future collectibility. The Company’s assumptions are based upon individual assessment of a customer’s credit quality as well as subjective factors and trends, including the aging of receivables balances. Generally, these individual credit assessments occur at regular reviews during the life of the exposure and consider (a) a customer’s ability to meet and sustain their financial commitments; (b) a customer’s current and projected financial condition; (c) the positive or negative effects of the current or projected industry outlook; and (d) the economy in general. Once the Company considers all of these factors, a determination is made as to the probability of default. An appropriate provision is made, which takes into account the severity of the likely loss on the outstanding receivable balance based on the Company’s experience in collecting these amounts. In addition to these individual assessments, in general, the Company provides a 5% reserve against all outstanding customer balances that are greater than 60 days past due. The Company’s level of reserves fluctuates depending upon all of the factors mentioned above. Credit losses have historically been within our expectations and the allowances established. At October 29, 2004, accounts receivable totaled $76.1 million, net of reserves for bad debt of $4.6 million.

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. In general, our losses from inventory obsolescence have been within our expectations and the reserves established. At October 29, 2004, inventories totaled $67.7 million, net of reserves for excess and obsolete inventory of $15.4 million and contract losses of $6.4 million.

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Valuation of Goodwill, Intangible and Other Long-Lived Assets. We are required to assess goodwill impairment in fiscal 2005 using the methodology prescribed by Statement of Financial Accounting Standards (SFAS) No. 142 “Goodwill and Other Intangible Assets.” SFAS No. 142 requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests in certain circumstances. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units and determining the fair value of each reporting unit. Significant judgments required to estimate the fair value of reporting units include estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for each reporting unit.

The majority of our acquisitions that resulted in goodwill being recorded fall within our Wireless Systems segment. The majority of goodwill and other long-lived assets within the Wireless Systems segment are attributable to the ADC Mersum OY, Himark and Paradigm acquisitions. Nanowave Technologies, Inc., which was merged into the Defense & Space segment in connection with the reorganization/reevaluation of the reporting units in 2003, is the only purchased business of this segment. Management determined in accordance with SFAS No. 142 that our segments meet the criteria for aggregation and therefore performed its analysis at the reporting segment level. Our impairment review process is based on the income approach methodology of valuation that uses our estimates of revenue for the reporting units, driven by assumed market growth rates and assumed market segment share, and estimated costs as well as appropriate discount rates.

We performed an assessment of goodwill impairment as of July 30, 2004 and the Company determined that there were indicators of impairment for the Wireless Systems reporting segment. The Company tested the goodwill of the reporting segment for impairment in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. The performance of the test required a two-step process. The first step of the test involved comparing the fair value of the affected reporting unit with the reporting segment’s aggregate carrying value, including goodwill. The Company estimated the fair value of the Wireless Systems reporting segment as of July 2004 using the income approach methodology of valuation. As a result of this comparison, the Company determined that the carrying value of the Wireless Systems business unit exceeded its implied fair value as of July 2004. Based on this assessment, the Company recorded a charge of $62.4 million to write down the value of goodwill associated with the Wireless Systems reporting segment during the second quarter of this fiscal year (see Note 10). The Company completed the second step of the goodwill impairment test, which required the Company to compare the implied fair value of the reporting segment goodwill with the carrying amount of that goodwill during the current fiscal quarter. Based on this assessment, there was no adjustment required to the loss previously recorded in the second fiscal quarter.

The Company also tested the long-lived assets of the Wireless Systems reporting segment for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This Statement requires you to recognize an impairment loss only if the carrying amount of the long-lived assets is not recoverable by its undiscounted cash flows, and to measure an impairment loss as the difference between the carrying amount and fair value of the assets. The Company completed this analysis and determined that there was no impairment to its long-lived assets of the Wireless Systems reporting segment as of October 29, 2004.

Accrued Restructuring Costs. To the extent that exact amounts are not determinable, we have estimated amounts for the direct costs and liabilities related to our restructuring efforts 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 will continue to reassess the related accrual annually and record adjustments to this reserve as circumstances warrant. At October 29, 2004, most accrued restructuring costs had been expensed.

Accrued Warranty Costs. Estimated future warranty obligations related to certain products are charged to operations in the period in which the related revenue is recognized. We establish a reserve for warranty obligations based on historical warranty experience.

Valuation of Deferred Income Taxes. Valuation allowances are established to reduce deferred tax assets to the amount expected to be realized when it is more likely than not that the deferred tax assets will not be realized in the near term. During fiscal 2003, in conjunction with our acquisition of Spectrian Corporation, management undertook a reassessment of our tax strategy and our overall tax situation, which included the transferring of certain intangible property to off-shore entities. This analysis led us to conclude that, while management expects that we will transition to profitability, the majority of any future profitability will be generated in tax jurisdictions with low effective tax rates. As a result, we believe that our ability to recover tax assets associated with high effective tax rate jurisdictions has diminished in the near term and that it is appropriate to establish a valuation allowance to fully reserve our net deferred tax assets.

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Item 3. Qualitative and Quantitative Disclosures About Market Risk.

Interest Rate Risk. In July 2004, we increased our credit facility from $25.0 million to $30.0 million of which $15.8 million is available for borrowing at October 29, 2004. To the extent of our borrowings under this facility, we will be exposed to changes in interest rates.

At October 29, 2004, our investment portfolio includes fixed-income securities with a market value of approximately $2.6 million. These securities are subject to interest rate risk and will decline in value if interest rates increase. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. A hypothetical 100 basis point increase in interest rates in our investment portfolio would not materially affect the fair value of these securities.

Foreign Currency Exchange Rate Fluctuations. We have operations in Europe, Asia-Pacific and the Americas. As a result, our financial position, results of operations and cash flows can be affected by fluctuations in foreign currency exchange rates. Many of our reporting entities conduct a portion of their business in currencies other than the entity’s functional currency. These transactions give rise to receivables and payables that are denominated in currencies other than the entity’s functional currency. The value of these receivables and payables is subject to changes in exchange rates because they may become worth more or less than they were worth at the time we entered into the transaction due to changes in exchange rates. Both realized and unrealized gains or losses in the value of these receivables and payables are included in the determination of net income. Net currency exchange losses recognized on business transactions were $0.9 million and $0.6 million for the three and nine months ended October 29, 2004, respectively, and gains of $0.3 million and $1.5 million for the three and nine months ended October 31, 2003, respectively, and are included in Interest income and other, net in the Condensed Consolidated Statements of Operations.

Historically, our currency exposures have been primarily concentrated in the Euro and the British Pound Sterling. As fluctuations in these currencies occurred, we experienced equal upward or downward movement in our net sales and related costs and operating expenses. As we continue to concentrate our manufacturing operations in countries whose functional currency is the US dollar, we will be subject to market risk associated with fluctuations in the Euro and the British Pound Sterling. In the fourth quarter of fiscal 2004, we established a formal documented program to utilize foreign currency forward exchange contracts to offset the risk associated with the effects of specific foreign currency exposures. Under this program, increases or decreases in our foreign currency exposures are offset by gains and losses on the forward contracts, so as to mitigate the possibility of foreign currency transaction gains and losses. Under this program, foreign currency exposures arose from sales denominated in Euro and therefore the related forward contracts qualified for special hedge accounting.

At October 29, 2004, we have open forward contracts totaling a notional amount of 41.9 million Euros with terms of 30 to 180 days. The fair value of these forward contracts amounted to $1.1 million and are included in other current liabilities. During the quarter ended April 30, 2004, we determined that previously designated hedged forecasted transactions with a combined notional value of 13.0 million Euros, which originally qualified for special hedge accounting, had to be discontinued as the forecasted transactions no longer were expected to occur in the form originally contemplated. Accordingly, $0.7 million of unrealized gains on these derivatives that had not previously been included in earnings had to be reclassified to earnings to reflect the discontinuance of this portion of the cash flow hedge. The reclassified amounts are recorded in Interest income and other, net. The remaining forward contracts totaling a notional amount of 41.9 million Euros, still qualify for special hedge accounting as it is probable that the forecasted transactions will occur as designated. Our policy is to measure effectiveness by comparing changes in spot exchange rates. This method reflects our risk management strategies, the economics of these strategies in our financial statements and better manages the overall effectiveness of the forward hedges. Under this method, the change in fair value for the quarter ended October 29, 2004 for the forward contracts that still qualify for special hedge accounting attributable to the changes in spot exchange rates (the “effective portion”) totaling $2.8 million and are reported in other comprehensive income in shareholders’ equity. The remaining change in fair value of the forward contract (the “ineffective portion”) totaling $0.4 million of expense has been recognized in Interest income and other, net. Our ultimate realized gain or loss with respect to currency fluctuations will depend on the currency exchange rates and other factors in effect as the contracts mature.

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Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures. The Company maintains controls and procedures designed to ensure that it is able to collect the information it is required to disclose in reports it files or submits under the Exchange Act, and to record, process, summarize and disclose this information within the time periods specified in SEC rules and forms. Based on an evaluation during the most recent quarter, 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-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (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 SEC rules and forms.

Changes in Internal Controls. During the period covered by this report, the Company has continued its efforts to improve its internal controls over financial reporting in connection with its assessment of such internal controls pursuant to Section 404 of the Sarbanes-Oxley Act of 2002.

Sarbanes-Oxley 404 Compliance. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, the Company is engaged in an evaluation of the effectiveness of its internal controls over financial reporting. The Company’s Section 404 project plan includes many time-critical milestones, and its actions during the fourth quarter will be critical to achieving these milestones and successfully completing the assessment of its internal controls. Documentation of internal controls is substantially complete and internal testing of controls is underway. During the documentation and testing phase, the Company has identified control deficiencies that it must correct and retest prior to January 31, 2005. Remediation of these control deficiencies may be significant and, even though the Company has made the Section 404 project a top priority, there can be no assurances that all control deficiencies identified during this process will be remediated before the end of the fiscal year, or that the remaining unresolved control deficiencies will not rise to the level of significant deficiencies or material weaknesses. Further, the Company’s timely compliance with Section 404 has been adversely impacted by the lack of involvement by an independent registered public accountant following the resignation of Ernst & Young LLP, announced at the end of September 2004 and effective following their review of the Company’s interim financial statements for the quarter ended October 29, 2004. The Company has only recently been able to retain a new independent registered public accounting firm. If the newly retained accounting firm cannot timely complete the work necessary to attest to the Company’s internal controls, the Company could fail to meet its regulatory reporting obligations.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

On September 29, 2004 three class action lawsuits were filed against REMEC and current and former officers in the United States District Court for the Southern District of California alleging violations of federal securities laws between September 8, 2003 and September 8, 2004. The complaints assert, among other things, that during that time period, false and misleading statements were made and material information was not disclosed regarding REMEC’s financial condition and performance, growth, operations, financial statements, markets, management, earnings and present and future business prospects. REMEC believes that the lawsuits are without merit and intends to defend against them vigorously. Even if we are entirely successful in these lawsuits, we may incur significant legal expenses and our management may expend significant time in the defense.

Other than the lawsuits 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, all of which collectively are not anticipated to have a material adverse effect on the business or financial condition of REMEC.

Items 2 through 4 are not applicable and have been omitted.

Item 5. Other Information.

(a)

On September 16, 2004, the Company’s Board of Directors approved an updated form of Indemnification Agreement (the “Updated Agreement”), and authorized the Company to enter into the Updated Agreement with each of its officers and directors. The Board of Directors had previously approved and entered into indemnification agreements with its officers and directors (the “Prior Agreements”). The Updated Agreement is a revised version of the Prior Agreement, and is intended to supersede and replace the Prior Agreement. The revisions in the Updated Agreement were made to conform the Prior Agreement to applicable state and federal law, and to further the purposes and intent of the indemnification provisions contained in the Company’s Articles of Incorporation and Bylaws. The updated form of Indemnification Agreement is included in this report as Exhibit 10.1.

On November 9, 2004, the Company entered into a Change of Control and Transition Agreement with Jack A. Giles, its Executive Vice President and President of REMEC Space & Defense. This Agreement provides Mr. Giles with certain benefits in the event of a change of control, including acceleration of his unvested options and restricted stock units, severance payments and continued health benefits. The Change of Control and Transition Agreement is included in this report as Exhibit 10.2.

On November 12, 2004, the Company amended its Change of Control Agreement with Mr. Jon E. Opalski, its Executive Vice President, Commercial Operations, to expand the definition of “change of control” in such Agreement. The Company previously filed a form Change of Control Agreement as an exhibit to its Annual Report on Form 10-K for the year ended January 31, 2003.

(b) None.

Item 6. Exhibits

(a) Exhibits.

Exhibit Number	Description
10.1	Form of Indemnification Agreement for directors and officers.
10.2	Change of Control Agreement dated November 9, 2004 between REMEC, Inc. and Jack A. Giles.
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes–Oxley Act of 2002.
31.2	Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes–Oxley Act of 2002.
32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

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

REMEC, Inc.
By:	/s/ THOMAS H. WAECHTER
	Thomas H. Waechter
	President and Chief Executive Officer
	/s/ WINSTON E. HICKMAN
	Winston E. Hickman
	Chief Financial and Accounting Officer
Date:	December 8, 2004

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EX-10.1

Exhibit 10.1

INDEMNIFICATION AGREEMENT

This Indemnification Agreement (the “Agreement”) is entered into as of September 16, 2004 by and between REMEC, Inc., a California corporation (the “Company”), and                          (“Indemnitee”).

BACKGROUND

A. The Company and Indemnitee recognize the increasing difficulty in obtaining directors’ and officers’ liability insurance, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance.

B. The Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting officers and directors to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited.

C. Indemnitee does not regard the current protection available as adequate under the present circumstances and Indemnitee and other officers and directors of the Company may not be willing to continue to serve as officers and directors without additional protection.

D. The Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve as officers and directors of the Company and to indemnify its officers and directors so as to provide them with the maximum protection permitted by law.

E. The Bylaws of the company provide for the indemnification of directors, officers, employees and other agents of the Company in certain circumstances, and certain of the Company’s directors and officers have entered into Indemnity Agreements with the Company. This Agreement shall, with respect to Indemnitee, supersede any conflicting provisions in the indemnification section of the Company’s Bylaws and any Indemnity Agreement entered into by Indemnitee and the Company prior to the date of this Agreement.

AGREEMENT

NOW, THEREFORE, in consideration of Indemnitee’s continued services as a director or officer of the Company after the date hereof and for other good and valid consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows:

1. Indemnification.

(a) Third Party Proceedings. The Company shall indemnify Indemnitee if Indemnitee is or was a party or is threatened to be made a party to any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company to procure a judgment in its favor) by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) actually and reasonably incurred by Indemnitee in connection with such action or proceeding if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe Indemnitee’s conduct was unlawful. The termination of any action or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that (i) Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in the best interests of the Company or (ii) with respect to any criminal action or proceeding, Indemnitee had reasonable cause to believe that Indemnitee’s conduct was unlawful.

(b) Proceedings by or in the Right of the Company. The Company shall indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made a party to any threatened, pending or completed action or proceeding by or in the right of the Company or any subsidiary of the Company to procure a judgment in its favor by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees) and, to the fullest extent permitted by law, amounts paid in settlement, in each case to the extent actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such action or proceeding if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the best interests of the Company and its shareholders, except that no indemnification shall be made (i) in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged to be liable to the Company in the performance of Indemnitee’s duty to the Company and its shareholders unless and only to the extent that the court in which such action or

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proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for expenses and then only to the extent that the court shall determine, (ii) of amounts paid in settling or otherwise disposing of a pending action without court approval or (iii) of expenses incurred in defending a pending action which is settled or otherwise disposed of without court approval.

2. Expenses; Indemnification Procedure.

(a) Advancement of Expenses. The Company shall advance all expenses incurred by Indemnitee in connection with the investigation, defense, settlement or appeal of any civil or criminal action or proceeding referenced in Section 1(a) or 1(b) of this Agreement (but not amounts actually paid in settlement of any such action or proceeding). Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall ultimately be determined that Indemnitee is not entitled to be indemnified by the Company as authorized hereby. The advances to be made hereunder shall be paid by the Company to Indemnitee within 20 days after delivery of a written request therefor by Indemnitee to the Company.

(b) Notice and Cooperation by Indemnitee. Indemnitee shall, as a condition precedent to his or her right to be indemnified under this Agreement, under any statute, or under any provision of the Company’s Articles of Incorporation or Bylaws, give the Company notice in writing as soon as practicable of any claim made against Indemnitee for which indemnification will or could be sought. Notice to the Company shall be directed as provided for in Section 14 of this Agreement. In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee’s power.

(c) Procedure. Promptly after receipt of a written request for indemnification (and in any event within 90 days thereof), the Company shall either provide such indemnification or shall provide a written notice to Indemnitee advising of the decision not to indemnify Indemnitee and outlining the general basis for the decision. If a claim for indemnification is not paid in full by the Company within such 90 day period and Indemnitee determines to dispute the Company’s decision not to provide indemnification, Indemnitee must advise the Company in writing of both the decision to dispute the denial and his or her Selected Forum (a “Contest Notice”). Indemnitee shall be entitled to select from the following forums for determination of the validity of the Company’s denial of indemnification (the forum selected by Indemnitee being the “Selected Forum”):

(i) A quorum of the board of directors of the Company (the “Board”) consisting of directors who are not parties to the proceeding for which indemnification is being sought;

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(ii) Independent legal counsel selected by Indemnitee, and reasonably approved by the Board, which counsel shall render its determination in a written opinion; or

(iii) A panel of three arbitrators, one of whom is selected by the Company, one of whom is selected by Indemnitee, and the last of whom is selected by the first two arbitrators selected.

As soon as practicable, and in no event later than 30 days after its receipt of the Contest Notice, the Company shall, at its own expense, submit in writing to the Selected Forum an explanation of the substance validating its claim that Indemnitee is not entitled to indemnification. If the Selected Forum determines that Indemnitee is entitled to indemnification, the determination shall be final and binding on the Company. If the Selected Forum determines that Indemnitee is not entitled to indemnification, Indemnitee may apply to the court in which the proceeding giving rise to the indemnification is or was pending or any other court of competent jurisdiction for the purpose of enforcing Indemnitee’s right to indemnification.

(d) Defense/Burden. It shall be a defense to any such dispute or action (other than a dispute or action brought to enforce a claim for expenses incurred in connection with any action or proceeding in advance of its final disposition) that Indemnitee has not met the standards of conduct which make it permissible under applicable law for the Company to indemnify Indemnitee for the amount claimed. However, the burden of proving such defense shall be on the Company and Indemnitee shall be entitled to receive interim payments of expenses pursuant to Section 2(a) of this Agreement unless and until such defense may be finally adjudicated by the Selected Forum, if applicable, or court order or judgment from which no further right of appeal exists, if Indemnitee appeals the decision of the Selected Forum pursuant to Section 2(c) of this Agreement. It is the parties’ intention that if the Company contests Indemnitee’s right to indemnification, the question of Indemnitee’s right to indemnification shall be for the Selected Forum or the court, as applicable, to decide, and neither the failure of the Company (including the Board, any committee or subgroup of the Board, independent legal counsel or its shareholders) to have made a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct required by applicable law, nor an actual determination by the Company (including its Board, any committee or subgroup of the Board, independent legal counsel or its shareholders) that Indemnitee has not met such applicable standard of conduct, shall create a presumption that Indemnitee has or has not met the applicable standard of conduct.

(e) Notice to Insurers. If, at the time of the receipt of a notice of a claim pursuant to Section 2(b) of this Agreement, the Company has directors’ and officers’ liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures

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set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies.

(f) Selection of Counsel. In the event the Company shall be obligated under Section 2(a) hereof to pay the expenses of any proceeding against Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such proceeding, with counsel approved by Indemnitee, which approval shall not be unreasonably withheld, upon the delivery to Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same proceeding, provided that (i) Indemnitee shall have the right to employ his counsel in any such proceeding at Indemnitee’s expense and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense or (C) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, then the fees and expenses of Indemnitee’s counsel shall be borne by the Company.

3. Additional Indemnification Rights; Nonexclusivity.

(a) Scope. Notwithstanding any other provision of this Agreement, the Company hereby agrees to indemnify Indemnitee to the fullest extent not prohibited by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company’s Articles of Incorporation, the Company’s Bylaws or by statute. In the event of any change after the date of this Agreement in any applicable law, statute or rule which expands the right of a California corporation to indemnify a member of its board of directors or an officer, such changes shall be, ipso facto, within the purview of Indemnitee’s rights and the Company’s obligations under this Agreement. In the event of any change in any applicable law, statute or rule which narrows the right of a California corporation to indemnify a member of its board of directors or an officer, such changes, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement shall have no effect on this Agreement or the parties’ rights and obligations hereunder.

(b) Nonexclusivity. The indemnification provided by this Agreement shall not be deemed exclusive of any rights to which Indemnitee may be entitled under the Company’s Articles of Incorporation, its Bylaws, any agreement, any vote of shareholders or disinterested directors, the California General Corporation Law, or otherwise, both as to action in Indemnitee’s official capacity and as to action in another capacity while holding such office. The indemnification provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though Indemnitee may have ceased to serve in such capacity at the time of any action or other covered proceeding.

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4. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the expenses, judgments, fines or amounts paid in settlement actually or reasonably incurred by Indemnitee in the investigation, defense, appeal or settlement of any civil or criminal action or proceeding, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such expenses, judgments, fines or amounts paid in settlement to which Indemnitee is entitled.

5. Mutual Acknowledgement. Both the Company and Indemnitee acknowledge that in certain instances, federal law or applicable public policy may prohibit the Company from indemnifying its directors and officers under this Agreement or otherwise. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Company’s right under public policy to indemnify Indemnitee.

6. Directors’ and Officers’ Liability Insurance. The Company shall, from time to time, make the good faith determination whether or not it is practicable for the Company to obtain and maintain a policy or policies of insurance with reputable insurance companies providing the officers and directors of the Company with coverage for losses from wrongful acts, or to ensure the Company’s performance of its indemnification obligations under this Agreement. Among other considerations, the Company will weigh the costs of obtaining such insurance coverage against the protection afforded by such coverage. In all policies of directors’ and officers’ liability insurance, Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company’s directors, if Indemnitee is a director; or of the Company’s officers, if Indemnitee is not a director of the Company but is an officer; or one of the Company’s key employees, if Indemnitee is not an officer or director but is a key employee. Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain such insurance if the Company determines in good faith that such insurance is not reasonably available, if the premium costs for such insurance are disproportionate to the amount of coverage provided, if the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or if Indemnitee is covered by similar insurance maintained by a subsidiary or parent of the Company.

7. Severability. Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Company’s inability, pursuant to court order or applicable law, to perform its obligations, or any of them, under this Agreement shall not constitute a breach of this

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Agreement. The provisions of this Agreement shall be severable as provided in this Section. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms.

8. Exceptions. Any other provision herein to the contrary notwithstanding, including, without limitation the provisions of Section 3(a) of this Agreement, the Company shall not be obligated pursuant to the terms of this Agreement:

(a) Excluded Acts/Violation of Applicable Law. To indemnify Indemnitee for any acts or omissions or transactions from which a director may not be relieved of liability under the California General Corporation Law or to take any action or fail to do any act in violation of applicable law or court order; or

(b) Claims Initiated by Indemnitee. To indemnify or advance expenses to Indemnitee with respect to proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to proceedings brought to establish or enforce a right to indemnification under this Agreement, the Company’s Articles of Incorporation or Bylaws, any statute or law or as otherwise required under Section 317 of the California General Corporation Law and for which Indemnitee exhausted the demand procedures set forth at Section 2(c) of this Agreement. This shall not limit the Company’s ability to either indemnify or advance expenses in specific cases if the Board finds it appropriate; or

(c) Lack of Good Faith. To indemnify Indemnitee for any expenses incurred by Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by Indemnitee in such proceeding was not made in good faith or was frivolous; or

(d) Insured Claims. To indemnify Indemnitee for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) which have been paid directly to Indemnitee by an insurance carrier under a policy of directors’ and officers’ liability insurance maintained by the Company; or

(e) Claims Under Section 16(b). To indemnify Indemnitee for expenses and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute.

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9. Effectiveness of Agreement; Entire Agreement. To the extent that the indemnification permitted under the terms of certain provisions of this Agreement exceeds the scope of the indemnification provided for in the California General Corporation Law, such provisions shall not be effective unless and until the Company’s Articles of Incorporation authorize such additional rights of indemnification. In all other respects, the balance of this Agreement shall be effective as of the date set forth on the first page and may apply to acts or omissions of Indemnitee which occurred prior to such date if Indemnitee was an officer, director, employee or other agent of the Company, or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, at the time such act or omission occurred. This Agreement, together with the Company’s Articles of Incorporation and the Company’s Bylaws, contains the entire agreement between the Company and Indemnitee with respect to the matters contemplated by this Agreement and supercedes all prior agreements or understandings between the Company and Indemnitee regarding the subject matter set forth herein.

10. Construction of Certain Phrases.

(a) For purposes of this Agreement, references to the “Company” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees or agents, so that if Indemnitee is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued.

(b) For purposes of this Agreement, references to “other enterprises” shall include employee benefit plans; references to “fines” shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to “serving at the request of the Company” shall include any service as a director, officer, employee or agent of the Company which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries.

(c) For purposes of this Agreement, references to a “subsidiary” shall mean any corporation, limited liability company, limited partnership or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by the Company.

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11. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original.

12. Successors and Assigns; Survival of Rights. The rights conferred on Indemnitee by this Agreement shall continue after Indemnitee has ceased to be a director or officer of the Company and shall inure to the benefit of Indemnitee’s estate, legal representatives, executors and administrators.

13. Attorneys’ Fees. In the event that any action, whether through a Selected Forum or court, as applicable, is instituted by Indemnitee under this Agreement to enforce or interpret any of the terms hereof, Indemnitee shall be entitled to be paid all arbitration or court costs and expenses, including reasonable attorneys’ fees, incurred by Indemnitee with respect to such action, unless as a part of such action, the Selected Forum or court of competent jurisdiction, as applicable, determines that each of the material assertions made by Indemnitee as a basis for such action were not made in good faith or were frivolous. In the event of an action instituted by or in the name of the Company under this Agreement or to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be paid all court costs and expenses, including attorneys’ fees, incurred by Indemnitee in defense of such action (including with respect to Indemnitee’s counterclaims and cross-claims made in such action), unless as a part of such action the court determines that each of Indemnitee’s material defenses to such action were made in bad faith or were frivolous.

14. Notice. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand, on the date of receipt or (ii) if mailed by domestic certified or registered mail properly addressed and with postage prepaid, on the third business day after the date postmarked. Addresses for notice to either party are as set forth on the signature page of this Agreement, or as subsequently modified by written notice.

15. Consent to Jurisdiction. The Company and Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of California for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be brought only in the state courts of the State of California.

16. Choice of Law. This Agreement shall be governed by and its provisions construed in accordance with the laws of the State of California as applied to contracts between California residents entered into and to be performed entirely within California.

[Signatures to follow]

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IN WITNESS WHEREOF, the parties hereto have executed this Indemnification Agreement as of the date first above written.

THE COMPANY:	REMEC, INC.
	By:
	[Name]
	Its:
	Address:	3790 Via de la Valle
		Suite 311,
		Del Mar, CA 92014
INDEMNITEE:
	Address:	3790 Via de la Valle
		Suite 311,
		Del Mar, CA 92014

EX-10.2

Exhibit 10.2

CHANGE OF CONTROL AND TRANSITION AGREEMENT

This Change of Control Agreement (the “Agreement”) is made and entered into effective as of November 9, 2004 (the “Effective Date”), by and between Jack A. Giles (the “Executive”) and REMEC, Inc. (the “Company”).

R E C I T A L S

A. It is expected that the Company from time to time will consider the possibility of a Change of Control. The Board of Directors of the Company (the “Board”) recognizes that such consideration can be a distraction to the Executive and can cause the Executive to consider alternative employment opportunities.

B. The Board believes that it is in the best interest of the Company and its shareholders to provide the Executive with an incentive to continue his employment and to maximize the value of the Company upon a Change of Control for the benefit of its shareholders.

C. In order to provide the Executive with enhanced financial security and sufficient encouragement to remain with the Company notwithstanding the possibility of a Change of Control, the Board believes that it is imperative to provide the Executive with certain benefits upon a Change of Control.

AGREEMENT

In consideration of the mutual covenants herein contained and the continued employment of Executive by the Company, the parties agree as follows:

1. Definition of Change of Control. “Change of Control” shall mean the occurrence of any of the following events:

(a) Merger or Consolidation: The completion of a merger or consolidation of the Company with any other corporation or entity, other than a merger or consolidation that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation;

(b) Sale. The sale or other disposition of all or substantially all (that is, not less than 95% of the net book value) of the assets of the Company, or its wholly owned subsidiary REMEC Defense & Space, Inc., to an unrelated corporation or entity;

(c) Liquidation: Any approval by the shareholders of the Company of a plan of complete liquidation of the Company;

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(d) Acquisition of Fifty Percent Voting Power: Any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) becoming the “beneficial owner” (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company’s then outstanding voting securities; or

(e) Change in Composition of the Board: A change in the composition of the Board, as a result of which less than a majority of the directors are incumbent directors. “Incumbent Directors” shall mean directors who either: (i) are directors of the Company as of the date hereof; or (ii) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of those directors whose election or nomination was not in connection with any transaction described in subsections (a), (b), (c) or (d) or in connection with an actual or threatened proxy contest relating to the election of directors of the Company.

2. Term of Agreement. This Agreement shall terminate upon the date that all obligations of the parties hereto under this Agreement have been satisfied.

3. At-Will Employment. The Company and the Executive acknowledge that the Executive’s employment is and shall continue to be at-will, as defined under applicable law. If the Executive’s employment terminates for any reason, the Executive shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement, or as may otherwise be established under the company’s then existing employee benefit plans or policies at the time of termination.

4. Option Acceleration and Change of Control Benefits.

(a) Option Acceleration. Upon a Change of Control, all unvested options, restricted stock units and other forms of equity compensation granted to the Executive by the Company prior to such Change of Control shall immediately vest and become fully exercisable.

(b) Change of Control Benefits.

(i) Benefits. Upon a Change of Control, the Executive shall be entitled to receive as benefits (“Change of Control Benefits”) a sum equal to: (1) eighteen (18) months of his annualized base salary as in effect immediately prior to the Change of Control; and (2) one and one-half times the average of any annual bonuses received from the Company during the two years prior to such Change of Control. Such Change of Control Benefits shall be paid in equal monthly installments in accordance with the Company’s normal payroll practices. In addition, during the period of payment of such Change of Control Benefits, the Company shall continue to make available to the Executive and Executive’s spouse and dependents all group medical, dental or other health plans, any disability or life insurance plans and other similar insurance plans in which Executive or Executive’s spouse or dependents participate on the date of the Executive’s termination on the same basis as before such termination.

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(c) Other Termination. If the Executive’s employment with the Company terminates prior to a Change of Control, then the Executive shall not be entitled to receive Change of Control Benefits hereunder, but may be eligible for those benefits (if any) as may then be established under the Company’s then existing severance and benefits plans and policies at the time of such termination.

(d) Health-Related Benefits. Upon the termination of the Change of Control Benefits under this Agreement, or at the time the Executive’s employment with the Company terminates for any other reason, the Company shall continue for Executive and for Executive’s spouse, medical, dental and vision insurance upon the payment to the Company of the same monthly premiums for such insurance as are being paid from time to time by the Company’s corporate executives, until the death of both the Executive and Executive’s spouse.

(e) Accrued Wages and Vacation; Expenses and Equipment. Without regard to the reason for, or the timing of, Executive’s termination of employment: (i) the Company shall pay the Executive any unpaid base salary due for periods prior to the date of termination; (ii) the Company shall pay the Executive all of the Executive’s accrued and unused vacation through the date of termination; and (iii) following submission of proper expense reports by the Executive, the Company shall reimburse the Executive for all expenses reasonably and necessarily incurred by the Executive in connection with the business of the Company prior to the date of termination. These payments shall be made promptly upon termination and within the period of time mandated by law. In addition, Executive may retain all his office furniture, computers, copiers, fax machines, and similar items currently at his home.

5. Successors.

(a) Company’s Successors. Any successor to the Company (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company’s business and/or assets shall assume the Company’s obligations under this Agreement and agree expressly to perform the Company’s obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. For all purposes under this Agreement, the term “Company” shall include any successor to the Company’s business and/or assets which executes and delivers the assumption agreement described in this subsection (a) or which become bound by the terms of this Agreement by operation of law.

(b) Executive’s Successors. Without the written consent of the Company, Executive shall not assign or transfer this Agreement or any right or obligation under this Agreement to any other person or entity. Notwithstanding the foregoing, the terms of this Agreement and all rights of Executive hereunder shall inure to the benefit of, and be enforceable by, Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.

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6. Notices.

(a) General. Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt request and postage prepaid. In the case of the Executive, mailed notices shall be addressed to him at the home address that he most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its Secretary.

(b) Notice of Termination. Any termination by the Company or by the Executive shall be communicated by a notice of termination to the other party hereto given in accordance with this Section. Such notice shall indicate the specific termination provision in this Agreement relied upon, shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision so indicated. The failure by the Executive to include in the notice any fact or circumstance which contributes to a showing of Involuntary Termination shall not waive any right of the Executive hereunder or preclude the Executive from asserting such fact or circumstance in enforcing his rights hereunder.

7. Nonsolicitation Of Employees. For a period of eighteen (18) months following the termination of the Executive’s employment with the Company, for any reason, the Executive will not, directly or indirectly, induce any employee of the Company or any of its subsidiaries to terminate employment with such entity, and shall not, directly or indirectly, either individually or as owner, agent, employee, consultant, or otherwise, employ or offer employment to any person who is or was employed by the Company or a subsidiary thereof.

8. Excise Tax Adjustments.

(a) Effect of Application of Excise Tax. In the event that the Executive becomes entitled to Change of Control Benefits under Section 4(b)(i) herein, and the Company determines that the Change of Control Benefits or the benefit of the acceleration provided in Section 4(a) (with the Change of Control Benefits, the “Total Payments”) will be subject to the tax (the “Excise Tax”) imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), or any similar tax that may hereafter be imposed, the Company shall compute the “Net After-Tax Amount,” and the “Reduced Amount,” and shall adjust the Total Payments as described below. The Net After-Tax Amount shall mean the present value of all amounts payable to the Executive hereunder, net of all federal income, excise and employment taxes imposed on the Executive by reason of such payments. The Reduced Amount shall mean the largest aggregate amount of the Total Payments that if paid to the Executive would result in the Executive receiving a Net After-Tax Amount that is equal to or greater than the Net After-Tax Amount that the Executive would have received if the Total Payments had been made. If the Company determines that there is a Reduced Amount, the Total

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Payments will be reduced to the Reduced Amount. Such reduction shall be made by the Company with respect to benefits in the order and in the amounts suggested by the Executive, except to the extent that the Company determines that a different reduction or set of reductions would significantly reduce the costs or administrative burdens of the Company.

(b) Tax Computation. For purposes of determining whether the Total Payments will be subject to the Excise Tax and the amounts of such Excise Tax and for purposes of determining the Reduced Amount and the Net After-Tax Amount:

(i) Any other payments or benefits received or to be received by the Executive in connection with a Change in Control of the Company or the Executive’s termination of employment (whether pursuant to the terms of this Plan or any other plan, arrangement, or agreement with the Company, or with any individual, entity, or group of individuals or entities (individually and collectively referred to in this subsection (b) as “Persons”) whose actions result in a change in control of the Company or any Person affiliated with the Company or such Persons) shall be treated as “parachute payments” within the meaning of Section 280G(b)(2) of the Code, and all “excess parachute payments” within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless in the opinion of a tax advisor selected by the Company and reasonably acceptable to the Executive (“Tax Counsel”), such other payments or benefits (in whole or in part) should be treated by the courts as representing reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code), or otherwise not subject to the Excise Tax;

(ii) The amount of the Total Payments that shall be treated as subject to the Excise Tax shall be equal to the lesser of (i) the total amount of the Total Payments; or (ii) the amount of excess parachute payments within the meaning of Section 280G(b)(1) of the Code (after applying clause (i) above);

(iii) In the event that the Executive disputes any calculation or determination made by the Company, the matter shall be determined by Tax Counsel. All fees and expenses of Tax Counsel shall be borne solely by the Company.

(iv) The Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made, and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive’s residence on the effective date of employment, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes, taking into account the reduction in itemized deduction under Section 68 of the Code.

9. Arbitration.

(a) Disputes or Controversies. Except as provided in Section 8, above, any dispute or controversy arising out of, relating to, or in connection with this

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Agreement, or the interpretation, validity, construction, performance, breach, or termination thereof, shall be settled by binding arbitration to be held in San Diego, California, in accordance with the National Rules for the Resolution of Employment Disputes then in effect of the American Arbitration Association (the “Rules”). The arbitrator may grant injunctions or other relief in such dispute or controversy. The decision of the arbitrator shall be final, conclusive and binding on the parties to the arbitration. Judgment may be entered on the arbitrator’s decision in any court having jurisdiction.

(b) Governing Law. The arbitrator(s) shall apply California law to the merits of any dispute or claim, without reference to conflicts of law rules. The arbitration proceedings shall be governed by federal arbitration law and by the Rules, without reference to state arbitration law. Executive hereby consents to the personal jurisdiction of the state and federal courts located in California for any action or proceeding arising from or relating to this Agreement or relating to any arbitration in which the parties are participants.

(c) At-Will Employment Status. Executive understands that nothing in this Section modifies Executive’s at-will employment status. Either Executive or the Company can terminate the employment relationship at any time, with or without cause.

(d) ACKNOWLEDGEMENT. EXECUTIVE HAS READ AND UNDERSTANDS THIS SECTION, WHICH DISCUSSES ARBITRATION. EXECUTIVE UNDERSTANDS THAT SUBMITTING ANY CLAIMS ARISING OUT OF, RELATING TO, OR IN CONNECTION WITH THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION, PERFORMANCE, BREACH OR TERMINATION THEREOF TO BINDING ARBITRATION TO THE EXTENT PERMITTED BY LAW, AND THAT THIS ARBITRATION CLAUSE CONSTITUTES A WAIVER OF EXECUTIVE ‘S RIGHT TO A JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING TO ALL ASPECTS OF THE EMPLOYER/EMPLOYEE RELATIONSHIP, INCLUDING BUT NOT LIMITED TO, THE FOLLOWING CLAIMS:

(i) ANY AND ALL CLAIMS OF WRONGFUL DISCHARGE OF EMPLOYMENT; BREACH OF CONTRACT, BOTH EXPRESS AND IMPLIES; BREACH OF THE COVENANT OF GOOD FAITH AND FAIR DEALING, BOTH EXPRESS AND IMPLIED; NEGLIGENT OR INTENTIONAL INFLICTION OF EMOTIONAL DISTRESS; NEGLIGENT OR INTENTIONAL MISREPRESENTATION; NEGLIGENT OR INTENTIONAL INTERFERENCE WITH CONTRACT OR PROSPECTIVE ECONOMIC ADVANTAGE; AND DEFAMATION.

(ii) ANY AND ALL CLAIMS FOR VIOLATION OF ANY FEDERAL STATE OR MUNICIPAL STATUTE, INCLUDING, BUT NOT LIMITED TO, TITLE VII OF THE CIVIL RIGHTS ACT OF 1964, THE CIVIL RIGHTS ACT OF 1991, THE AGE DISCRIMINATION IN EMPLOYMENT ACT OF 1967, THE AMERICANS WITH DISABILITIES ACT OF 1990, THE FAIR LABOR STANDARDS ACT, THE CALIFORNIA FAIR EMPLOYMENT AND HOUSING ACT, AND LABOR CODE SECTION 201, et seq.;

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(iii) ANY AND ALL CLAIMS ARISING OUT OF ANY OTHER LAWS AND REGULATIONS RELATING TO EMPLOYMENT OR EMPLOYMENT DISCRIMINATION.

10. Miscellaneous Provisions.

(a) No Duty to Mitigate. The Executive shall not be required to mitigate the amount of any payment contemplated by this Agreement, nor shall any such payment be reduced by any earnings that the Executive may receive from any other source.

(b) Waiver. No provision of this Agreement may be modified, waived or discharged unless the modification, waiver or discharged unless the modification, waiver or discharge is agreed to in writing and signed by the Executive and by an authorized officer of the Company (other than the Executive). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time.

(c) Integration. This Agreement and the stock option agreements representing the Options represents the entire agreement and understanding between the parties as to the subject matter herein and supersedes all prior or contemporaneous agreements, whether written or oral.

(d) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the internal substantive laws, but not the conflicts of law rules, of the State of California.

(e) Severability. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect.

(f) Employment Taxes. All payments made pursuant to this Agreement shall be subject to withholding of applicable income and employment taxes.

(g) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument.

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IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written.

COMPANY:		EXECUTIVE
By:	/s/ THOMAS H. WAECHTER	/s/ JACK A. GILES
	Thomas H. Waechter	Jack A. Giles
	President and CEO

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EX-31.1

EXHIBIT 31.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Thomas H. Waechter, 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-15(e) and 15d-15(e)) for the registrant and we have:

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

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 8, 2004	/s/ THOMAS H. WAECHTER
	Thomas H. Waechter
	President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Winston E. Hickman, 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 report;

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

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

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 8, 2004	/s/ WINSTON E. HICKMAN
	Winston E. Hickman
	Chief Financial and Accounting Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION

906 OF THE SARBANES-OXLEY ACT OF 2002

Each of the undersigned, in his capacity as an officer of REMEC, Inc. (the “Registrant”), hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The quarterly report of the Registrant on Form 10-Q for the period ended October 29, 2004 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/ THOMAS H. WAECHTER

Thomas H. Waechter

President and Chief Executive Officer

/s/ WINSTON E. HICKMAN

Winston E. Hickman

Chief Financial and Accounting Officer

Date: December 8, 2004

A signed original of this certification has been provided to REMEC, Inc., and will be retained by REMEC, Inc. and furnished to the Securities and Exchange Commission upon request.