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SECURITIES AND EXCHANGE COMMISSION

Commission file number 0-11685

RADYNE COMSTREAM INC.

DELAWARE
(State or other jurisdiction of incorporation or organization)

11-2569467
(IRS EMPLOYER IDENTIFICATION NO.)

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

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

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

YES   X      NO

         The registrant had 15,234,693 shares of its common stock, par value $.001, outstanding as of October 31, 2002.

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PART I – FINANCIAL INFORMATION

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

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RADYNE COMSTREAM INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except share data)

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

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

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

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RADYNE COMSTREAM INC.

Notes To Condensed Consolidated Financial Statements

1   Organization and Acquisition

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

         ComStream Corp. (ComStream), a major subsidiary acquired in 1998 designs, markets and manufactures satellite data and Internet modems, systems and earth stations.

         Armer Communications Engineering Services, Inc. (“Armer”), acquired in 2000, specializes in the integration and installation of ground segment equipment and networks for a wide range of satellite-based telecommunications systems and applications.

         Description of Acquisitions

         On April 19, 2001, Tiernan Radyne ComStream Inc. (“TRC”), a wholly owned subsidiary of the Company, obtained all of the assets of Tiernan Communications, Inc. (“TCI”) through a private foreclosure sale relating to a secured note TRC had purchased for $3.9 million in cash. Product lines acquired include standard digital TV encoders, high definition TV encoders, and ATM video network adapters as well as integrated receiver/decoders. TRC offered employment to most of the employees of TCI. The acquisition was recorded in accordance with the “purchase method” of accounting.

2   Summary of Significant Accounting Policies

(a)

Basis of Presentation

         The interim unaudited condensed consolidated financial statements furnished reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of financial position as of September 30, 2002 and the results of operations for the three and nine months ended September 30, 2002 and 2001 and cash flows for the nine months ended September 30, 2002 and 2001. Such adjustments are of a normal recurring nature. This information should be read in conjunction with the consolidated financial statements included in the Company’s Form 10-K for the year ended December 31, 2001.

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

(b)

Use of Estimates

         The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions affect the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates the estimates and assumptions based upon historical experience and various other factors and circumstances. The Company believes that the estimates and assumptions are reasonable in the circumstances; however, actual results could differ from these estimates under different future conditions.

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(c)

Principles of Consolidation

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

(d)

Cash Equivalents

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

(e)

Revenue Recognition

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

(f)

Inventories

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

(g)

Property and Equipment

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

(h)

Intangible Assets

         Goodwill, which represents the excess of purchase price over fair value of net assets acquired in the ComStream acquisition, was amortized on a straight-line basis over ten years through December 31, 2001. Goodwill acquired as a result of the purchase of Armer was amortized on a straight-line basis over 12 years through December 31, 2001. Covenants not to compete are being amortized on a straight-line basis over the contractual term of the covenants of two years. Goodwill is not being amortized after December 31, 2001, (see “New Accounting Pronouncements”).

(i)

Purchased Technology

         In connection with the acquisition of ComStream, value was assigned to purchased technology. Purchased technology is being amortized on a straight-line basis over the expected period to be benefited of 6.25 years. In the third quarter of 2002, we revalued these assets in light of our restructuring efforts, which included the discontinuance of the product lines represented by the purchased technology. Management believes that the value of these assets has been fully impaired and has charged the value of this asset to expenses in the period ended September 30, 2002.

(j)

Impairment of Long-Lived Assets

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

(k)

Warranty Costs

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

(l)

Research and Development

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

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(m)

Income Taxes

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

(n)

Concentration of Credit Risk

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

(o)

Net Earnings (Loss) Per Share

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

(p)

Fair Value of Financial Instruments

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

(q)

Employee Stock Options

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

(r)

Segment Reporting

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

(s)

New Accounting Pronouncements

         In June 2001, the FASB issued Statement of Financial Accounting Standards No. 141, “Business Combinations” (SFAS No. 141) and Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations. SFAS No. 141 specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported separately from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 144 (SFAS 144, see below).

         The Company adopted the provisions of SFAS No. 141 as of July 1, 2001, and SFAS No. 142 as of January 1, 2002. Goodwill and intangible assets determined to have an indefinite useful life acquired in a purchase business combination completed after June 30, 2001, are not amortized. Goodwill and indefinite useful life intangible assets acquired in business combinations completed before July 1, 2001 continued to be amortized through December 31, 2001. Amortization of such assets ceased on January 1, 2002 upon adoption of SFAS 142. The effect of the

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Company’s adoption of this method of accounting resulted in a reduction in amortization expense of $137,000 (basic and diluted earnings per share impact of $0.01) and $410,000 (basic and diluted earnings per share impact of $0.03) for the three and nine-month periods ended September 30, 2002, respectively.

         Upon adoption of SFAS No. 142, the Company was required to evaluate its existing intangible assets and goodwill that were acquired in purchase business combinations, and to make any necessary reclassifications in order to conform with the new classification criteria in SFAS No. 141 for recognition separate from goodwill. The Company was also required to reassess the useful lives and residual values of all intangible assets acquired, and make any necessary amortization period adjustments by the end of the first interim period after adoption.

         In connection with SFAS No. 142’s transitional goodwill impairment evaluation, the Statement required the Company to perform an assessment of whether there was an indication that goodwill is impaired as of the date of adoption. To accomplish this, the Company was required to identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of January 1, 2002. The Company was required to determine the fair value of each reporting unit and compare it to the carrying amount of the reporting unit within six months of January 1, 2002. To the extent the carrying amount of a reporting unit exceeded the fair value of the reporting unit, an indication existed that the reporting unit goodwill may be impaired and the Company would be required to perform the second step of the transitional impairment test. In this step, the Company is to compare the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill, both of which are to be measured as of the date of adoption. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit to all of the assets (recognized and unrecognized) and liabilities of the reporting unit in a manner similar to a purchase price allocation in accordance with SFAS No. 141. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill.

         As a result of the performance of the first step of the transitional impairment test, the Company has identified impairment to the goodwill recorded in one of its two reporting units of its one operating segment. The transitional impairment loss, once quantified, will be recognized as a cumulative effect of a change in accounting principle, effective January 1, 2002.

         In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 amends existing guidance on asset impairment and provides a single accounting model for long-lived assets to be disposed of. SFAS No. 144 also changes the criteria for classifying an asset as held-for-sale; and broadens the scope of businesses to be disposed of that qualify for reporting as discontinued operations and changes the timing of recognizing losses on such operations. The Company adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 did not affect the Company’s financial statements.

         In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” This Statement rescinds the requirement to report gains and losses from extinguishment of debt as an extraordinary item. Additionally, this statement amends Statement 13 to require sale-leaseback accounting for certain lease modifications that have economic effects similar to sale-leaseback transactions. The provisions of this statement relating to Statement 4 are applicable in fiscal years beginning after May 15, 2002. The provisions of this Statement related to Statement 13 are effective for transactions occurring after May 15, 2002. All other provisions of this Statement are effective for financial statements issued on or after May 15, 2002. The adoption of SFAS No. 145 is not expected to have a material effect on the Company’s financial statements.

         In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS 146 nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. For purposes of this Statement, an exit activity includes, but is not limited to a restructuring as that term is defined in IAS 37, “Provisions, Contingent Liabilities, and Contingent Assets”. The Statement is effective for exit or disposal activities initiated after December 31, 2002. The Company is in the process of evaluating the adoption of SFAS No. 146 and its impact on the financial position and results of operations of the Company.

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The following summarizes changes to restructuring related liabilities for the nine months ended September 30, 2002:

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6   Earnings (loss)/ Per Share

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

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

         This information should be read in conjunction with the condensed consolidated financial statements and the notes thereto included in Item 1 of Part I of this Quarterly Report and the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2001 contained in the Company’s 2001 Annual Report on Form 10-K.

         Except for the historical information contained herein, the following discussion includes statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”) and Radyne ComStream claims the protection of the safe-harbor for forward-looking statements contained in the Reform Act. These forward-looking statements are often characterized by the terms “may,” “believes,” “projects,” “expects,” or “anticipates,” and do not reflect historical facts. Specific forward-looking statements contained in the following discussion include, but are not limited to, (i) the anticipated reversal of declining bookings, (ii) continuing market share gains, (iii) anticipated increases in the levels of business, (iv) expansion of current product lines to address new markets and customer requirements, (v) anticipated increases in sales volume resulting in corresponding decreases in inventory, (vi) the expectation that the company will be successful in renegotiating its bank line of credit and regain compliance with the applicable covenants; and (vii) the belief that existing cash and cash from operations will be sufficient to meet future operational needs and capital requirements.

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

	•		loss of, and failure to replace, any significant customers;
	•		timing and success of new product introductions;
	•		product developments, introductions and pricing of competitors;
	•		timing of substantial customer orders;
	•		availability of qualified personnel;

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	•		the impact of local political and economic conditions and foreign exchange fluctuations on international sales;
	•		performance of suppliers and subcontractors;
	•		decreasing or stagnant market demand and industry and general economic or business conditions;
	•		availability, cost and terms of capital;
	•		our level of success in effectuating our strategic plan;
	•		our ability to successfully integrate acquisitions;
	•		adequacy of our inventory, receivables and other reserves;
	•		other factors to which this report refers or to which our 2001 Annual Report on Form 10-K refers.
	•		other factors that the Company is currently unable to identify or quantify, but may arise or become known in the future.

         In addition, the foregoing factors may affect generally our business, results of operations and financial position.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

         The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions affect the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to bad debts, inventories, intangible assets, income taxes, warranty obligations, and contingencies based upon historical experience and various other assumptions, factors, and circumstances. We believe that our estimates and assumptions are reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and future conditions.

         We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:

•		Revenue Recognition. We recognize revenues for orders of products to be shipped as we ship the products and transfer ownership to our customers. We maintain allowances for sales returns.
•		Allowance for Doubtful Accounts. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
•		Long-Lived Assets. We estimate the useful lives of our property and equipment, goodwill and other identifiable intangibles. We may experience losses if these assets suffered impairment due to the useful lives ultimately being shorter than they were originally estimated or if the carrying value of the long-lived assets are not recoverable from our operations.
•		Warranties. We provide for the estimated cost of product warranties at the time revenue is recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our vendors, our warranty obligation is affected by product failure rates and material usage and service delivery costs incurred in correcting any product failures. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required.

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•		Inventories. We write down our inventory for estimated obsolescence or the inability to market its inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
•		Deferred Taxes. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.
•		Restructuring Charges. The Company records accruals for the estimated future cash expenditures required from restructuring its business. The accruals include estimates of future rent payments and other settlements until the obligation is canceled. Should actual cash expenditures differ from the Company’s estimates, revisions to the estimated restructuring liability would be required.

Results of Operations

         Results of operations for the three-month period ended September 30, 2002 compared to the three-month period ended September 30, 2001, were as follows:

         During the period ended September 30, 2002, management determined that certain assets of the Company were non-performing or under-performing and formulated a plan to reduce costs associated with the production of the products related to these assets. We expensed a total of $2.5 million in the period related to the plan as follows:

	•		we laid off 19 employees for which we provided severance costs of $170,000;
	•		we abandoned approximately 29,000 square feet of leasehold space for which we provided $930,000 for future rent expense and for abandoned leasehold improvements; and
	•		we wrote off the value of unamortized purchased technology, which amounted to $995,000 and the unrealizable value of the inventory related to the products, which amounted to $431,000.

These amounts will be reflected in their respective expense categories below.

         Net sales decreased 24% to $12.8 million during the three-month period ended September 30, 2002 from $17 million during the three-month period ended September 30, 2001 due to several factors. As a result of the prolonged downturn in market conditions in the telecommunications industry, we experienced a decline in bookings and sales during the current quarter and year to date periods compared to the same time frames in 2001. While we anticipate that this trend will reverse when market conditions improve, we cannot guarantee that these conditions will turn around anytime soon, if at all. We have realized success in introducing our new product lines into the market. However, due to the continuing market downturn, sales of these products have been lower than expected. We expect sales on our new product lines to generate a significant portion of our revenue when and if market conditions improve.

         Cost of sales as a percentage of net sales increased to 69% during the three-month period ended September 30, 2002 compared to 58% for the three-month period ended September 30, 2001. The higher costs in the current period include the write-off of $431,000 (3.4% of sales) of inventory related to restructuring our operations as explained above. Additionally, we experienced higher unabsorbed overhead of approximately $600,000 (5% of sales) due to slower than anticipated sales resulting from the economic slowdown. The remaining differences are due to the mix of products sold during the period.

         Selling, general and administrative costs decreased to $2.9 million (22% of sales) during the three-month period ended September 30, 2002 from $3.8 million (23% of sales) during the three-month period ended September 30, 2001. This reduction was primarily due to the reductions in personnel during the year to date period, as offset by the costs experienced in moving the operations of the Tiernan Radyne ComStream Inc. entity into the ComStream facilities in the year earlier period. We are continually evaluating alternatives to reduce our selling, general, and administrative costs. We intend to aggressively focus on our selling, general, and administrative costs for the duration of the economic downturn in our industry and, where appropriate in the view of management, make changes to reduce these costs.

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         Research and development expenditures decreased 29% to $1.9 million (15% of sales) during the three-month period ended September 30, 2002 from $2.8 million (16.3% of sales) during the three-month period ended September 30, 2001. The decrease was primarily due to a reduction in our engineering staff during the first seven months of this year. We intend to continue exploring alternatives to reduce our research and development expenditures. However, these expenditures may fluctuate from period to period depending on the staging of on-going projects. In future periods, we anticipate research and development expenditures may increase as we expand our product lines to address new markets and customer requirements.

         Asset impairment costs during the period are related to the restructuring plan as explained above. Specifically, the unamortized portion of the technology asset acquired from ComStream of $995,000 was impaired as a result of the implementation of the restructuring plan that we developed during the period. This asset was being amortized over 6.25 years at the rate of $100,000 each quarter. Since there is no realizable future cash flows related to the products represented by the purchased technology asset, we have written off the value of the asset in the current period.

         Restructuring charges, not otherwise identified in costs of sales, were approximately $170,000 related to severance costs for the reduction in force of 19 employees during the quarter, and approximately $930,000 related to costs for the abandonment of leasehold space at our San Diego operations facility.

         Interest expense remained flat year over year at $13,000 in the three-month period ended September 30, 2002 from $12,000 in the three-month period ended September 30, 2001. The small change is due to the varied rates we pay on capitalized lease obligations.

         Other income decreased to $57,000 in the three-month period ended September 30, 2002 from $93,000 during the three-month period ended September 30, 2001 primarily due to a decrease in interest income due to reduced rates on our short-term investments.

         We made no provision for income taxes in the current period due to losses experienced in the current period compared with a provision of $267,000 during the same period last year. Management continues to evaluate the recoverability of the deferred tax assets in light of future earnings projections.

         Because of the factors discussed above, we experienced a net loss of ($2.9 million) (($0.19) per diluted common share) during the current quarter compared to net income of $428,000 ($0.03 per diluted common share) during the three-month period ended September 30, 2001.

         New-orders-booked (Bookings) decreased to $14 million for the three-month period ended September 30, 2002 from $17.7 million during the three-month period ended September 30, 2001. The decrease was due to the current market conditions as discussed above. However, since the first quarter of 2002, bookings have slowly increased sequentially and this has resulted in a Book-to-Bill ratio during the current quarter of 1.1:1, which is the highest level since the first quarter of 2000 (10 consecutive quarterly periods).

         Backlog (the level of unfilled-orders-to-ship) decreased to $11.1 million at September 30, 2002 from $14 million at September 30, 2001 and increased from $9.9 million at June 30, 2002 as a result of lower booking levels including the cancellation of approximately $1 million in orders during the first nine months of this year.

         Results of operations for the nine-month period ended September 30, 2002 compared to the nine-month period ended September 30, 2001, were as follows:

         During the period ended September 30, 2002, management determined that certain assets of the Company were non-performing or under-performing and formulated a plan to reduce costs associated with the production of the products related to these assets. We expensed a total of $2.5 million in the period related to the plan as follows:

	•		we laid off 19 employees for which we provided severance costs of $170,000;
	•		we abandoned approximately 29,000 square feet of leasehold space for which we provided $930,000 for future rent expense and for abandoned leasehold improvements; and
	•		we wrote off the value of unamortized purchased technology, which amounted to $995,000 and the unrealizable value of the inventory related to the products, which amounted to $431,000.

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These amounts will be reflected in their respective expense categories below.

         Net sales decreased 11% to $43.9 million during the nine-month period ended September 30, 2002 from $49.4 million during the nine-month period ended September 30, 2001 due to several factors. As a result of the prolonged downturn in market conditions in the telecommunications industry and offset by an additional $2.6 million of sales as a result of the Tiernan purchase, we experienced a decline in bookings and sales during the current period compared to the first nine-months of 2001. While we anticipate that this trend will reverse when market conditions improve, we cannot guarantee that these conditions will turn around anytime soon, if at all. We have realized success in introducing our new product lines into the market. However, due to the continuing market downturn, sales of these products were lower than expected. We expect sales on our new product lines to generate a significant portion of our revenue when and if market conditions improve.

         Cost of sales increased to $30.3 million (68% of sales) during the nine-month period ended September 30, 2002 compared to $27.9 million (56% of sales) during the nine-month period ended September 30, 2001. This increase consisted of $1.1 million (4% of sales) related to the write down of inventory from discontinued product lines, the write-off of $431,000 (1% of sales) of inventory related to restructuring our operations as explained above, $200,000 (1% of sales) related to excess and obsolete inventory as a result of the decrease in sales as discussed above and $650,000 (1% of sales) in unabsorbed overhead due to the reduced level of business. The balance of the variance from period to period is related to the mix of products sold.

         Selling, general and administrative costs decreased to $10 million (23% of sales) during the nine-month period ended September 30, 2002 from $11.4 million (23% of sales) during the nine-month period ended September 30, 2001. This reduction was primarily due to the reduction in personnel during the late part of the first quarter and to the excess costs experienced in the beginning of the prior year’s third quarter due to the addition of the operations of the Tiernan Radyne ComStream Inc. entity, prior to its consolidation with the ComStream facilities. We are continually evaluating alternatives to reduce our selling, general and administrative costs. We intend to aggressively focus on our selling, general and administrative costs for the duration of the economic downturn in our industry.

         Research and development expenditures decreased 15% to $6.8 million during the nine-month period ended September 30, 2002 from $7.9 million during the nine-month period ended September 30, 2001. The decrease was primarily due to a reduction in our engineering staff during the first quarter of this year. We intend to continue exploring alternatives to reduce research and development expenditures. These expenditures fluctuate from period to period depending on the staging of on-going projects. During the first quarter of 2002, we reduced the workforce in the research and development section due to the ongoing contraction of business in the telecommunications market sector.

         Asset impairment costs during the period are related to the restructuring plan as explained above. Specifically, the unamortized portion of the purchased technology asset of $995,000 was impaired as a result of the implementation of the restructuring plan that we developed during the period. This asset was being amortized over 6.25 years at the rate of $100,000 each quarter. Since there is no realizable future cash flows related to the products represented by the purchased technology asset, we have written off the value of the asset in the current period.

         Restructuring charges, not otherwise identified in costs of sales, were approximately $170,000 related to severance costs for the reduction in force of 19 employees during the quarter, and approximately $930,000 related to costs for the abandonment of leasehold space at our San Diego operations facility.

         Interest expense increased to $34,000 in the nine-month period ended September 30, 2002 from $32,000 in the nine-month period ended September 30, 2001.

         Other income (which includes interest income) decreased to $147,000 in the nine-month period ended September 30, 2002 from $457,000 during the nine-month period ended September 30, 2001, due mainly from a decrease in average cash balances and declining interest rates and by $185,000 of income from the sale of stock obtained from an insurance company during the previous year to date period.

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         The Company made no provision for income taxes in the current nine-month period compared with a provision of $759,000 during the same period last year due to the losses experienced in the current period. Management continues to evaluate the recoverability of the deferred tax assets in light of future earnings projections.

         Because of the factors discussed above, we experienced a net loss of ($5.1 million) (($0.33) per diluted common share) during the current nine-month period compared to net income of $1.6 million ($0.10 per diluted common share) during the nine-month period ended September 30, 2001.

         New-orders-booked (Bookings) decreased to $40 million for the nine-month period ended September 30, 2002 from $45.7 million during the nine-month period ended September 30, 2001. The decrease was due to the current market conditions as discussed above.

         Backlog (the level of unfilled-orders-to-ship) decreased to $11.1 million at September 30, 2002 from $14 million at September 30, 2001 and from $9.9 million at June 30, 2002 as a result of lower booking levels including the cancellation of approximately $1 million in orders during the first nine months of this year.

Liquidity and Capital Resources

         Working capital was $30.3 million at September 30, 2002, a decrease of $5.7 million (16%) from the $36.0 million in working capital at December 31, 2001. This decrease was primarily attributable to a decrease in current assets of approximately $7 million during the nine-month period ended September 30, 2002, offset by a decrease in current liabilities of approximately $1.3 million. The decrease in current assets was due to reduced accounts receivables (down 39%, or $5.7 million, from December 31, 2001), inventory levels (down 27%, or $4.9 million, from December 31, 2001), prepaid expenses (down 37%, or $292,000, from December 31, 2001) and a reclassification of deferred tax assets ($2.6 million) from current assets to long term-assets. The decrease in current liabilities was almost entirely made up of a reduction in accounts payable of $1.3 million. This reduction is due to fluctuations in the schedule of payments of trade payables and because of the slower pace that the company is receiving inventory as a result of the economic slow down (lower sales levels).

         Total cash increased by $6.5 million during the nine-month period ended September 31, 2002 compared to a reduction of cash of ($7.4 million) during the first nine months of 2001 due to the following factors:

	•		Net cash provided by operating activities was $7.5 million for the nine-month period ended September 30, 2002, as compared to cash used of ($2.1 million) by operating activities during the nine-month period ended September 30, 2001. This increase in cash from operations was primarily attributable to the reduction of accounts receivables in the amount of $5.7 million and inventories of $4.9 million. This was partially offset by the net loss of ($5.1 million) the company experienced, during the year-to-date period, and a reduction in accounts payables of $1.3 million. Other factors contributing to the increase in net cash included an increase in customer advances of approximately $45,000 during 2002 compared to a decrease of $496,000 during the same period in 2001.
	•		Cash used in investing activities was $1.6 million for the nine-month period ended September 30, 2002 compared to $6 million for the nine-month period ended September 30, 2001. The decrease of $4.5 million between the two periods was due to assets, net of cash, acquired from Tiernan in the prior period. During the current nine-month period ended September 30, 2002, we added property and equipment of $1.6 million as was the case during the nine-month period ended September 30, 2001.
	•		Net cash provided by financing activities was $690,000 and $669,000 for the nine months ended September 30, 2002 and September 30, 2001, respectively. The primary source of this cash was net proceeds from the exercise of stock options ($306,000 and $167,000) and common stock sold through the Employee Stock Purchase Plan ($446,000 and $513,000) during the nine months ended September 30, 2002 and 2001, respectively, offset by principal payments made on capital lease obligations of $58,000 and $12,000 for the period ended September 30, 2002 and 2001, respectively.

         As a result of the foregoing, our cash balances increased by $6.5 million during the nine-month period ended September 30, 2002 compared to a reduction of cash of ($7.4 million) during the first nine months of 2001.

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         We also have a committed line of credit with a bank in the amount of $10 million, for which there was no outstanding balance due as of September 30, 2002. However, as of September 30, 2002, we were in default of certain covenants related to profitability. The company and its lender are currently re-negotiating the terms of the credit facility, which management expects to result in an increase in the allowable capital expenditures from $1.5 million to $2.3 million; the deletion of a covenant regarding allowable ratio of EBITDA to interest expense; the addition of a new covenant that would set the applicable interest rate at LIBOR plus 2.5% in the event EBITDA is negative; a new covenant that net income must exceed $4 million at all times, a new covenant requiring profitability, measured on a quarterly basis; and the application of a 0.15% facility fee, which will result in an annual payment of $15,000.

         We believe that cash and cash equivalents on hand, anticipated future cash receipts, and borrowings available under our credit facility will be sufficient to meet our obligations as they become due for the next twelve months. However, a decrease in our sales or demand for our products or services would likely adversely affect our working capital amounts. As part of our business strategy, we occasionally evaluate potential acquisitions of businesses, products and technologies. Accordingly, a portion of our available cash may be used at any time for the acquisition of complementary products or businesses. These potential transactions may require substantial capital resources, which, in turn, may require us to seek additional debt or equity financing. There are no assurances that we will be able to consummate any of these transactions. For more detailed information, see our Risk Factors contained in Exhibit 99.1 to our Annual Report on Form 10-K filed with the Securities and Exchange Commission.

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

         We are exposed to market risk on our financial instruments from changes in interest rates. We do not use financial instruments for trading purposes or to manage interest rate risk. As of September 30, 2002, a 1% change in interest rates would, over a year’s period, have a potential pretax impact of approximately $130,000, which is not material to our consolidated financial statements.

Item 4 — Controls and Procedures

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

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

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

                           None

Item 2. Changes in Securities

                           None

Item 3. Defaults upon Senior Securities

                           None

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

                           None

Item 5. Other Information

                           None

Item 6 — Exhibits and Reports on Form 8-K

(b)

Registrant did not file any reports on Form 8-K during the three month period ended September 30, 2002.

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

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SIGNATURES

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

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CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, Robert C. Fitting, certify that:

1.		I have reviewed this quarterly report on Form 10-Q of Radyne ComStream 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 Company’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
		a) designed such disclosure controls and procedures to ensure that material information relating to the Company, 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 Company’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
		c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.		The Company’s other certifying officers and I have disclosed, based on our most recent evaluation, to the Company’s auditors and the audit committee of Company’s board of directors (or persons performing the equivalent function):
		a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize and report financial data and have identified for the Company’s auditors any material weaknesses in internal controls; and
		b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls; and
6.		The Company’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002

/s/ Robert C. Fitting

Robert C. Fitting
Chief Executive Officer

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CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, Garry D. Kline, certify that:

1.		I have reviewed this quarterly report on Form 10-Q of Radyne ComStream 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 Company’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
		a) designed such disclosure controls and procedures to ensure that material information relating to the Company, 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 Company’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
		c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.		The Company’s other certifying officers and I have disclosed, based on our most recent evaluation, to the Company’s auditors and the audit committee of Company’s board of directors (or persons performing the equivalent function):
		a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize and report financial data and have identified for the Company’s auditors any material weaknesses in internal controls; and
		b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls; and
6.		The Company’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002

/s/ Garry D. Kline

Garry D. Kline
Chief Financial Officer

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EXHIBIT INDEX

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