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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

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

Commission File Number 0-11685

Radyne ComStream Inc.

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

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

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

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

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Disclosure Concerning Forward-Looking Statements

     This Annual Report on Form 10-K, includes statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”) and Radyne ComStream claims the protection of the safe-harbor for forward-looking statements contained in the Reform Act. These forward-looking statements are often characterized by the terms “may,” “believes,” “projects,” “expects,” or “anticipates,” and do not reflect historical facts. Specific forward-looking statements contained in this Annual Report on Form 10-K in the Notes to Consolidated Financial Statements and under the captions “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” include, but are not limited to: (i) growth in demand for satellite system ground-based equipment and satellite-delivered communications services, (ii) continued global deregulation and privatization of telecommunications carriers, (iii) worldwide demand for Internet over Satellite connectivity and communications services in general, (iv) an increase in total foreign sales, (v) an increase in market share, and (vi) sufficient cash reserves and cash from operations to fund planned future operations and capital requirements through the end of 2003.

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

	•		loss of, and failure to replace, any significant customers;
	•		timing and success of new product introductions;
	•		product developments, introductions and pricing of competitors;
	•		timing of substantial customer orders;
	•		availability of qualified personnel;
	•		the impact of local political and economic conditions and foreign exchange fluctuations on international sales;
	•		performance of suppliers and subcontractors;
	•		market demand and industry and general economic or business conditions;
	•		availability, cost and terms of capital;
	•		the “Risk Factors” set forth in Exhibit 99.1, which is attached hereto and incorporated by reference into this Annual Report on Form 10-K; and
	•		Other factors that Radyne ComStream is currently unable to identify or quantify, but may exist in the future.

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

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

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Part I

Item 1. Business

Overview

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

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

	•		The world’s highest capacity domestic, digital satellite telephone network-PT Telkom, Indonesia.
	•		Italy’s first digital telephone/data network-Telespacio, Italian Railways.
	•		Colombia’s first alternate telecommunications network-Anditel.
	•		Supplied HDTV Encoders and IRDs for Major Korean Broadcasters
	•		Earth stations for the first international satellite links in China, India, Pakistan, Brazil, Haiti and Zambia.
	•		One of the world’s largest private satellite broadcast network-Reuters.
	•		Supplied complete Data Broadcast network for Shanghia Stock Exchange-over 4,000 sites throughout mainland China.
	•		International Cablecasting Technologies — utilizing 40,000 digital audio broadcast receivers.
	•		Supply of Ground equipment for delivery of IP over Satellite to major satellite bandwidth providers.
	•		First major Internet over Satellite network with 300 terminals deployed in the Dominican Republic for a distance learning application.
	•		Major private audio network in Mexico and Central America for a department store chain, which transmits music, advertising and product announcements to all its store locations.
	•		Supply of major control room equipment plus engineering, installation and training at new customer service center for PanAmSat Corporation.
	•		Broadband satellite modems and frequency converters to provide telephone and Internet connectivity for VSNL, the largest international telecommunications provider in India.
	•		High-Speed DVB Modulators for Hughes Direct to PC network.
	•		High Definition Television encoders and IRDs for major international sporting events (2002 winter Olympics through NBC, 2002 World Cup through Korea Telecom and various programming through ESPN-Star TV in Singapore).
	•		First Internet broadcast network in the Republic of Myanmar.
	•		Selected by PamAmSat, Intelsat and ChinaSat as preferred vendor for the deployment of IP over satellite solutions.
	•		Major expansion of US Government Satellite Communications Network.

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Industry Overview

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

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

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

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

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

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

Industry Growth

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

	•		Worldwide demand for Internet over Satellite connectivity. A large number of the World Wide Web sites reside in North America and high-speed access to the web will continue to be a major issue.
	•		Worldwide demand for communications services in general, including data communications services, high-speed digital television/HDTV and corporate Intranets.

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	•		The relative cost-effectiveness of satellite communications for many applications, such as digital television delivery, distance learning and IP over satellite.
	•		Technological advancements that broaden applications for and increase the capacity in satellite networks.
	•		Lack of global terrestrial infrastructure to support increased demand for Broadband and Internet applications and services.
	•		U.S. Federal Communications Commission mandate for Television Broadcasters to adopt DTV standards by 2008.

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

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

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

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

Market Opportunities

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

International and Rural Telephony

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

•

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

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	•		All areas within a satellite beam receive the same level of service, making it highly attractive in rough terrain or underdeveloped regions.
	•		Satellites can be deployed much more rapidly to offer international services.

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

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

Private Networks

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

Information and Radio Broadcasts

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

Television Video Distribution

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

	•		Satellites provide television broadcasters with an efficient and economical method to distribute their programming to cable service providers and direct broadcast satellite operators.
	•		Compressed video encoding and decoding make satellites available for less demanding video transmissions, including business teleconferencing, private business networks, and telemedicine.
	•		The economics of compressed video allow the use of satellite transmission for long-distance teaching applications.
	•		Digital cinema distribution is emerging as a viable alternative to the physical distribution of feature length

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

Internet Communications

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

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

Government and Military

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

Strategy

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

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

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

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

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

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

Products and Services

     We offer the following product families:

	•		Satellite modems and earth stations.
	•		Internet via Satellite terminal equipment.
	•		Frequency converters.
	•		Data, audio, and video broadcast equipment.
	•		Digital video broadcast (DVB) and high-speed modems.
	•		Cable and microwave modems.
	•		Standard and High Definition Digital Television (HDTV) encoders and IRDs (Integrated Receivers / Decoders).
	•		Digital TV ATM and network interface adapters.

     We offer the following services:

•

Design, integration and installation of turnkey communication systems.

Satellite Modems and Earth Stations

	We produce satellite modems that are sold individually and earth stations that are a bundled solution built around our satellite modems. Satellite modems transform user information, such as data, video or audio, into a signal that can be further processed for transmission via satellite. We produce several varieties of satellite modems, which operate at different speeds using a variety of modulation techniques.
	We’ve recently introduced a major addition to our satellite modem line, the Turbo forward error correction codec. The turbo product provides customers with greatly improved satellite and bandwidth performance, which directly translates to space segment cost savings. This product also affords our installed base of customers (in excess of 10,000 modems) the opportunity to improve their performance at a significant operational cost saving.
	Our earth stations commonly consist of several components, including a satellite modem, a frequency converter, a

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	transceiver, a transmitter, and an antenna. Earth stations serve as an essential link in transmitting signals to, and receiving signals from, satellites. Our earth stations enable users to program power levels and operating parameters in order to compensate for low signal levels, extreme weather conditions, and other variables. We design and manufacture our earth stations using components that we manufacture as well as components that we obtain from other manufacturers.
	Our Star Network Management System augments these product offerings. The Star Network Management System, which consists of a Windows NT® point and click system, is used to remotely monitor and maintain the functioning of an entire network of modems, earth stations, and ancillary equipment. This can be done from a single location, thereby eliminating the need to travel to each remote location. This system provides local and remote modem management, control of the equipment connected to the modems and earth stations, collection of network status and alarm information, remote channel monitoring, and dial-up control.

Frequency Converters

	We currently market two varieties of converters used to transmit signals to satellites and three converters used to receive signals relayed from satellites. We also produce a redundancy control unit, which will switch a satellite system to stand-by equipment in the event of a malfunction in a satellite modem or converter. Such redundancy is a critical element for many of our customers, such as rural or international telephony networks, that strive to provide uninterrupted satellite communications services to their customers.
	Each satellite is configured to receive or transmit a particular radio wave pattern, otherwise called a frequency band, which is typically different from the frequency of the satellite modem. Frequency converters are used to alter the input/output of a satellite modem into a wave pattern that can be interpreted by the particular satellite being used in the satellite system to relay communication signals.

Data, Audio and Video Broadcast Equipment

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

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

Two-way Internet Satellite Terminal Equipment

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

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Digital Video Broadcast (DVB) and High-Speed Modems

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

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

Cable and Microwave Modems

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

Standard and High Definition Digital TV Encoders

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

Digital TV Integrated Receivers / Decoders

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

Digital TV ATM and Network Interface Adapters

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

Design, Integration and Installation of Turnkey Communications Systems

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

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Research and Development

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

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

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

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

Sales and Marketing

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

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

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

Customers

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

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

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

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

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

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

Competition

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

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

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

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

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

	•		An experienced management group, which has extensive technological and engineering expertise and excellent customer relationships. The members of our management team have an average of over 20 years of experience in the satellite communications industry.
	•		Our expansive line of well-known, well-respected, off-the-shelf, state-of-the-art equipment that enables us to meet our customers’ requirements.
	•		Our ability to custom design products for our customers’ special applications and to provide a one-stop shopping option to our customers.
	•		Our ability to meet the complex satellite ground communications systems requirements of our customers in diverse political, economic, and regulatory environments in various locations around the world.
	•		Our worldwide sales and service organization with the expertise to successfully conduct business internationally through sales and service offices staffed by our employees in most of our major markets throughout the world, including in Boca Raton, Beijing, Singapore, London, Jakarta, and Amsterdam.

Manufacturing

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

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

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Intellectual Property

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

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

Employees

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

Available Information

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

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Item 2. Properties

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

Item 3. Legal Proceedings

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

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

     Not applicable.

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PART II

Item 5.

Market for Registrant’s Common Equity and Related Stockholder Matters

Market for Common Stock

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

Holders of Record

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

Dividends

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

Sale of Unregistered Securities

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

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Item 6. Selected Financial Data

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

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

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

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Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

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

     On December 8, 2000, we completed the acquisition of all of the outstanding shares of common stock of Armer Communications Engineering Services, Inc. (“Armer”) for an aggregate purchase price of $1.9 million. This purchase price consisted of $1.2 million in cash and 130,680 shares of our common stock. The fair value of the stock was determined based on the average market price of the stock over a reasonable period of time before and after the terms of the acquisition were agreed to and announced. Armer specializes in innovative solutions for the integration and installation of turnkey satellite communications systems. This acquisition was recorded in accordance with the “purchase method” of accounting and, accordingly, the purchase price was allocated to the assets purchased and the liabilities assumed based upon the estimated fair values at the date of acquisition. The excess of the purchase price over the fair values of the net assets acquired was approximately $1.9 million and was recorded as goodwill, which was amortized on a straight-line basis over twelve years until the adoption of SFAS 142 on January 1, 2002, at which time amortization was suspended and new accounting rules took effect. The results of operations of the acquired operations have been included in the accompanying statements of operations from the acquisition date.

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

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

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

Critical Accounting Policies and Estimates

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

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

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

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

	•		Valuation of Receivables. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Bad debt reserves are recorded based upon historic default averages as well as through the creation of reserves established for specific customers deemed marginal in their ability to pay based upon factors known at that time. In general, if the financial condition of a customer was to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
	•		Valuation and Impairment of Intangible Assets. In assessing our goodwill and other intangible assets for impairment in accordance with the Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets,” we are required to make significant assumptions about the future cash flows, overall performance, identity and allocation and valuation of the assets including goodwill and other intangibles of our reporting units. Market prices are not readily available for certain businesses, unique physical assets, and most intangible assets to be valued in goodwill impairment tests. Therefore, we estimate fair values using estimating techniques and assumptions that are matters of judgment. Our transitional impairment analysis of goodwill as of January 1, 2002, as required by SFAS 142, yielded an impairment charge of $4.3 million, recorded in fourth quarter 2002 as a cumulative effect of change in accounting principle. We have no remaining goodwill on our balance sheet as of December 31, 2002.
	•		Warranty Liability. We provide limited warranties on certain of our products and systems for periods generally not exceeding two years. Estimated warranty costs for potential product liability and warranty claims based on our claim experience are accrued as cost of sales at the time revenue is recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our vendors, our warranty liability is affected by product failure rates and material usage and service delivery costs incurred in correcting product failures. Should actual product failure rates, material usage or service delivery costs differ from the Company’s present estimates, additional warranty liabilities may be required.
	•		Valuation of Inventories. Inventories, consisting of satellite modems and related products, are valued at the lower of cost (first-in, first-out) or market. Our inventories include high-technology components and systems sold into rapidly changing and competitive markets, whereby such inventories may be subject to early technological obsolescence. We evaluate inventories for excess, obsolescence or other factors that may render inventories unmarketable at normal margins. Write-downs are recorded so that inventories reflect the approximate net realizable value. Assumptions about future demand,

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			market conditions and decisions to discontinue certain product lines can impact the decision to write down inventories. If assumptions about future demand change or actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. In any case, actual amounts could be different from those estimated.
	•		Accounting for Income Taxes. Management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and the valuation allowance recorded against net deferred tax assets. The carrying value of our net operating loss carry-forwards is dependent upon our ability to generate sufficient future taxable income. In addition, we consider historic levels of income, expectations and risk associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing a tax valuation allowance. Should we determine that we are not able to realize all or part of our deferred tax assets in the future, a valuation allowance is recorded against the deferred tax assets with a corresponding charge to income in the period such determination is made. Likewise, should we determine that we would be able to realize deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made.

Results of Operations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Liquidity and Capital Resources

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

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

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

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

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

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

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

Contractual Obligations and Commitments

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

Impact Of Inflation

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

Accounting Matters

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

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combinations initiated after June 30, 2001. Statement 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. Statement 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually with the provisions of Statement 142. Statement 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.

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

     Statement 141 required, upon adoption of Statement 142, that we evaluate existing intangible assets and goodwill acquired in prior purchase business combinations, and make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart from goodwill. Upon adoption of Statement 142, we were required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, we were required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period.

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

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

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

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

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

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

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

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

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Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

     We are exposed to market risk on our financial instruments from changes in interest rates. We do not use financial instruments for trading purposes or to manage interest rate risk. The Company does not have any derivative financial instruments. As of December 31, 2002, a change in interest rates of 1% would, over a year’s period, have a potential pretax impact of $70,000 on our interest earnings, which is immaterial to our consolidated financial statements.

Item 8. Financial Statements and Supplementary Data

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

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Independent Auditors’ Report

The Board of Directors and Stockholders
Radyne ComStream Inc.:

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

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

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

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

/s/ KPMG LLP

Phoenix, Arizona
March 7, 2003

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Radyne ComStream Inc.
 
Consolidated Balance Sheets

See accompanying notes to consolidated financial statements.

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Radyne ComStream Inc.
 
Consolidated Statements of Operations