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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended September 30, 2003
Or

For the transition period from                 to

Radyne ComStream Inc.

Registrant’s telephone number including area code: (602) 437-9620

     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 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 number of shares of the registrant’s common stock, which were outstanding as of the close of business on November 1, 2003, was 15,868,432.

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Part I
FINANCIAL INFORMATION

Item 1. Financial Statements.

Radyne ComStream Inc.
Condensed Consolidated Balance Sheets

See Notes to Unaudited Condensed Consolidated Financial Statements

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Radyne ComStream Inc.
Condensed Consolidated Statements of Operations
Unaudited

See Notes to Unaudited Condensed Consolidated Financial Statements

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Radyne ComStream Inc.
Condensed Consolidated Statements of Cash Flows
Unaudited

See Notes to Unaudited Condensed Consolidated Financial Statements

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Radyne ComStream Inc.
Notes to Condensed Consolidated Financial Statements
(Information for September 30, 2003 and 2002 is Unaudited)

(1)		Unaudited Interim Condensed Consolidated Financial Statements
		In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements contain all adjustments necessary, all of which are of a normal recurring nature, to present fairly the Company’s financial position, results of operations and cash flows. For further information, refer to the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002. The results of operations for the nine months ended September 30, 2003 are not necessarily indicative of the results to be expected for the full year.
(2)		Goodwill and Other Intangible Assets
		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 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 fourth quarter 2002 to be effective January 1, 2002 as a cumulative effect of change in accounting principle. The Company had no remaining goodwill on its balance sheet as of December 31, 2002.
(3)		Stock-Based Compensation
		The Company follows the intrinsic value-based method prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations to account for its stock-based compensation plans. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, “Accounting for Stock-Based Compensation,” established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above, and has adopted the disclosure requirements of SFAS No. 123. Accordingly, the Company does not recognize compensation expense for any of its stock-based plans because it does not issue options at exercise prices below the market value at date of grant. Had compensation cost for the Company’s stock-based plans been determined consistent with SFAS No. 123, its net earnings (loss) and earnings (loss) per share would have been reduced to the pro forma amounts indicated below:

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		The fair value of options granted was estimated on the date of grant with vesting periods ranging from one to three years using the Black-Scholes option-pricing model with the following weighted average assumptions used: no dividend yield, expected volatility of 48 percent - 129 percent, risk free interest rate of 1.5 percent - 6 percent and expected lives of five - nine years. The per share weighted average fair value of stock options granted for the three months ended September 30, 2003 and September 30, 2002 was $1.47 and $1.99 respectively using the Black-Scholes option-pricing model and the assumptions listed above.
		The pro forma data listed above was calculated by retroactively considering the impact of cancellations of stock options by employees effective January 22, 2003. For a full explanation of the cancelled options, please refer to the section below titled “Non-Executive Employee Stock Option Exchange Offer”.
		Non-Executive Employee Stock Option Exchange Offer
		On December 23, 2002, the Company offered to exchange certain “out of the money” non-executive employee stock options. As a result of the volatility in the stock market reflecting the current economic climate, many employees held stock options with an exercise price that significantly exceeded the market price of the Company’s common stock. Because the Company believed that these options were not providing the appropriate level of performance incentives, it offered a voluntary option exchange program allowing eligible employees to cancel their current stock options with exercise prices ranging between $6.00 and $8.25 and between $14.00 and $14.63 per share in exchange for a lesser amount of new options that will be granted no earlier than six months and one day after the options are accepted for exchange and canceled by the Company. The participating employees were to receive an amount of new options in accordance with the following exchange ratio schedule, subject to adjustments for any future stock splits, dividends and similar events:

		Executive officers, directors, and non-employees were not eligible for this offer. Additionally, employees who received options within six months and a day of the commencement of the exchange offer were not permitted to participate. The offer expired on January 22, 2003. The Company accepted for exchange, options to purchase an aggregate of approximately 999,615 shares of the Company’s common stock, representing approximately 89% of the shares subject to options that were eligible to be exchanged under the offer. On July 23, 2003, the Company granted, in accordance with the Non-Executive Employee Stock Option Exchange Offer, new options to purchase 496,429 shares of common stock.
(4)		Inventories

Inventories consist of the following at:

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(5)

Property and Equipment

Property and equipment consist of the following at:

(6)

Accrued Liabilities

Accrued liabilities consist of the following at:

Changes to restructuring related liabilities for the nine months ended September 30, 2003 were as follows:

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

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(7)

Earnings (loss) Per Share

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

(8)

Concentrations of Risk

For the three months ended September 30, 2003 and September 30, 2002, our largest customer accounted for less than 8% of the Company’s net sales. The largest customer for the current period was not the same as the largest customer for the prior period.

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

     For a description of the Company’s significant accounting policies and an understanding of the significant factors that influenced the Company’s performance during the third quarters and nine months ended September 30, 2003 and 2002, this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) should be read in conjunction with the Consolidated Financial Statements, including the related notes, appearing in Item 1 of this Report as well as the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

Forward-Looking Statements

     Except for the historical information contained herein, the following discussion includes statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”) and Radyne ComStream claims the protection of the safe-harbor for forward-looking statements contained in the Reform Act. These forward-looking statements are often characterized by the terms “may,” “believes,” “projects,” “expects,” or “anticipates,” and do not reflect historical facts. Specific forward-looking statements contained in the following discussion include, but are not limited to, (i) management’s belief that its ability to utilize certain of its net operating loss and tax credit carryforwards to offset future taxable income within the carryforward periods under existing tax laws and regulations is more likely than not and (ii) the belief that existing cash and cash from operations will be sufficient to meet future operational needs and capital requirements.

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

•		loss of, and failure to replace, any significant customers;
•		timing and success of new product introductions;
•		product developments, introductions and pricing of competitors;
•		timing of substantial customer orders;
•		availability of qualified personnel;
•		the impact of local political and economic conditions and foreign exchange fluctuations on international sales;
•		performance of suppliers and subcontractors;
•		decreasing or stagnant market demand and industry and general economic or business conditions;
•		availability, cost and terms of capital;
•		our level of success in effectuating our strategic plan;
•		our ability to successfully integrate acquisitions;
•		adequacy of our inventory, receivables and other reserves;
•		other factors to which this report refers or to which our 2002 Annual Report on Form 10-K refers.
•		other factors that the Company is currently unable to identify or quantify, but may arise or become known in the future.

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

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

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Company Overview

     Radyne ComStream Inc. (the “Company”) designs, manufactures, integrates, installs and sells 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. The Company’s 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 its network of international offices and service centers, it serves 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.

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

Results of Operations

     Sales. Net sales of $15.8 million for third quarter 2003 were up 23% compared to third quarter 2002 net sales of $12.8 million. Net sales for the nine months ended September 30, 2003 were $41.5 million, down 6% compared to net sales of $43.9 million for the same period in 2002. The Company’s annual sales decreased each year from 2000 to 2002 due to declining economic conditions and corporate capital spending and a severe downturn in the telecommunications equipment market. Sales dropped to $10.9 million for the first quarter and have increased each of the next two quarters of 2003 due to an improving economy and increased corporate capital spending.

     Gross Profit Margins. Third quarter 2003 gross profits were $7.1 million, 78% greater than the same quarter of 2002 due primarily to increased sales of new, lower cost, higher gross margin products introduced during the second quarter. Gross profit for third quarter 2002 was reduced by a $0.4 million write-down of inventories. Gross profit margins increased to 45% of net sales for third quarter 2003 compared to 31% for third quarter 2002, and to 42% for the nine months ended September 30, 2003 compared to 31% for the same period in 2002. Gross profits for the third quarter and the first nine months of 2003 benefited from cost reductions and other operating changes implemented in the first quarter of 2003, resulting in lower operating overhead compared to the same periods in 2002.

     Operating Expenses. Total operating expenses were down 6% and 10% for the three-month and nine-month periods ended September 30, 2003, respectively, compared to the same periods in 2002, excluding $2.1 million in asset impairment and restructuring charges recorded in third quarter 2002. These expense decreases are the result of management’s continued cost control efforts, and for the nine-month period, staff reductions at the end of first quarter 2002. The Company’s headcount was reduced from 259 employees at the beginning 2002 to 205 employees at the end of 2002. Selling, general and administrative expenses for the third quarter and first nine months of 2003 were higher by $109,000 and $182,000, respectively. The year-to-date expense includes approximately $385,000 in costs related to the abandoned tender offer for Wegener Corporation that were expensed during second quarter 2003. The Company reduced research and development expenses by 20% and 28% for the third quarter and first nine months of 2003, respectively, compared to the same periods of 2002 by reducing engineering staff and focusing only on projects with the highest return on investment.

     Earnings (Loss) From Operations. Earnings from operations were $2.6 million and $2.4 million for the third quarter and first nine months of 2003, respectively, compared to losses of $2.9 million and $5.2 million for the same periods in 2002. Earnings from operations for the second and third quarters of 2003 have benefited from increases in gross profit margins and lower operating expenses, while the same period in 2002 was negatively impacted by $2.5 million in inventory write-downs, asset impairment and restructuring charges recorded in third quarter 2002.

     Income Taxes. The Company recorded an income tax provision of $1.0 million against its deferred tax assets in the third quarter based on pre-tax earnings of $2.6 million for the first nine months of 2003 to reflect utilization of net operating losses. There was no income tax benefit recorded in the first nine months of 2002 and the first quarter of 2003 because the Company incurred operating losses and provided a 100% valuation allowance against the net deferred tax assets arising during these periods. At December 31, 2002, the Company had a valuation allowance of $10.1 million against deferred tax assets related to net operating loss carryforwards of approximately $20,195,000 expiring in

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various years through 2022, federal tax credits of $351,000 for utilization against any taxable income and taxes payable in future periods and temporary differences. Due to the losses incurred in 2002 and the first quarter of 2003, the Company has not made any adjustments to the deferred tax asset valuation allowance during the second and third quarters of 2003. To the extent that it continues to experience profitable operations, the Company will evaluate the need for the valuation allowance against its deferred tax assets in future periods.

     Net Earnings. Net earnings were $1.6 million, or $0.10 per share on a diluted basis, for the third quarter ended September 30, 2003, compared to a net loss of $2.9 million, or $0.19 per share, for the third quarter of 2002, due to higher sales and gross margins, lower operating expenses and other factors described in the preceding sections of this management, discussion and analysis. Earnings were $1.5 million, or $0.10 per share on a diluted basis, for the first nine months of 2003 compared to a net loss of $9.4 million, or $0.62 per share, for the same period in 2002. In addition to the charges described above, results for the first nine months of 2002 include an impairment charge of $4.3 million, or $0.28 per share, related to the adoption of SFAS 142 recorded in fourth quarter 2002 to be effective January 1, 2002 as a cumulative effect of a change in accounting principle.

Liquidity and Capital Resources

     Cash Flow

     Cash and cash equivalents increased $8.1 million during the first nine months of 2003, to $24.4 million at September 30, 2003 from $16.2 million at December 31, 2002. Net cash provided by operating activities for the first nine months of 2003 was $8.1 million, generated mostly by reductions in working capital, excluding cash and cash equivalents, which dropped to $12.6 million at September 30, 2003 from $17.8 million at December 31, 2002. The primary source of this cash flow was a $3.3 million decrease in inventories since the beginning of 2003. Investing activities in 2003 included capital expenditures of approximately $351,000 compared to $1.6 million in 2002. Purchases of capital equipment was sharply curtailed during the first nine months of the year due to the prolonged downturn in the economy. In 2003, cash provided by financing activities was approximately $357,000 compared to $690,000 in 2002. Financing activities included sales of common stock to employees through incentive stock option exercises and the employee stock purchase plan, net of expenses of $390,000 and $749,000 for the nine month periods ending September 30, 2003 and 2002, respectively. The decrease in activities related to employee purchases of stock during the current period was a result, in part, of the lower stock option activity due to the Non-Executive Employee Stock Option Exchange Plan put in place during the first six months of the year and lower stock prices of the Companies securities during the same period. These activities were partially offset by principal payments on capital lease obligations of $33,000 and $59,000 for the nine months ended September 30, 2003 and September 30, 2002, respectively.

     Capital Structure

     There were no significant changes in the Company’s capital structure during the first nine months of 2003. The Company had no long-term debt at September 30, 2003 or December 31, 2002. Stockholders’ equity increased to $39.2 million at September 30, 2003 from $37.3 million at December 31, 2002.

     For a description of the Company’s Contractual Obligations and Commitments for the next five years and thereafter, see Item 7 in the Company’s Annual Report on Form 10-K. For a description of the Company’s Obligations Under Capital Leases and Commitments for the next five years and thereafter, see Item 8, Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K. There are no material changes to this information.

     Capital expenditures of $0.4 million for first nine months of 2003 were funded through cash provided by operating activities. The Company does not have any material commitments for capital expenditures during the next twelve months.

     Liquidity Analysis

     The Company maintained a credit agreement with a bank that included a line-of-credit of up to $10 million that it allowed to expire on June 1, 2003. The Company is working with this bank and other prospective lenders to

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establish a new credit facility to provide additional sources of liquidity for the future. The Company believes that cash and cash equivalents on hand and anticipated future cash flow will be sufficient to meet its obligations as they become due during the next twelve months. However, a significant decrease in its sales would likely affect its working capital amounts and could result in the need for external credit sources.

     As part of its business strategy, the Company occasionally evaluates potential acquisitions of businesses, products and technologies. These potential transactions may require substantial capital resources, which, in turn, may require the Company to seek additional debt or equity financing. There are no assurances that the Company will be able to consummate any of these transactions or that it will have the liquidity available to consummate the transactions it desires. For more detailed information, see the Company’s Risk Factors contained in Exhibit 99.1 to the its Annual Report on Form 10-K.

Recently Issued Accounting Pronouncements

     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 did not have a material effect on the Company’s consolidated 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. Adoption of FIN 45 did not have a material effect on the Company’s consolidated financial statements.

     In November 2002, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF Issue No. 00-21 did not have a material effect on the Company’s consolidated financial statements.

     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 condensed 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. 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 ending after December 15, 2003. The Company has not had any interests in variable interest entities, therefore, application of this Interpretation is not expected to have a material effect on the Company’s consolidated financial statements.

     In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149 (“SFAS 149”), Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which amends and clarifies

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financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts. SFAS 149 will be effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The provisions of SFAS 149 are to be applied prospectively and did not have a material effect on the Company’s consolidated financial statements.

On May 15, 2003, the Financial Accounting Standards Board issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. The Statement requires issuers to classify as liabilities (or assets in some circumstance) three classes of freestanding financial instruments that embody obligations for the issuer. Generally, the Statement is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted the provisions of the Statement on July 1, 2003. The application of this statement did not have a material effect on the Company’s consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     The Company is exposed to market risk on its financial instruments from changes in interest rates. It does not use financial instruments for trading purposes or to manage interest rate risk. The Company does not have any derivative financial instruments. As of September 30, 2003, a change in interest rates of 10% over a year’s period would not have a material impact on our interest earnings.

Item 4. Controls and Procedures

     The Company’s management, including its Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this quarterly report (the “Evaluation Date”). Based on such evaluation, the Company’s management has concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective such that material information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified by the Securities and Exchange Commission’s rules and forms relating to the Company. The Company’s management has also concluded that the Company’s disclosure controls and procedures are designed to accumulate and communicate the information required to be disclosed by Radyne ComStream to the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. No significant changes were made in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the Evaluation Date.

Part II
OTHER INFORMATION

Items 1-5 are not applicable and have been omitted.

Item 6. Exhibits and Reports On Form 8-K

     (a)  (3) See Exhibit Index

•

On July 31, 2003, the Company filed a Current Report on Form 8-K attaching a press release concerning the Company’s earnings and results of operations for the Company’s second fiscal quarter ended June 30, 2003.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: November 14, 2003

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EXHIBIT INDEX

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