UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

For the fiscal year ended December 31, 2003
Or

For the transition period from            to

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 $11 million based on the closing price of $2.04 per share of common stock as reported on the Nasdaq National Market on 30 June, 2003. 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 4, 2004 was 16,445,745.

DOCUMENTS INCORPORATED BY REFERENCE

     Items 10, 11, 12, 13 and 14 of Part III incorporate information by reference from the definitive proxy statement for the registrant’s Annual Meeting of Stockholders to be held on May 13, 2004 at 2:00 p.m. in the Phoenix office.

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Table of Contents

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 2004.

     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

Our web site is www.radn.com. We design, manufacture, integrate, install and sell capital equipment used in the ground-based portion of satellite communication systems and cable communications networks to receive and transmit data, telephone, television, video and telephone-over-Internet. 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. We design, manufacture, integrate, install and sell capital equipment used for upgrading existing analog point-to-point microwave radios to handle digital signals. We design, manufacture, integrate, install and sell capital equipment for High Definition Television (HDTV) and other digital encoding and transmission and our Armer subsidiary provides innovative solutions for the integration and installation of turnkey communications systems. Information contained on the foregoing website is not a part of this report. Through our network of international sales and service offices, agents 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:

•		HDTV Encoders and Integrated Receiver Decoders (IRDs) for a Major Korean Communications company.
•		Earth stations for the first international satellite links in China, India, Pakistan, Brazil, Haiti and Zambia.
•		We have provided numerous microwave modems to convert existing analog TV distribution systems to handle Digital TV.
•		Supplied complete Data Broadcast network for Shanghai 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.
•		High-Speed DVB Modulators for Hughes Direct to PC Network and Hughes DirecTV.
•		HDTV 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).
•		Selected by PamAmSat, Intelsat and ChinaSat for the deployment of IP over satellite solutions.
•		Major expansion of U.S. Government Satellite Communications Network.

Industry Overview

     Satellite technology has been established as a key element in the worldwide infrastructure of communications systems. Satellites enable 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.

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     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. 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, the segment of the industry that the Company operates within, 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 converter, redundancy switches and voice, data, and/or video network interface equipment. Earth stations provide a communications link to the end user either directly or through land-based networks.

     Digital Encoding of TV Signals. Digital Encoding of TV Signals through the use of our encoders take analog TV signals from cameras or other sources and first convert to digital to preserve the quality eternally and second to compress the signals so they can be transmitted over much smaller bandwidths.

     Conversion of Existing Analog Point-to-point Radios. Conversion of existing analog point-to-point radios can be converted to handle digital signals for digital TV, telephone, and Internet backhaul through the use of our microwave modems.

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 from abroad will continue to be a major emphasis.
•		Worldwide demand for communications services, including data communications, high-speed digital television/HDTV and corporate Intranets.
•		The cost-effectiveness of satellite communications for many applications, such as digital television delivery, distance learning and IP over satellite.
•		Technological advancements and capital equipment upgrades that broaden applications and increase the capacity in satellite networks.
•		Lack of global ground-based infrastructure to support increased demand for Broadband and Internet applications and services.
•		Digital TV encoding is driven by The U.S. Federal Communications Commission mandate for Television Broadcasters to adopt DTV standards by January 2006 and the increased sales of HDTV sets being marketed today.

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•

There are thousands of analog point-to-point microwave radios in operation that are candidates for upgrade to digital to handle digital TV, telephone, and Internet traffic.

     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.

     Because of current concerns with international terrorism, the Militaries of many countries have increased requirements for communications as their forces are spread around the world in such places as Afghanistan and Iraq. The U.S. Government’s needs, such as maintaining communications with embassies, and the U.S. military’s worldwide Command and Control requirements, continue to drive more demand for satellite communications.

     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 significant distances separate population concentrations, 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 complex bandwidth efficient modulation schemes, turbo error correcting codes, 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.
•		All areas within a satellite beam receive the same level of service, making it highly attractive in rough terrain or underdeveloped regions.
•		Satellite earth stations can be deployed much more rapidly to offer international services for third world countries and, additionally, for military deployment.

     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.

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     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 eternally preserves the quality of TV signals and 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 films and special media events.
•		Television is distributed to affiliate stations from broadcasters through the use of point-to-point analog microwave radios that are candidates for upgrade with our microwave modem equipment. This option provides a solution at a much lower cost than replacing the analog radio with a digital radio.

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.

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     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 a few thousand websites represent a majority 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

     Satellites allow the military to have instant secure communications when deploying rapidly to troubled parts of the world and further support the infrastructure necessary for military tactical deployments.

     The United States government provides a significant market opportunity for satellite equipment manufacturers as 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 sizable customer that is likely to provide consistent business.

Strategy

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

     Capitalize On Our Existing Technology Leadership. We believe that the global satellite communications services and equipment market presents a number of attractive opportunities to apply our advanced technologies and capabilities. We plan to develop new products and enhance existing products by leveraging our technology to capture a significant share of these growth opportunities.

     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.

     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.

     Continued Emphasis on Operational Efficiency and Financial Performance. We have historically maintained a strong emphasis on operation efficiency and financial performance. We believe that continuing to focus our operational focus is essential to future success while continuing to grow our business. As part of this continued emphasis, we plan to devote significant time and resources to key components of our business, such as our manufacturing processes, design systems and customer relationships.

     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

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     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.
•		Digital Standard Definition and HDTV encoders and IRDs (Integrated Receivers / Decoders).

     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 large, worldwide installed base of customers 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 transceiver, a transmitter, redundancy switches 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.

Frequency Converters

We currently market a variety of converters used to transmit and receive signals over satellites in the commercial satellite frequency ranges of C-Band, Ka_Band, and Ku_Band. 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

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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.

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 Internet service providers, corporations, educational institutions and government agencies.

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 HDTV. 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 are used with point-to-point microwave radios 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 newsgathering 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. Many U.S. 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 IRDs 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.

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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. In addition, we sell support services to existing and new customers. 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.

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 $6.3 million for the year ended December 31, 2003, $8.7 million for the year ended December 31, 2002 and $10.8 million for the year ended December 31, 2001. 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 operations to fund our research into products for Internet over Satellite links, Standard Definition digital and 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, Beijing, Singapore, London, Amsterdam and Bangalore, India. Our direct sales force consists of 21 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, agents and systems integrators sell our products, supported by our sales and marketing personnel.

     We participate in approximately five to seven 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 that also includes customer service and support staff who support customers and agents and provide installation supervision, if needed. In certain instances, we use third-party companies to install and maintain our products at customer 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.

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     During the years ended December 31, 2003 and 2002, no single customer represented more than 10% of our net sales. Because of the nature of our business, we anticipate that any customer who could potentially represent 10% or more of our total revenue will vary from period 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.

     We believe that foreign sales will continue to make up a major portion 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:

     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 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.

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     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 average over 20 years 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 and Chandler, Arizona and San Diego, California facilities using subsystems and circuit boards acquired from subcontractors. We obtain the remainder of our products, completely assembled and tested, from subcontractors. Although we believe that we maintain adequate stock to minimize the procurement lead-time for certain components, our products use a number of specialized 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 interruptions in production while we develop alternative procurement sources. We maintain an inventory of certain chips, components and subassemblies to limit the exposure for such an interruption. We believe that there are a number of alternative suppliers capable of providing replacements for the types of chips, customized components and subassemblies used in production.

     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.

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 certain 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. 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, 2003, we had 183 full-time employees, including 4 executive officers, 108 engineering and manufacturing personnel, 34 sales and marketing, 15 installation and customer service and 22 administration personnel. These figures include employees who are based outside the United States. Our employees are not represented by a labor union. We believe that our relationships with our employees are satisfactory and in good standing.

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Available Information

     Our website is http://www.radn.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 (the “Commission”). Any materials we file with the Commission may be read and copied at the Commission’s Public Reference Room at 450 Fifth Street N.W., Washington, D.C. 20549. Information concerning the operation of the Commission’s Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. The Commission also maintains a website at http://www.sec.gov at which you can view and download copies of reports, proxy and information statements and other information filed electronically through the Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. Information contained on our website is not a part of this report.

Item 2. Properties

     We currently occupy approximately 40,000 square feet of building space in Phoenix, Arizona, 16,000 square feet in Chandler, Arizona and 36,000 square feet in our San Diego, California 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 for a five year renewal. 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 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 February 13, 2004, 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 2003, we did not issue any equity securities that were not registered under the Securities Act of 1933, as amended. However, on February 19, 2004 Stetsys Pte. Ltd. and Stetsys US, Inc. entered into definitive purchase agreements to sell their unregistered shares of common stock in the Company, an aggregate of 9,676,800 shares, to approximately 40 institutional investors in a private transaction. The purchase price of the common stock was $9.25 per share. The shares sold in the transaction will be subject to securities law restrictions on their subsequent resale. However, the Company has agreed to register the shares for resale. The Company has not received any proceeds from this transaction.

Equity Compensation Plans

     See Item 12.

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Item 6. Selected Financial Data

     The following selected statement of operations data for the years ended December 31, 2003, 2002, 2001, 2000 and 1999, 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.

Notes: (1) Consists of the write down of purchased technologies related 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

Overview

     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.

     We reported revenues of $58 million, $57.7 million and $68.5 million for the years ended December 31, 2003, 2002 and 2001, respectively. The fluctuation of revenues is due to the downturn in the telecommunications industry over the last couple of years. Our customers’ trend has been to reduce capital expenditures to the most urgent needs. We believe the urgency for these companies to begin expending funds for new capital equipment will increase in the near term as older products fail and as newer product technologies improve the operating efficiencies of the users, saving them money over use of their older technologies. We have recently introduced new products with the latest technologies that can help our customers reduce their operational costs while increasing their capacity to deliver services.

     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 No. 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 at the San Diego facility 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 $431,000 was charged to cost of sales and the balance was charged to restructuring charge. This amount included $170,000 in severance costs. During the year ended December 31, 2002, we paid all charges except for $645,000 in lease exit costs. During the year ended December 31, 2003, $238,000 in lease exit costs was paid and $407,000 remained to be paid through February 2005.

     During the year ended December 31, 2003, we further reduced our workforce to 183 full time employees from 205 and 259 at December 31, 2002 and 2001, respectively. These reductions allowed the Company to reduce employee related expenses by approximately $2 million per year. Additionally, costs of sales were reduced which translated to higher gross margins and, because of the lower operating costs, to higher net earnings.

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 consolidated financial statements. Such estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to bad debts, inventories, 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.

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

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•		Revenue Recognition. Revenues from product sales are recognized upon the actual shipment of product and transfer of the risk of ownership from us, or our contract manufacturers, to our customers in accordance with SEC Staff Bulletin No. 101, Revenue Recognition in Financial Statements,” as amended. We do not sell through distributors and we do not use consignment resellers as a method of selling our products. Revenue from services principally consists of sales related to services for installation and integration of satellite earth stations and video and microwave hub stations and are recognized at the time the services are performed.
•		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 (SFAS) No. 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 No. 142, yielded an impairment charge of $4.3 million, recorded in 2002 as a cumulative effect of change in accounting principle. We have no remaining goodwill on our balance sheet as of December 31, 2003 and 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, 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 valuation allowance for deferred tax assets would result in an income tax benefit in the period such determination was made.

Results of Operations

Year Ended December 31, 2003 Compared To The Year Ended December 31, 2002

     Our net sales increased .6% to $58.0 million during the year ended December 31, 2003 from $57.7 million during the year ended December 31, 2002. This increase is primarily attributable to improved market conditions and strengthening of the economy as a

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whole during the last half of the year ended December 31, 2003 compared to the same period in 2002. While revenues did not increase dramatically from year to year, the first three months of 2003 was depressed, in terms of sales, resulting in our lowest volume of quarterly sales in 4 years. Sales during the last three quarters of the year continuously improved and, in total, the last nine-months of the year increased by 10% over the prior year’s last nine months. We believe our customers will begin to increase orders for our newest products and sales should increase further during the next few years.

     Our cost of sales as a percentage of net sales decreased by 12% to 55% during the year ended December 31, 2003 from 67% for the year ended December 31, 2002. The change in cost of sales as a percent of net sales is primarily due to a change in our product and services mix. Our service and installation business, which provides lower gross margins relative to certain products such as satellite modems, decreased to 8% of sales for the year ended December 31, 2003 from 12% in the prior year. Sales from services typically produce margins in the 20% to 30% range compared to the satellite modem products that produce margins in the 45% to 55% range. Our newest products enable us to sell software upgrades over a satellite link or via email or through the use of a CDRom or PCM-CIA card that is plugged into the product. These upgrades can increase our sales by up to 100% of the hardware sales price without significant increases in costs. This should help our margins increase further during the years to come, especially after we have an established base of product deployed in the field.

     Selling, general and administrative costs increased to $13.6 million, or 23% of net sales, during the year ended December 31, 2003 from $13.5 million, or 23% of sales, for the year ended December 31, 2002. Expenses attributable to our tender offer for Wegener Corporation amounted to approximately $385,000 during the second quarter of the year. Before these expenses, selling, general and administrative costs decreased slightly from the prior year. Most of our selling, general and administrative expenses are fixed and do not change when sales fluctuate.

     Research and development expenditures decreased to $6.3 million, or 11% of net sales during the year ended December 31, 2003 from $8.7 million, or 15% of net sales, during the year ended December 31, 2002. Research and development costs decreased during the year ended December 31, 2003 by approximately $2.4 million, as we benefited from the cost savings initiatives put into place in 2002.

      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. Our research and development personnel concentrate on technology for the satellite and microwave communications, telecommunications, and cable television industries, as well as the Tiernan product lines, which target the digital television broadcast industry.

     As a result of the increase in our gross profit and our lower operating expenses as a percentage of net sales, we recorded earnings from operations of $6.5 million during year ended December 31, 2003 compared to an operating loss of $5.0 million during the year ended December 31, 2002.

     Interest expense decreased to $28,000 in the year ended December 31, 2003 from $62,000 in the year ended December 31, 2002 due to lower capitalized lease obligations during the current fiscal year compared to the year ended December 31, 2002.

     Interest income increased to $254,000 in the year ended December 31, 2003 from $236,000 in the year ended December 31, 2002. Interest income increased as a result of our approximately $22 million average cash balance on hand during the year ended December 31, 2003 compared to approximately $12 million average balance during the prior year, despite lower average interest rates of approximately 1% during the current period compared to approximately 1.5% for the prior period. We keep our cash in money market accounts and short term AAA rated investments maturing in seven to twenty-eight day increments.

     We recorded income tax expense in the year ended December 31, 2003 of $2.6 million compared to an income tax benefit of $196,000 in the year ended December 31, 2002. The increase in expense is due to taxable income generated in the current fiscal year compared to a loss in the prior year. At December 31, 2003, we provided a full valuation allowance against our remaining deferred tax assets, consisting primarily of net operating loss carryforwards. To the extent that we continue to experience profitable operations, we will evaluate the need for the valuation allowance against our deferred tax assets in future periods. Additionally, due to the stock sale as discussed in note 20 to our consolidated financial statements, it is possible that the use of net operating loss carryforwards may be limited in accordance with Section 382 of the Internal Revenue Code. 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 valuation allowance for deferred tax assets would result in an income tax benefit in the period such a determination was made.

     New orders booked (bookings) decreased 7% to $51.9 million for the year ended December 31, 2003 from $56.0 million for the year ended December 31, 2002. We believe this trend is due to the reluctance of our customers to place long term capital equipment

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orders in the aftermath of the economic downturn of the last few years. While we believe this trend will reverse itself over time, there can be no assurance that the trend will reverse itself soon, if at all. 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 $8.0 million as of December 31, 2003 a decrease of 40% from the $13.4 million in backlog as of December 31, 2002. We believe that this reduction is a result of our customers’ desires to reduce their inventory levels, shorten cycle times for filling orders and to keep their capital equipment orders to a minimum. We expect that this trend will continue to keep our backlog depressed but will not reduce our backlog below $6 million to $7 million within the next year. However, future backlogs could be reduced as we further improve our cycle times to compete with other suppliers of our product lines. 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, 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 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.

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     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 SFAS No. 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 SFAS No. 142. This analysis yielded an impairment charge of $4.3 million, recorded in 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.

     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.

Liquidity and Capital Resources

     We had working capital of $41.4 million at December 31, 2003, which represents an increase of $7.4 million, or 22%, from $34.0 million at December 31, 2002. Our working capital increased primarily as a result of an increase in cash and cash equivalents of $13.9 million, partially offset by a decrease in accounts receivable, inventory and deferred tax assets of $738,000, $2.9 million and $2.6 million, respectively. Please see the following discussion of related events.

     Net cash provided by operating activities was $12.1 million for the year ended December 31, 2003 compared to cash provided by operating activities of $9.7 million for the year ended December 31, 2002. The change is primarily due to a decrease in inventories of $2.9 million to $7.8 million for the year ended December 31, 2003, compared to a decrease in inventories of $7.2 million during the year ended December 31, 2002. In addition, accounts receivable decreased by $738,000 to $9.8 million for the year ended December 31, 2003, compared to a decrease of $4.3 million during the year ended December 31, 2002. Accounts payable increased $300,000 during the year ended December 31, 2003 compared to a decrease of $592,000 for the year ended December 31, 2002. We recorded a

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reduction in deferred tax assets of $2.6 million during the year ended December 31, 2003. Accrued expense decreased by only $387,000 during the year ended December 31, 2003 compared to a decrease of $79,000 during 2002. This activity, which resulted in positive changes in the Company’s cash flow was increased by net income of $4.1 million for the year ended December 31, 2003 compared to net loss of $9.0 million for the year ended December 31, 2002. However, the net loss during the year ended December 31, 2002 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 $12.1 million for the year ended December 31, 2003 compared to cash provided by operating activities of $9.7 million for the year ended December 31, 2002 and cash used in operating activities of $3.7 million during the year ended December 31, 2001.

     Cash used in investing activities was $400,000 for the year ended December 31, 2003 compared to $1.5 million and $6.1 million for the years ended December 31, 2002 and 2001, respectively. The decrease in net cash used in investing activities in the year ended December 31, 2003 was the result of a reduction in capital expenditures of $951,000 compared to the prior year, partially offset by an increase in proceeds from the disposal of assets of $107,000. The decrease in net 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 $2.1 million, $824,000, and $773,000 during the years ended December 31, 2003, 2002, and 2001, respectively. During the year ended December 31, 2003, 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 $1.9 million and $316,000 respectively. During the year ended December 31, 2003, the Company offered to exchange certain out-of –the-money stock options held by non-executive employees of the company and the newly granted options under the plan accounted for $.5 million of the $1.9 million of proceeds received in 2003 for the exercise of stock options (see also discussion of stock option exchange program, completed during the year ended December 31, 2003, under Note 14) 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, 2001, 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 $310,000 and $463,000 respectively.

     During the years ended December 31, 2002 and through June 1, 2003, we had a credit arrangement with a bank for up to $10 million, based upon 80% of eligible accounts receivable, as defined. We paid 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, we had no borrowings against the line of credit. The credit agreement expired on June 1, 2003 and was not renewed.

     We believe that cash and cash equivalents on hand and anticipated future cash receipts 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. 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, 2003:

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*

Total lease amounts are stated less interest with rates of 2.26% to 12.96% calculated to be $663 for the life of the leases.

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.

Recently Issued and Adopted 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 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 applied 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 2003, the FASB issued FASB Interpretation No. (FIN) 46R, Consolidation of Variable Interest Entities, which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 44R replaces FASB Interpretation 46, Consolidation of Variable Interest Entities, which was issued in January 2003. The Company will be required to apply FIN 46R to variable interests in VIEs created after December 31, 2003. For variable interests in VIEs created before January 1, 2004, the Interpretation will be applied beginning January 1, 2005. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and noncontrolling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and noncontrolling interest of the VIE. The adoption of this pronouncement is not expected to have a material effect on the Company’s consolidated financial statements.

     On May 15, 2003, the FASB issued SFAS 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.

     In December 2003, the Securities and Exchange Commission (“SEC”) issued staff accounting bulletin No. 104 (“SAB 104 Revenue Recognition”) which codifies, revises and rescinds certain sections of Staff Accounting Bulletin No. 101 “Revenue Recognition,” in order to make this interpretive guidance consistent with current authoritative accounting guidance and SEC rules and regulations. The changes noted in SAB 104 did not have a material effect on our consolidated financial statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

     We are exposed to certain market risks in the ordinary course of our business. These risks result primarily from changes in foreign currency exchange rates and interest rates. In addition, our international operations are subject to risks related to differing economic conditions, changes in political climate, differing tax structures and other regulations and restrictions.

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     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, 2003, a change in interest rates of 10% over a year’s period would not have a material impact on our interest earnings.

Item 8. Financial Statements and Supplementary Data

     Our consolidated financial statements as of December 31, 2003 and 2002 and for each of the years in the three-year period ended December 31, 2003, 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
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, 2003 and 2002, 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, 2003. 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated 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, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, 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 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
February 27, 2004

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Radyne ComStream Inc.
Consolidated Balance Sheets
December 31, 2003 and 2002

See accompanying notes to consolidated financial statements.

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Radyne ComStream Inc.
Consolidated Statements of Operations
For the Years Ended December 31, 2003, 2002 and 2001

See accompanying notes to consolidated financial statements.

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Radyne ComStream Inc.
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)
Years ended December 31, 2003, 2002 and 2001

See accompanying notes to consolidated financial statements.

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Radyne ComStream Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2003, 2002, and 2001

See accompanying notes to consolidated financial statements.

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Radyne ComStream, Inc.
Notes to the Consolidated Financial Statements
For the year Ended December 31, 2003, 2002 and 2001

(1) Organization and Acquisition

Radyne Corp., a Delaware corporation, (Radyne) was incorporated on November 25, 1980. On August 12, 1996, Radyne became a subsidiary of Singapore Technologies Pte Ltd (STPL), through its wholly-owned subsidiary, Stetsys US, Inc. (ST). In March 1999, Radyne changed its name to Radyne ComStream Inc. During 2000, the Company changed its state of incorporation from New York to Delaware and changed the par value of its common stock from $.002 to $.001. STPL beneficially owned 9,676,800 shares of the Company’s common stock at December 31, 2003. These shares represented 60% of the Company’s voting shares outstanding as of December 31, 2003 (see note 20).

Radyne ComStream Inc. (the Company) has manufacturing locations in Chandler and Phoenix, Arizona and in San Diego, California. Additionally, the Company has sales offices in Singapore, Beijing, Jakarta, London and Amsterdam. The Company also contracts with representatives that provide sales and/or service centers in Rio de Janeiro, Bangalore, Shanghai and Moscow. The Company designs, manufactures, and sells products, systems and software used for the transmission and reception of data over satellite, microwave and cable communication networks.

The Company operates primarily in North America in the satellite communications industry. ComStream, the Company’s San Diego manufacturing facility, designs, and manufacturers satellite interactive modems and earth stations. Additionally, they manufacture and market full-transponder satellite digital audio receivers for music providers and have designed and developed a suite of products to address Internet over satellite applications and infrastructure and are the home to the Tiernan digital video product lines.

Description of Acquisitions

On April 18, 2001, Tiernan Radyne ComStream Inc. (TRC), a wholly owned subsidiary of the Company, obtained all of the assets of Tiernan Communications, Inc. (TCI) through a private foreclosure sale relating to a secured note TRC had purchased for $4.0 million in cash. Product lines acquired include standard digital TV encoders, HDTV encoders, and ATM video network adapters as well as integrated receiver/decoders. TRC offered employment to most of the employees of TCI. The acquisition was recorded in accordance with the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets purchased and certain 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 $1,355,000 and was recorded as goodwill, which was amortized on a straight-line basis over seven years, until January 1, 2002, the date of adoption of SFAS 142. The results of operations of the acquired operations have been included in the accompanying statements of operations from the acquisition date.

The following summary, prepared on a pro forma basis, combines the consolidated results of operations (unaudited) as if the acquisition had taken place on January 1, 2001. Such pro forma amounts are not necessarily indicative of what the actual results of operations might have been if the acquisition had been effective on January 1, 2001 (in thousands, except per share amounts):

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(2) Summary of Significant Accounting Policies

(a) Use of Estimates

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

(b) Principles of Consolidation

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

(c) Cash Equivalents

The Company considers all money market accounts with original maturities of 90 days or less to be cash equivalents.

(d) Revenue Recognition

The Company recognizes revenue when products have been shipped to the customer, an agreement with the customer has been executed, transfer of title and acceptance has occurred, pricing is fixed and collectibility is probable. Revenue from services is recognized when the related services have been performed.

(e) Inventories

Inventories, consisting of satellite modems and related products, are valued at the lower of cost (first-in, first-out) or market. The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based on assumptions about future demand and market conditions.

(f) Property and Equipment

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

(g) Intangible Assets

Goodwill represents the excess of costs over fair value of assets of businesses acquired. The Company adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, as of January 1, 2002. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.

In connection with SFAS No. 142’s transitional goodwill impairment evaluation, the Statement required the Company to perform an assessment of whether there was an indication that goodwill is impaired as of the date of adoption. To accomplish this, the Company was required to identify its reporting units and determine the

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carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of January 1, 2002. The Company was required to determine the fair value of each reporting unit and compare it to the carrying amount for each. To the extent the carrying amount of a reporting unit exceeded the fair value of the reporting unit, the Company would be required to perform the second step of the transitional impairment test, as this is an indication that the reporting unit goodwill may be impaired.

The second step was required for two reporting units. In this step, the Company compared the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill, both of which were measured as of the date of adoption. The implied fair value of goodwill was determined by allocating the fair value of the reporting unit to all of the assets (recognized and unrecognized) and liabilities of the reporting unit in a manner similar to a purchase price allocation, in accordance with SAS No. 141, Business Combinations. The residual value after this allocation was the implied fair value of the reporting unit goodwill. The implied fair value of these reporting units did not exceed their carrying amounts and the Company was required to recognize an impairment loss as further discussed below.

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 determined that it had three reporting units under its one operating segment, largely due to the different profit margins and product base among its reporting units. Two of the Company’s reporting units had recorded goodwill. The Company performed its transitional impairment test on those two reporting units. A present value technique was utilized in determining the fair value of each of the Company’s two reporting units that had goodwill. The discount rate utilized in the present value calculation was 20%. The most significant fundamental assumptions utilized in the discounted cash flow were the cash flow to be generated, the life of the asset, the stage of the product life cycle curve, and the inherent risks in achieving the projected benefits of owning the asset. The impairment analysis yielded an impairment charge of $4.3 million, recorded in 2002 as a cumulative effect of change in accounting principle. The Company has no remaining goodwill on its balance sheet at December 31, 2003 and 2002.

Prior to the adoption of SFAS No. 142, goodwill was amortized on a straight-line basis over the expected periods to be benefited, generally 7 to 12 years, and assessed for recoverability by determining whether the amortization of the goodwill balance over its remaining life could be recovered through undiscounted future operating cash flows of the acquired operations. All other intangible assets were amortized on a straight-line basis from 3 to 8 years. The amount of goodwill and other intangible assets were amortized on a straight-line basis from 3 to 15 years. The amount of goodwill and other intangible asset impairment, if any, was measured based on projected discounted future operating cash flows using a discount rate reflecting the Company’s average cost of funds.

As of the date of adoption of SFAS No. 142, the Company had unamortized goodwill with a value of $4,281,205. Had SFAS No. 142 been in effect for the year ended December 31, 2001 the Company’s net earnings would have been increased to the following pro forma amounts:

(h) Purchased Technology

In connection with the acquisition of ComStream in 1998, value was assigned to Purchased technology. Purchased technology was amortized on a straight-line basis over the expected period to be benefited of 6.25 years. Purchased technology of $995,000 was written-off during 2002 because the Company discontinued use of the technology.

(i) Impairment of Long-Lived Assets

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

(j) Warranty Costs

The Company provides limited warranties on certain of its products and systems for periods generally not exceeding two years. Estimated warranty costs for potential product liability and warranty claims based on the Company’s claim experience are accrued as cost of sales at the time revenue is recognized. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its vendors, the Company’s 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 estimates, revisions to the estimated warranty liability would be required.

(k) Research and Development

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

(l) Income Taxes

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

(m) Concentration of Credit Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, are principally accounts receivable. The Company maintains ongoing credit evaluations of its customers and generally does not require collateral.

The Company maintains allowances for doubtful accounts for estimating losses resulting from the inability of its customers to make required payments and such losses have not exceeded management’s expectations. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Periodically during the year, the Company maintains cash in financial institutions in excess of the amounts insured by the federal government.

(n) Net Earnings (Loss) Per Share

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

(o) Fair Value of Financial Instruments

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

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(p) Employee Stock Options

The Company applies the intrinsic value based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25, to account for its fixed plan stock options. 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. FASB Statement No. 123, Accounting for Stock Based Compensation and FASB Statement No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123, established accounting and disclosure requirements using a fair value based method of accounting for stock based employee compensation plans. As permitted by existing accounting standards, the Company has elected to continue to apply the intrinsic value based method of accounting described above, and has adopted only the disclosure requirements of Statement 123, as amended. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company’s net earnings (loss) and earnings (loss) per share would have been reduced (increased) to the pro forma amounts indicated below:

The full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net earnings (loss) amounts presented above because compensation cost is reflected (increased) over the options’ vesting period of three years.

The fair value of options granted under the stock option plans 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 49 percent — 128 percent, risk free interest rate of 1.20 percent – 4.50 percent, and expected lives of five — seven years. The per share weighted average fair value of stock options granted under the Plan for the years ended December 31, 2003, 2002 and 2001 were $1.65, $3.16 and $6.53, respectively, using the Black-Scholes option-pricing model and the assumptions listed above.

(q) Segment Reporting

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

(r) Reclassifications

Certain reclassifications have been made to the 2002 and 2001 consolidated financial statement amounts to conform to the 2003 presentation.

(3) Inventories

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(4) Property and Equipment

(5) Accrued Expenses

The following summarizes changes to restructuring related liabilities for the years ended December 31, 2003 and 2002:

During the third quarter of 2002, the Company 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 its 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 at the San Diego facility as a result of these cost cutting measures. This effort resulted in a charge to the Company’s operating expenses of approximately $1.5 million; of which $431,000 was charged to cost of sales and the balance was charged to restructuring charge. This amount included $170,000 in severance costs. During the year ended December 31, 2002, the Company paid all charges except for $645,000 in lease exit costs. During the year ended December 31, 2003, $238,000 in lease exit costs was paid and $407,000 remained to be paid through February 2005.

(6) Line of Credit

During the year ended December 31, 2003 the Company’s line of credit expired and was not renewed.

(7) Obligations Under Capital Leases

The Company leases machinery and equipment under capital leases. The cost and accumulated depreciation of the equipment was $146,101 and $130,623, respectively, at December 31, 2003 and $252,440 and $151,073, respectively, at December 31, 2002, and is included in property and equipment in the accompanying consolidated balance sheets and is being amortized over the estimated useful lives of the machinery and equipment. The reductions in amounts of equipment under capital leases is due to leases which expired in 2003.

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Payments on capital lease obligations due after December 31, 2003 are as follows:

(8) Commitments

Rent expense was $1,860,315, $1,778,557 and $1,801,765 for the years ended December 31, 2003, 2002, and 2001, respectively. Future minimum rentals under leases after December 31, 2003 are as follows:

The Company currently subleases a portion of its Phoenix facility to the University of Phoenix Online. Rent expense was offset by $275,151 and $267,098 for the years ended December 31, 2003 and 2002 for rent payments received through this sublease. Future minimum rentals under leases after December 31, 2003 are also offset by $283,204, $291,257, $299,311 and $255,018 for the years ended December 31, 2004, 2005, 2006 and 2007, respectively. This sublease agreement expires in 2007.

The Company generally has commitments with certain suppliers and subcontract manufacturers to supply certain components and estimates its non-cancelable obligations for these commitments to be approximately $4,460,000 at December 31, 2003.

(9) Income Taxes