UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

For the fiscal year ended December 31, 2004
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

     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 R No £

     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. £

     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 R No £

     The aggregate market value of the common stock held by non-affiliates of the registrant was approximately $108 million computed by reference to the closing price of the stock on the Nasdaq National Market on June 30, 2004, the last trading day of the registrant’s most recently completed second fiscal quarter. 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 8, 2005 was 16,623,221.

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 June 8, 2005 at 2 p.m. in the Phoenix office.

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 the following discussion include, but are not limited to, (i) continued growth in demand for satellite system ground-based equipment and satellite-delivered communications services, (ii) continued global deregulation and privatization of telecommunications carriers, (iii) continued growth in worldwide demand for Internet over Satellite connectivity and communications serves in general, (iv) expectations for continued growth and improvement in gross margin associated with product introductions, (v) our ability to complete the Xicom acquisition and integrate the operations, products and personnel of Xicom with the Company, (vi) an increase in total foreign sales, and (vii) sufficient cash reserves and cash from operations to fund planned future operations and capital requirements through the end of 2005.

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

•	availability of future taxable income to be able to realize the deferred tax assets;
•	loss of, and failure to replace, any significant customers;
•	timing and success of new product introductions;
•	product developments, introductions and pricing of competitors;
•	timing of substantial customer orders;
•	availability of qualified personnel;
•	the impact of local, political and economic conditions and foreign exchange fluctuations on international sales;
•	performance of suppliers and subcontractors;
•	decreasing or stagnant market demand and industry and general economic or business conditions;
•	availability, cost and terms of capital;
•	our level of success in effectuating our strategic plan;
•	our ability to successfully integrate acquisitions;
•	adequacy of our inventory, receivables and other reserves;
•	the effects that acts of international terrorism may have on our ability to ship products abroad;
•	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 the Company is currently unable to identify or quantify, but may arise or become known in the future.

     In addition, the foregoing factors may affect generally 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

     Radyne ComStream (the Company) designs, manufactures, integrates, installs and sells 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. The Company is headquartered in Phoenix, Arizona and has manufacturing facilities in Phoenix and in San Diego, California. Additionally, the Company has sales offices in Boca Raton, Florida, Singapore, Beijing, Jakarta, London and Amsterdam. The Company also contracts with representatives that provide sales and/or service centers in Rio de Janeiro and Bangalore.

     Through our network of international sales and service offices, agents and sales representatives, we serve customers in over 90 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 Decoders for a Major American Television Network for use during their coverage of the National Basketball Association.
	•	Satellite modems used as the backbone for major new US Department of Defense communications systems
	•	Complete satellite and microwave television network for Alabama Public Television.
	•	Supplied complete satellite backhaul systems for a GSM mobile phone provider in China.
	•	Satellite modems for the US Department of Defense in support of their domestic and international communications needs.
	•	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.
	•	High-Speed DVB Modulators for Hughes Direct to PC Network and Hughes DirecTV.
	•	Selected by PanAmSat, Intelsat and ChinaSat for the deployment of IP over satellite solutions.
	•	Major expansion of U.S. Government Satellite Monitoring Network.

     On March 3, 2005, Radyne ComStream announced its intention to acquire Xicom Technology Inc (Xicom). Xicom is a leading provider of satellite and microwave power amplifiers and other RF products. The combination of Xicom’s amplifier products and RF technologies with Radyne’s line of satellite modems and other satellite communications equipment will make the Company a full line supplier of satellite electronic systems. The acquisition brings an increased customer base for both companies’ products as well as the potential of offering complete system solutions.

     Xicom’s Solid State Power Amplifiers (SSPAs), Traveling Wave Tube Amplifiers (TWTAs), and Klystron Power Amplifiers (KPAs) are used in commercial and military satellite communications terminals throughout the world. Xicom High Power Amplifiers (HPAs) provide power levels vital to satellite communications in fixed, SNG, flyaway, mobile, shipboard, and airborne platforms. Xicom will operate as a subsidiary of Radyne from its current facilities.

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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 or to supplement existing inadequate service. Unlike the cost of land-based networks, such as microwave and fiber cable, the cost to provide services via satellite does not increase with the distance between sending and receiving stations. Satellite networks can be rapidly installed, upgraded, and reconfigured as compared with land-based networks, which require rights-of-way and are expensive and time consuming to install and upgrade.

     The three principal categories of satellite communications service applications are fixed satellite services, mobile satellite services, and direct broadcast services.

     Fixed Satellite Services. Fixed satellite services provide point-to-point and point-to-multipoint satellite communication of voice, data, and video between fixed ground-based earth stations. The introduction of high-power satellites has created new opportunities 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 underserved 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 within which the Company operates, 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 converts analog standard and high-definition television (SDTV & HDTV) signals from cameras or other sources to digital to preserve the quality eternally and 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:

	•	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.

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	•	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.
	•	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.

     We expect that digital television encoding and decoding product demand will be driven by the following factors:

	•	Continued demand from end-consumers for additional HDTV content for increasingly-affordable HD television sets.
	•	Requests from TV distributors (e.g., cable systems and direct satellite broadcasters) to provide additional HDTV channels in order to attract new customers.
	•	Ongoing efforts by broadcasters to meet Federal Communication Commission (FCC) mandates to convert existing analog signals to digital.

     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

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       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.

     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 HDTV digital video is a recently developed technology that provides significant new market opportunities. The development of digital compression technology eternally preserves the quality of TV signals and allows the transmission of television signals via satellite, point-to-point or fiber 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:

	•	Increased compression allows broadcasters to increase their channel offering with existing allocated spectrum
	•	New HDTV content provides new opportunities for additional network and local programming choices along with related revenue opportunities
	•	Satellites provide television broadcasters with an efficient and economical method to distribute their programming to cable service providers and direct broadcast satellite operators.

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	•	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 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.

     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.

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 and the digital television market present 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 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 digital television, Internet communications, rural

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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 continued focus on our operational efficiencies is essential to future financial 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. The Xicom acquisition should enable us to achieve all of these objectives.

Products and Services

     We offer the following product families:

	•	Satellite modems and earth stations.
	•	Digital Standard Definition Television (SDTV) and High Definition Television (HDTV) encoders
	•	Internet via satellite terminal equipment
	•	Frequency converters.
	•	Data, audio, and video broadcast equipment.
	•	Cable and microwave modems.
	•	If the Xicom acquisition is completed, we will also offer a complete line of power amplifiers.

     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.

During 2003, we introduced a major addition to our satellite modem line, the Turbo Forward Error Correction Code. 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.

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Standard and High Definition Digital TV Encoders

We offer a complete product line of SDTV and HDTV encoders for professional applications. This year we introduced a new SDTV encoder (SE-4000) and HDTV encoder (HE-4000). Both models featured the latest in MPEG-2 video encoding capability and audio compression. The HE-4000 features a monitor screen on its faceplate — the first encoder ever to do so — which enables the technician to monitor actual unit performance in real time. 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.

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.

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 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.

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.

Power Amplifiers

Xicom’s Solid State Power Amplifiers (SSPAs), Traveling Wave Tube Amplifiers (TWTAs), and Klystron Power Amplifiers (KPAs) are used in commercial and military satellite communications terminals throughout the world. Xicom High Power Amplifiers (HPAs) provide power levels vital to satellite communications in fixed, SNG, flyaway, mobile, shipboard, and airborne platforms.

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Design, Integration and Installation of Turnkey Communications Systems

Our Armer subsidiary designs, integrates and tests 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 $5.3 million for the year ended December 31, 2004, $6.3 million for the year ended December 31, 2003 and $8.7 million for the year ended December 31, 2002. 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, SDTV 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 Phoenix, San Diego, Boca Raton, Singapore, Beijing, Jakarta, London and Amsterdam. Our direct sales force consists of 18 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 that 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 (including radio and television stations), digital television users (including broadcast and cable networks), Internet service providers, financial information providers, systems integrators, banks and other corporate entities and the U.S. government.

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     During the years ended December 31, 2004, 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 direct sales into principal foreign markets for the periods indicated consisted of the following percentages of total sales.

     In addition to the above sales, we believe that 30% to 50% of our domestic sales are for products which ultimately are installed in foreign countries. 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 major competitors in the satellite communications field. These include large companies, such as Comtech EFData Corp. and Viasat both of which have significantly larger and more diversified operations and greater financial, marketing, human and other resources than we possess. We compete with a similar situation in our broadcast video products. Our principal competitors include Tandberg Television and Harmonic, Inc. Again, both companies are larger and command greater financial resources than we do.

     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 cost of the competing products generally offered by our major competitors represent major factors in our ability to compete. However, our major competitors have the resources to develop products with features and functions that are competitive with or superior to our products. Competition from current competitors or future entrants in the markets in which we compete could cause us to lose orders or customers or could force us to lower the prices we charge for our products.

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

	•	An experienced management group, which has extensive technological and engineering expertise and excellent customer relationships. The members of our management team 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 Beijing, Singapore, London, Jakarta, and Amsterdam.

Manufacturing

     We assemble and test certain products at our Phoenix, Arizona and San Diego, California facilities using subsystems and circuit boards acquired from subcontractors. We obtain the remainder of our products, completely assembled and tested, from subcontractors.

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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 assists in increasing the acceptance of our products. As of December 31, 2004 the Company’s ISO 9001 certifications remain in effect.

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, 2004, we had 173 full-time employees, including 5 executive officers, 83 manufacturing and operations personnel, 40 research and development and 45 selling, general and 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.

Available Information

     Our website is http://www.radn.com. We make available, free of charge through links 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, and 26,000 square feet in our San Diego, California facility. In addition we lease 16,000 square feet in Chandler, Arizona. 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 June 2010 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

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     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, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market for Common Stock

     Our common stock is quoted on the Nasdaq National Market under the symbol “RADN”. 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 22, 2005, we had approximately 300 holders of record of our common stock. We estimate that we have another 5,400 holders of our common stock in street name.

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.

Unregistered Sales of Equity Securities and Use of Proceeds

     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 were subject to securities law restrictions on their subsequent resale. However, the Company subsequently registered the shares for resale. The Company did not receive any proceeds from this transaction.

Warrants

     After December 31, 2004 but prior to the expiration date of February 7, 2005, 310,571 of our redeemable common stock purchase warrants were exercised. We received proceeds of $2,717,000 related to the exercises and have issued 310,571 shares of our common stock to the former holders of the redeemable warrants. The remaining 1,832,966 unexercised warrants expired on February 7, 2005.

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Issuer Purchases of Equity Securities

     On June 4, 2004, the Board of Directors authorized management to purchase up to $10 million of the Company’s outstanding common stock. As of December 31, 2004, the Company has purchased 402,600 shares under the program at a total cost of $2,791,000. This program expires on June 3, 2005 and was the only repurchase program outstanding at December 31, 2004. The following chart provides detailed information on the program:

Equity Compensation Plans

     See Part III, Item 12.

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Item 6. Selected Financial Data

     The following selected consolidated statement of operations data for the years ended December 31, 2004, 2003, 2002, 2001 and 2000, and the selected consolidated balance sheet data at those dates, are derived from our consolidated financial statements and notes thereto audited by an independent registered public accounting firm, 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.

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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 90 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 $56.6 million, $58.0 million and $57.7 million for the years ended December 31, 2004, 2003 and 2002, respectively. The decline in revenues is due, in part, to the Company’s decision to withdraw from bidding on service business jobs and focus on our higher margin products. In addition, our customers’ trend had 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 also believe that continued demand for capital equipment in the HDTV industry will drive demand for the Company’s products.

     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. The products have lowered cost of manufacture compared to the products that they replace which results in increased gross margins.

     On March 3, 2005, Radyne ComStream announced its intention to acquire Xicom Technology Inc. Xicom is a leading provider of satellite and microwave power amplifiers and other RF products. The combination of Xicom’s amplifier products and RF technologies with Radyne’s line of satellite modems and other satellite communications equipment would make the Company a full line supplier of satellite electronic systems. The acquisition brings an increased customer base for both companies’ products as well as the potential of offering complete system solutions. We believe that there is additional opportunity to create new products based on the combined technology of Radyne ComStream’s existing products and Xicom’s offering. Further, this acquisition, if completed should result in greater sales relative to fixed costs which should, in turn, increase the Company’s operating leverage or profitability.

     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 years ended December 31, 2004 and 2003, $340,000 and $238,000 in lease exit costs were paid and the remaining $67,000 was paid in January and February 2005.

     At December 31, 2004, our workforce consisted of 173 full time employees, which is reduced from 183 and 205 at December 31, 2003 and 2002.

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.

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

	•	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 Bulletins No. 104 Revenue Recognition and 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. We consider products and services as separate units of accounting under EITF 00-21, Revenue Arrangements with Multiple Deliverables. Revenue is allocated to the separate units of accounting based on their relative fair values.
	•	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 Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, (SFAS 142) 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 evaluated in goodwill impairment tests. Therefore, we estimate fair values using estimating techniques and assumptions that are matters of judgment. Our transitional impairment analysis of goodwill as of January 1, 2002, as required by SFAS 142, yielded an impairment charge of $4.3 million, recorded in 2002 as a cumulative effect of change in accounting principle. We have no remaining goodwill on our balance sheet as of December 31, 2004 and 2003. Assuming it is completed, we anticipate that the Xicom acquisition will result in goodwill. In that event, we will apply the provisions of SFAS 142.
	•	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 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 to utilize the recorded value. 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

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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

Sales:

     Net sales generally consist of sales of products, net of returns and allowances. Our sales have come predominantly from satellite modems, video signal encoders, point-to-point modems, Internet over satellite systems and systems integrations and installations. The following tables summarize the year-over-year comparison of our revenue for the periods indicated:

2004 vs. 2003

     For the year 2004, sales decreased $1.4 million, or 2% from the prior year 2003. This decrease was primarily due to a reduction in sales from our systems integrations and installation service which accounted for a decrease of $1.7 million in sales from 2003 to 2004. The decision was made due to the very competitive nature of this portion of the market and the relative low benefit we believe we received for being in the business. This resulted in lower sales, but higher margins, as we concentrated on delivery of our core products and development of new higher margin products. Based on orders received during the last quarter, management believes that continued growth in shipments of these newly introduced products will result in recovery of sales in the future.

2003 vs. 2002

     Our net sales increased 1% 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 for our core products (and offset by a reduction of sales in our systems integration and installation products) and strengthening of the economy as a 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 four 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.

Cost of sales:

     Cost of sales generally consists of costs associated with components, outsourced manufacturing and in-house labor associated with assembly, testing, packaging, shipping and quality assurance, depreciation of manufacturing equipment and indirect manufacturing costs. Gross profit is the difference between net sales and cost of sales. Gross margin is gross profit stated as a percentage of net sales. The following tables summarize the year-over-year comparison of our cost of sales, gross profit and gross margin for the periods indicated:

2004 vs. 2003

     During 2004, gross profit was $30.1 million, a 14% increase from 2003 due primarily to a change in our product and service mix in 2004 as compared to 2003. These lower costs resulted from the previously mentioned decision to withdraw from bidding on installation and integration jobs and low margin products during the second quarter of 2004 and to concentrate on our core products, which produce higher margins and the introduction of new products with reduced costs to manufacture. Gross margins increased to 53% of net sales for 2004 compared to 45% in 2003. Gross margins for the year benefited from a larger portion of our total sales being made up of our new higher margin products as compared to 2003, primarily from our new satellite modems that replaced the sales of our lower margin system integration services. Management believes that the Company may not be able to continue to increase gross margins in the future due to increased competition and larger customer orders.

2003 vs. 2002

     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 aborted 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.

Research and Development:

     Research and development expenses consist primarily of salaries and personnel-related costs, development material and other product development expense. The following tables summarize the year-over-year comparison of our research and development expenses for the periods indicated:

2004 vs. 2003

     Research and development expenses decreased 15% in 2004. The decrease was due to a reduction of personnel and reduced overhead expenses. We remain committed to invest in our future through technological advances and efforts to improve our older product lines for improve 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. We expect that research and development expenses will increase in the coming year as the Company expands the development and introduction of new products.

2003 vs. 2002

     Research and development expenses 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.

Interest Expense:

     Interest expense was $29,000 and $28,000 for the years ended December 31, 2004 and 2003 respectively as compared to $62,000 for the year ended December 31, 2002. The reduction in interest expense is due to lower capitalized lease obligations in 2004 and 2003 as compared to 2002.

Interest and Other Income:

     Other income increased to $492,000 in the year ended December 31, 2004 from $254,000 in the year ended December 31, 2003 and $236,000 during the year ended December 31, 2002. Other income is comprised primarily of interest income, which increased as a result of higher average interest rates during 2004 as compared to 2003 and 2002. In addition, we maintained a higher average cash balance during 2004 and 2003 as compared to 2002. We keep our cash in money market accounts and short term AAA rated investments maturing in seven to twenty-eight day increments. We expect that interest income will decline in the coming year as the Company uses available cash to pursue the Xicom and other acquisitions, repurchase stock and invest in other business opportunities. See “Liquidity and Capital Resources” below.

Income Taxes (Benefit):

     We recorded an income tax benefit during the year ended December 31, 2004 of $3.6 million compared to income tax expense of $2.6 million in the year ended December 31, 2003. We recorded an income tax benefit of $196,000 in 2002 due to a tax refund. During the year ended December 31, 2004, the Company reduced the valuation allowance related to the deferred tax assets by $7,337,000 based on management's belief that it is more likely than not the deferred tax assets will be realized through the generation of future taxable income. Of this net reduction in the valuation allowance, approximately $7,030,000 was recorded as a reduction of income tax expense, approximately $772,000 was recorded as an increase to additional paid-in capital and approximately $465,000 was recorded as an increase in deferred tax assets. In addition to the $772,000 increase in additional paid-in capital for the release of the valuation allowance related to the tax benefits of stock option exercises in prior years, additional paid-in capital was increased for the tax benefit of stock option exercises during the year ended December 31, 2004 in the amount of approximately $1,063,000 for a total increase of approximately $1,835,000. As of December 31, 2004, the Company has total deferred tax assets of $8,209,000 with a corresponding valuation allowance of $2,546,000. The valuation allowance applies to the deferred tax assets related to net operating loss carryforwards which management believes are limited as to utilization under Internal Revenue Service Code Section 382. The company generated taxable income in each of the four quarters of 2004, the last three quarters of 2003 and projects future taxable income to be able to use the net deferred tax assets. Management believes that past profitable performance and the forecast of future profits supports the recognition of the deferred tax assets and the reduction of the valuation allowance.

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     During 2004, bookings increased 12% compared to 2003. This increase was mostly a result of higher fourth quarter bookings of $20.8 million compared to $15.6 million in 2003. The increase in backlog is due to the higher fourth quarter bookings, much of which remained in backlog at the end of the year. Our backlog consists of orders 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. Although the Company’s backlog increased at year due to record orders in the fourth quarter, we believe that the trend towards increased receiving and shipping orders in the same quarter will continue as customers continue to order our products on an “as needed” basis and we offer improved delivery times.

     New orders booked 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 was due to the reluctance of our customers to place long term capital equipment orders in the aftermath of the economic downturn of the last few years. Our backlog 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 was 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.

Liquidity and Capital Resources

     The Company had cash and cash equivalents totaling $39.3 million at December 31, 2004 compared to $30.1 million at December 31, 2003, an increase of $9.2 million. The primary factors in the increase were cash provided by operations of $10.6 million, the issuance of common stock through the exercise of stock options of $1.6 million and the sale of common stock to employees of $460,000. These were partially offset by the repurchase of the Company’s common stock for $2.8 million and capital expenditures of $822,000. Working capital increased 28% to $53.4 million at December 31, 2004 from $41.6 million at December 31, 2003.

Operating Activities:

     During 2004, net cash provided by operating activities was $10.6 million as compared to $12.1 million for 2003. Net cash provided by operating activities for 2004 resulted primarily from $13.5 million of net earnings, depreciation and amortization of $1.2 million, a tax benefit on stock option exercises of $1.8 million and an increase of $1.6 million in accrued expenses. These were partially offset by increases in deferred tax assets of $5.7 million and increases in asset accounts of $1.0 million (including accounts receivable, inventory and prepaid expenses and other current assets). Cash was further reduced by a decrease in customer advance payments of $728,000 and a decrease in accounts payable $615,000.

     During 2003, net cash provided by operating activities was $12.1 million. Net cash provided by operating activities resulted primarily from $4.1 million of net earnings, deferred income taxes of $2.6 million, a decrease in inventories of $2.9 million and depreciation and amortization of $1.9 million. These were partially offset by decreases in accrued expenses of $387,000 and accrued stock option compensation of $296,000.

     During 2002, net cash provided by operating activities was $9.7 million. Net cash provided by operating activities resulted primarily from a decrease of $7.2 million in inventories, a change in accounting principle of $4.3 million, a decrease in accounts receivable of $3.8 million, and $2.5 million of depreciation and amortization. These were partially offset by a loss of $9.0 million, a decrease in accounts payable of $592,000 and an increase in other assets of $115,000.

Investing Activities:

     Investing activities included capital expenditures of $822,000, $521,000 and $1,471,000 for the years ended December 31, 2004, 2003 and 2002. These were funded through cash provided by operating activities. The Company received $148,000, $121,000 and $14,000 for the years ended December 31, 2004, 2003 and 2002 for proceeds from disposal of assets. Although, the Company does not have any material commitments for capital expenditures planned during the next twelve months, the Company has entered into a definitive agreement to acquire Xicom Technology Inc. which will require investment of $46 million of cash and $2.0 million of

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stock. This cash amount includes approximately $39 million as part of the purchase consideration and approximately $5 million to retire existing Xicom debt.

Financing Activities:

     During 2004, net cash used in financing activities was $773,000, while net cash was provided by financing activities of $2.1 million and $825,000 for years ended December 31, 2003 and 2002. During 2004, the Company used $2.8 million of cash to repurchase shares of its common stock. Cash generated by financing activities included the issuance of common stock through the exercise of stock options of $1.6 million, $1.9 million and $306,000 in the years ended December 31, 2004, 2003 and 2002. The sale of common stock to employees provided cash of $460,000, $316,000 and $592,000 for years ended December 31, 2004, 2003 and 2002. Principal payments on capital lease obligations amounted to $14,000, $38,000 and $73,000 for the years ended December 31, 2004, 2003, and 2002. The Company had no long-term debt outstanding at December 31, 2004, 2003 or 2002. Stockholders’ equity was $58.2 million, $43.6 million and $37.3 million for the years ended December 31, 2004, 2003 and 2002.

     We received proceeds of $2,717,000 related to the exercises of 310,571 of our redeemable common stock purchase warrants between December 31, 2004 and the expiration date of February 7, 2005. The remaining 1,832,966 unexercised warrants expired on February 7, 2005.

     The Company maintains a credit arrangement with a bank for up to $9 million, based upon 80% of eligible accounts receivable, as defined. The amount of credit available to us under the credit agreement at December 31, 2004 was approximately $7 million. We paid approximately $35,000 for a facility fee and bank costs for a two year commitment on the arrangement, whether or not any amounts are actually drawn on the line of credit. At December 31, 2004 and 2003, we had no borrowings against the line of credit. The credit agreement expires on May 1, 2006 and limits or prohibits mergers, consolidations, acquisitions, transfers of assets, liens, loans and investments in other entities and limits the use of proceeds, acquisitions of assets, indebtedness and capital expenditures without the bank’s consent. To be eligible to draw funds under the line of credit, the credit agreement requires us to maintain specific levels of tangible net worth, earnings and other ratios. We were in compliance with all covenants at December 31, 2004. The credit agreement specifies an interest rate between LIBOR plus 150 basis points and prime rate minus 50 basis points depending on terms and other conditions.

     We are currently negotiating changes to our credit arrangement to facilitate the Xicom acquisition. We anticipate that these negotiations will result in an larger credit facility with terms and conditions similar to those described above. In addition, we anticipate that we will draw $5 million to finance the Xicom acquisition at the time of acquisition close.

     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, 2004:

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. We do not expect that inflation will materially affect our business within the next year.

Recent Accounting Pronouncements

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     In November 2004, the FASB issued Statement No. 151, Inventory Costs (SFAS 151). SFAS 151 requires that abnormal amounts of idle facility expense, freight, handling costs, and spoilage, be charged to expense in the period they are incurred rather than capitalized as a component of inventory costs. SFAS 151 is effective for inventory costs incurred in fiscal periods beginning after June 15, 2005. The adoption of this standard may result in higher expenses in periods where production levels are lower than normal ranges of production. We currently believe that the adoption of SFAS 151 will not have a material impact on our consolidated financial statements.

     In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123R, Share-Based Payment (SFAS 123R). SFAS 123R is a revision of SFAS 123 and supersedes APB 25. Among other items, SFAS 123R eliminates the use of APB 25 and the intrinsic value method of accounting, and requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, based on the grant date fair value of those awards, in the financial statements. The effective date of SFAS 123R is the first reporting period beginning after June 15, 2005, which is third quarter 2005 for calendar year companies, although early adoption is allowed. SFAS 123R permits companies to adopt its requirements using either a “modified prospective” method, or a “modified retrospective” method. Under the “modified prospective” method, compensation cost is recognized in the financial statements beginning with the effective date, based on the requirements of SFAS 123R for all share-based payments granted after that date, and based on the requirements of SFAS 123 for all unvested awards granted prior to the effective date of SFAS 123R. Under the “modified retrospective” method, the requirements are the same as under the “modified prospective” method, but also permits entities to restate financial statements of previous periods based on pro forma disclosures made in accordance with SFAS 123.

The Company currently utilizes a standard option-pricing model (i.e., Black-Scholes) to measure the fair value of stock options granted to employees. While SFAS 123R permits entities to continue to use such a model, the standard also permits the use of a “lattice” model. The Company has not yet determined which model it will use to measure the fair value of employee stock options upon the adoption of SFAS 123R.

SFAS 123R also requires that the benefits associated with the tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after the effective date. These future amounts cannot be estimated, because they depend on, among other things, when employees exercise stock options.

The Company currently expects to adopt SFAS 123R effective July 1, 2005; however, the Company has not yet determined which of the aforementioned adoption methods it will use. Subject to a complete review of the requirements of SFAS 123R, based on stock options granted to employees through December 31, 2004, and stock options expected to be granted during 2005, the Company expects that the adoption of SFAS 123R on July 1, 2005, will reduce both third quarter 2005 and fourth quarter 2005 net earnings and net earnings per share.

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 include changes in interest rates, introduction of competitive products, our ability to satisfy our customer’s technological requirements and the availability of raw materials from our vendors. 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.

     We are exposed to market risk on our financial instruments from changes in interest rates. As of December 31, 2004, a change in interest rates of 10% over a year’s period would not have a material impact on our interest earnings. We do not use financial instruments for trading purposes or to manage interest rate risk. The Company does not have any derivative financial instruments.

Item 8. Financial Statements and Supplementary Data

     Our consolidated financial statements as of December 31, 2004 and 2003 and for each of the years in the three-year period ended December 31, 2004, together with related notes and the report of KPMG LLP, an independent registered public accounting firm, are on the following pages. Other required financial information is more fully described in Part IV, Item 15 below.

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Radyne ComStream Inc.:

We have audited the accompanying consolidated balance sheets of Radyne ComStream Inc. and subsidiaries (the Company) as of December 31, 2004 and 2003, 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, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 11, 2005 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

/s/ KPMG LLP

Phoenix, Arizona
March 11, 2005

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Radyne ComStream Inc.
Consolidated Balance Sheets
December 31, 2004 and 2003
(in thousands, except share data)

See accompanying notes to consolidated financial statements.

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Radyne ComStream Inc.
Consolidated Statements of Operations
For the Years Ended December 31, 2004, 2003 and 2002
(in thousands, except per share data)

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, 2004, 2003 and 2002
(in thousands)

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, 2004, 2003 and 2002
(in thousands)

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, 2004, 2003 and 2002

(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. (the Company). 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. On February 19, 2004 STPL sold all 9,676,800 shares in a private transaction (see Note 10).

The Company is headquartered in Phoenix, Arizona and has manufacturing facilities in Phoenix and in San Diego, California. Additionally, the Company has sales offices in Boca Raton, Florida, Singapore, Beijing, Jakarta, London and Amsterdam. The Company also contracts with representatives that provide sales and/or service centers in Rio de Janeiro and Bangalore. The Company designs, manufactures, and sells products, systems and software used for the transmission and reception of data, voice, internet protocol and video over satellite, microwave and cable communication networks.

The Company operates primarily in North America in the satellite communications industry. The Phoenix facility designs and manufactures satellite and point-to-point modems and allied equipment. The San Diego facility designs and manufactures audio and video encoders, satellite modems and Internet over satellite hardware. The Company sells and distributes its products under the Radyne ComStream, ComStream and Tiernan brands.

(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 evaluates its estimates and assumptions based upon historical experience and various other factors and circumstances. The Company believes 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 and short term AAA investments with original maturities of 90 days or less to be cash equivalents.

(d) Accounts Receivable

Accounts receivable consist of trade receivables from customers. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make required payments. The allowance is assessed on a regular basis by management and is based upon management’s periodic review of the collectibility of the receivables with respect to historical experience. If

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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.

(e) 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. We consider products and services as separate units of accounting under EITF 00-21, Revenue Arrangements with Multiple Deliverables. Revenue is allocated to the separate units of accounting based on their relative fair values.

(f) 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.

(g) Property and Equipment

Property and equipment are stated at cost. Equipment held under capital leases is stated at the present value of future minimum lease payments. Expenditures for repairs and maintenance are charged to operations as incurred, and improvements, which extend the useful lives of the assets, are capitalized. Depreciation is computed using the straight-line method over the estimated useful lives as follows: machinery and equipment three to seven years; furniture and fixtures two to seven years; demonstration units two to three years and computers and software three to fine 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.

(h) Intangible Assets

Goodwill represents the excess of costs over fair value of assets of businesses acquired. The Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142) 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 142. SFAS 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 144, Accounting for Impairment or Disposal of Long-Lived Assets (SFAS 144).

Our transitional impairment analysis of goodwill as of January 1, 2002, as required by SFAS 142, yielded an impairment charge of $4.3 million, recorded in 2002 as a cumulative effect of change in accounting principle. We have no remaining goodwill on our balance sheet as of December 31, 2004 and 2003.

(i) 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.

(j) Impairment of Long-Lived Assets

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.

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(k) 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.

(l) Research and Development

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

(m) Income Taxes

The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future consequences attributed to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Differences between income for financial and tax reporting purposes arise primarily from 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.

The Company evaluates the recoverability of the deferred tax assets and records a valuation allowance to reduce its deferred tax assets to an amount for which realization is more likely than not. 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.

(n) Concentration of Credit Risk

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

The Company maintains allowances for doubtful accounts for the estimated 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.

(o) 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.

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(p) 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.

(q) Employee Stock Options

The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations in accounting for its employee stock options and to adopt the “disclosure only” alternative treatment under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123). Under SFAS 123, deferred compensation is recorded for the fair value of the stock on the date of the option grant. The deferred compensation is amortized over the vesting period of the option.

The Company applies APB 25 in accounting for its employee stock options. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS 123, the Company’s net earnings (loss) and net earnings (loss) per share would have been reduced to the pro forma amounts indicated below:

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 — 95 percent, risk free interest rate of 3.00 percent – 4.25 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, 2004, 2003 and 2002 were $4.75, $1.65 and $3.16 respectively, using the Black-Scholes option-pricing model and the assumptions listed above.

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123R, Share-Based Payment (SFAS 123R). SFAS 123R is a revision of SFAS 123 and supersedes APB 25. Among other items, SFAS 123R eliminates the use of APB 25 and the intrinsic value method of accounting, and requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, based on the grant date fair value of those awards, in the financial statements. The effective date of SFAS 123R is the first reporting period beginning after June 15, 2005, which is third quarter 2005 for calendar year companies, although early adoption is allowed. SFAS 123R permits companies to adopt its requirements using either a “modified prospective” method, or a “modified retrospective” method. Under the “modified prospective” method, compensation cost is recognized in the financial statements beginning with the effective date, based on the requirements of SFAS 123R for all share-based payments granted after that date, and based on the requirements of SFAS 123 for all unvested awards granted prior to the effective date of SFAS 123R. Under the “modified retrospective” method, the requirements are the same as under the “modified prospective” method, but also permits entities to restate financial statements of previous periods based on pro forma disclosures made in accordance with SFAS 123.

The Company currently utilizes a standard option-pricing model (i.e., Black-Scholes) to measure the fair value of stock options granted to employees. While SFAS 123R permits entities to continue to use such a model, the

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standard also permits the use of a “lattice” model. The Company has not yet determined which model it will use to measure the fair value of employee stock options upon the adoption of SFAS 123R.

SFAS 123R also requires that the benefits associated with the tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after the effective date. These future amounts cannot be estimated, because they depend on, among other things, when employees exercise stock options.

The Company currently expects to adopt SFAS 123R effective July 1, 2005; however, the Company has not yet determined which of the aforementioned adoption methods it will use. Subject to a complete review of the requirements of SFAS 123R, based on stock options granted to employees through December 31, 2004, and stock options expected to be granted during 2005, the Company expects that the adoption of SFAS 123R on July 1, 2005, will reduce both third quarter 2005 and fourth quarter 2005 net earnings and net earnings per share.

(r) Segment Reporting

The Company has utilized the management approach as defined by Statement of Financial Accounting Standards No. 131 Disclosures about Segments of an Enterprise and Related Information (SFAS 131) to determine if the Company has reportable operating segments. Based on this evaluation, the Company has determined that it has only one operating business segment, the sale, integration and installation of equipment for satellite, microwave and cable communications and television networks.

(s) Reclassifications

Certain reclassifications have been made to the prior years consolidated financial statements to conform to the current year presentation.

(3) Inventories

(4) Property and Equipment

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(5) Accrued Expenses