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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(MARK ONE)

For the fiscal year ended January 31, 2003

OR

For the transition period from                      to                     .

Commission File Number 1-16541

REMEC, INC.

(Exact name of Registrant as specified in its charter)

Registrant’s telephone number, including area code: (858) 505-3713

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 Par Value

(Title of Class)

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 twelve (12) months (or such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past ninety (90) days: Yes  x    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.  ¨

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes  x    No  ¨

The aggregate market value of the registrant’s common stock, $0.01 par value per share, held by non-affiliates of the registrant on August 2, 2002, the last business day of the registrant’s most recently completed second fiscal quarter, was $132,955,704 (based on the closing sales price of the registrant’s common stock on that date). Shares of the registrant’s common stock held by each officer and director and each person who owns 5% or more of the outstanding voting power of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not a determination for other purposes.

The number of outstanding shares of REMEC common stock as of March 28, 2003 was 57,139,770.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for REMEC’s Annual Meeting of Shareholders expected to be held on June 20, 2003, a definitive copy of which will be filed with the SEC within 120 days after the end of the year covered by this Form 10-K, are incorporated by reference herein in Part III of this Form 10-K.

REMEC, INC.

ANNUAL REPORT ON FORM 10-K

FOR FISCAL YEAR ENDED JANUARY 31, 2003

TABLE OF CONTENTS

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Some of the statements made by us in this Annual Report on Form 10-K are forward-looking in nature, including but not limited to, statements relating to our future revenue, product development, demand, acceptance and market share, gross margins, levels of research and development, our management’s plans and objectives for our current and future operations, and other statements that are not historical facts. Forward-looking statements include, but are not limited to, statements that are not historical facts, and statements including forms of the words “intend,” “believe,” “will,” “may,” “could,” “expect,” “anticipate,” “plan,” “possible,” and similar terms. Actual results could differ materially due to a variety of factors, including the risks described in this Annual Report and the other documents we file from time to time with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

PART I

INTRODUCTION

REMEC, Inc. (“REMEC” or the “Company” or “our” or “we”) was incorporated in California in January 1983. Our principal executive offices are located at 3790 Via de la Valle, Del Mar, California 92014, and the telephone number for that location is (858) 505-3713. Our Internet address is www.remec.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports and other Securities and Exchange Commission, or “SEC,” filings are available free of charge through our website as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. Our common stock trades on the Nasdaq National Market under the symbol “REMC.”

REMEC designs and manufactures high frequency subsystems used in the transmission of voice, video and data traffic over wireless communications networks in the defense and commercial sectors. Our products are designed to improve the capacity, efficiency, quality and reliability of wireless communications infrastructure equipment. We also develop and manufacture highly sophisticated wireless communications equipment used in the defense industry, including communications equipment integrated into electronic systems for tactical aircraft, ships, ground systems, satellites, missile systems and smart weapons. We manufacture products that operate at the full range of frequencies currently used in wireless communications transmission, including radio frequencies, or “RF,” microwave frequencies and millimeter wave frequencies. By offering products that cover the entire frequency spectrum for wireless communications, we are able to address opportunities in the worldwide mobile wireless communications market and defense markets.

INDUSTRY BACKGROUND

Increased Demand for Mobile Wireless Services Necessitates Expansion of Wireless Infrastructure. Wireless network service providers to date have focused primarily on satisfying the increasing demand for wireless telephony through the transmission of voice and low speed data signals over analog cellular systems and digital personal communication systems (“PCS”). The demand created by increased minutes of usage will ultimately require a substantial increase in capital investment in wireless communications infrastructure equipment, although the current depressed state of the industry has resulted in the deferment of capital expenditures by many service providers.

Advances in Mobile Wireless Communications Network Technology will Require Additional Wireless Infrastructure Equipment.    The capacity and quality of domestic and international mobile wireless communications networks have evolved with advances in technology. In response to capacity and an increase in the level of service demands, service providers are expanding their current infrastructure and are implementing new wireless technologies, such as third generation (“3G”) networks.

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Demand for High Speed Internet Access and Other Data Services Increases the Need for Broadband Access. Consumers around the world are using the Internet for an ever-increasing range of purposes, including email, high quality audio, streaming video and other multimedia services. Businesses are also using the Internet to enhance their reach to both residential and business consumers with applications such as electronic commerce, global marketing, customer support, web hosting, order fulfillment and supply management. The Internet also permits access to corporate data networks, including intranets and extranets, facilitating communication among corporate sites or with telecommuters or traveling employees. This increased usage requires an expanded capacity for the quick and reliable transmission of voice, video and data, which can be accomplished through broadband access.

Fixed Wireless Access Broadband Technology is Emerging as a Cost Effective Alternative to Broadband Land Line Transmission.    New fixed wireless access broadband technology can provide quality of service comparable to the best land line network alternatives at speeds that are significantly faster than conventional copper wire-based networks. Fixed wireless access broadband technology is designed to be integrated with the existing network backbone to address the last mile bottleneck problem. In addition, certain types of fixed wireless access broadband technology provide an alternative for selective network backbone applications. Broadband wireless systems include point-to-point, point-to-multipoint and satellite-to-multipoint broadband technologies.

Frequency Allocations by International Agencies are Enabling Wireless Infrastructure Expansion.    In response to the increasing demand for wireless communications services, regulatory bodies continue to allocate new frequency spectrum. For example, international agencies are allocating frequency bands, including bands for local multipoint distribution systems and fixed wireless access, for two-way broadband wireless data services. It is anticipated that these frequencies will be used to deliver fixed wireless Internet and voice access to business and residential customers. This is especially used in areas where there is a need for wireless system networks due to lack of copper wire infrastructure. To take advantage of these licenses, network operators must deploy new network infrastructures specific to the licensed frequency band. Each frequency band requires unique transmission equipment designed to work with the technical requirements of the particular band. Thus, as additional frequencies are allocated by regulatory agencies around the world, wireless infrastructure equipment must be deployed to commercialize these licenses.

Wireless Infrastructure OEMs Rely on Subsystem Providers.    In order to meet the demand for mobile wireless and fixed wireless access broadband services, service providers are turning to systems integrators or original equipment manufacturers (“OEMs”) to build out infrastructure quickly, efficiently and in accordance with exacting performance specifications. In addition, OEMs are looking to outsource the design and manufacture of highly integrated reliable subsystems in a cost-effective manner. This permits OEMs to accelerate their time to market and allows them to leverage their core competencies of full system design and integration. By outsourcing subsystems, OEMs promote competition among developers and manufacturers, which leads to technological innovations in wireless infrastructure equipment. Concurrently, OEMs are seeking to select a core group of subsystem and component providers in order to reduce the supply and management risks associated with the currently fragmented supplier base.

THE REMEC SOLUTION

We market our products to OEMs of wireless communications networks and network service providers, as well as to prime contractors in the defense industry. We provide customers “one-stop shopping” for design, prototyping and mass production of highly reliable microwave and RF hardware.

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We believe that our core competencies enable us to effectively address the existing and emerging opportunities in the wireless communications infrastructure equipment and defense markets. These core competencies include the following:

Components.    Our components span the complete functionality needs of today’s RF and microwave subsystems, including power dividers, combiners, filters, switches, mixers, amplifiers, oscillators, converters and multipliers. We maintain state-of-the-art capability for performance and cost in all critical component areas, which are used in our integrated products and competitively benchmarked through individual component sales.

Integration Expertise.    We design high performance subsystems and systems over a broad range of RF, microwave and millimeter frequencies, which require sophisticated component integration. By effectively integrating a number of required microwave functions into a single package, or offering products as part of an overall system solution, we are able to: reduce the bill of materials; improve product performance; reduce cost and enhance yields; and improve product reliability.

Concurrent Engineering.    We streamline and optimize the product development cycle by employing “concurrent engineering,” which includes continuous joint participation with our customers from conceptualization, participation by our suppliers in the design process, and consideration of manufacturing constraints and limitations while developing a product design.

Design for Test and Design for Manufacturability Feedback.    Our ability to plan both our internal manufacturing services and design capability reduces product time to market and unit costs. We retain control of each step of the design and manufacturing process while minimizing the use of outside sources and subcontractors for key manufacturing processes and services. This capability also improves quality control, reliability, and our ability to implement volume production. We have enhanced efficiency using a rigorous new product introduction process and metric based manufacturing organization. These manufacturing metrics provide clearly documented inputs to the front-end design process that result in more reliable products that can be built in a cost-effective manner.

Broad Frequency Range.    Our technologies support the range of frequencies utilized for mobile wireless and broadband wireless applications. Our microwave technology expertise covers the full range of the frequency spectrum used for existing wireless communications. Many of our subsystem competitors only address select frequency bands in the subsystems they design, which makes them vulnerable to technological advances in products that use frequency bands they do not address. By having the ability to design and manufacture products across the breadth of the wireless communications market, we can better address our customers’ needs and capitalize on our overall design and manufacturing capabilities.

STRATEGY

Our objective is to build on the strength of our core competencies to be the supplier of choice of wireless service providers, OEMs in the wireless infrastructure equipment industry and prime contractors in the defense electronics industry. Our strategy includes the following key elements:

Leverage Technology Leadership.    Through twenty years of leadership in high frequency applications in the defense and commercial industries, we believe that we have one of the most advanced portfolios of products and technologies encompassing RF, microwave and millimeter wave technologies. The skills that we developed in the defense industry, and honed in the commercial wireless market, have enabled us to develop solutions to achieve substantial reductions in the size and cost of wireless infrastructure equipment. We intend to continue to integrate additional functions into smaller packaging with fewer parts while meeting the reliability and performance specifications of next-generation wireless infrastructure equipment.

Continue to Develop Strong Strategic Alliances with Customers.    By forming lasting customer relationships through working closely with customers, we are better able to develop insight into their system

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requirements and to design specific products that meet their needs. We intend to continue to expand our key customer alliances with leading infrastructure OEMs. We concentrate our efforts on the commercial customers we believe will be the most successful in selling their systems to service providers that require high volume production.

Supply Integrated Microwave Subsystems to OEMs’ Worldwide Operations.    We have established significant relationships with every major global OEM. We believe that we are one of few RF and microwave subsystem and system companies that have the breadth of expertise in wireless communications technology necessary to service these OEMs’ worldwide operations. In fiscal 2003, we expanded our customer relationships in China through our strategic relationship with REMEC Himark Telecom Company, a provider of network development and optimization solutions for telecom operators and manufactures in Asia. In addition, the recent acquisition of Spectrian Corporation has provided us with a sales, marketing and design presence in South Korea and expanded our sales presence in South America.

Supply Niche Products Directly to Network Service Providers.    We intend to continue expanding our marketing efforts to sell certain niche wireless products directly to network service providers. Although we do not intend to enter into direct competition with our OEM customers, there are several niche products that are not being marketed aggressively by OEMs, including base station antenna-line tower top products, booster amplifiers and mobile wireless coverage distribution products. We intend to continue expanding our product portfolio and our efforts to market these products to network service providers when we can do so without competing directly with our OEM customers or enter into partnership agreements with our OEM customers to integrate our products into their system solutions. Our recent acquisition of Spectrian Corporation has added a strong capability in booster amplifier products in this segment of our business.

Enhance High Volume Manufacturing Capability.    We intend to continue to implement process manufacturing automation and believe that our ability to develop a high level of automated product alignment and test capability will help us to further improve our cost effectiveness and time to market. We also intend to continue expanding our foreign manufacturing operations, both at our current locations such as Costa Rica and the Philippines and our newer manufacturing facility in China, when appropriate, in order to lower our costs or to access an available workforce. In addition, we intend to offer our manufacturing services to OEMs and subsystem and component developers or manufacturers who need high volume manufacturing of their own products either because of capacity constraints or lack of manufacturing expertise.

Pursue Strategic Acquisitions.    We intend to continue to augment our existing technology base by acquiring specialized technology companies that complement our product offerings and market strategies. We believe that expansion of our core competencies and market-share through the acquisition of such specialized technology companies, when combined with our technological and manufacturing skills, will allow us to achieve improved levels of integration.

SIGNIFICANT BUSINESS DEVELOPMENT IN FISCAL YEAR 2003

In December 2002, REMEC announced the completion of our acquisition of Spectrian Corporation (“Spectrian”). Spectrian is located in Sunnyvale, California and designs and manufactures power amplifiers for the wireless infrastructure market. The Spectrian acquisition has expanded our product portfolio and global footprint. Spectrian brings excellent technology skills and capabilities in power amplifiers and strategic relationships with leading wireless OEMs, especially Asian and North American service providers.

SEGMENT INFORMATION

We have moved to reduce expenses and improve financial performance by streamlining our organization into two business segments: Commercial and Defense & Space. The Commercial segment includes the groups formerly known as Mobile Wireless, Broadband Wireless and Global Manufacturing. The Defense & Space

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segment includes the operations of our REMEC Microwave, Inc. subsidiary; Nanowave Technologies, Inc., a majority owned subsidiary which designs and produces custom monolithic integrated circuits, critical modules and integrated subassemblies for fiber optic and broadband wireless communications systems; and certain non-operating subsidiaries.

Financial information regarding our business segments may be found in Note 8 to the Consolidated Financial Statements, which is incorporated herein by reference, and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Form 10-K.

Commercial Segment

The Commercial segment addresses the mobile wireless infrastructure market, the broadband wireless market and the generic components market.

The Mobile Wireless Market.    The mobile wireless market includes the cellular infrastructure market that supports Code Division Multiple Access (“CDMA”), Time Division Multiple Access (“TDMA”), Global Standard for Mobile (“GSM”), Enhanced Data Rates for GSM Evolution (“EDGE”), Universal Mobile Telecommunications System (“UMTS”) and 3G networks. Wireless network service providers to date have focused primarily on satisfying the increasing demand for wireless telephony through the transmission of voice and low speed data signals over analog cellular systems and digital PCS. In addition, the capacity and quality of domestic and international mobile wireless communications networks have evolved with advances in technology. In response to capacity and increased level of service demands, service providers are expanding their current infrastructure and are implementing new wireless technologies.

The Broadband Wireless Market.    The broadband wireless market includes higher frequency fixed wireless applications, such as point-to-multipoint fixed wireless access systems, point-to-point microwave radio systems, wireless fidelity (“WiFi”) and very small aperture terminals systems. Consumers around the world are using the Internet for an ever-increasing range of purposes, including email, high quality audio, streaming video and other multimedia services. This increased usage requires an expanded capacity for the quick and reliable transmission of voice, video and data, which can be accomplished through broadband access. Furthermore, new fixed wireless access broadband technology can provide quality of service comparable to the best land line network alternatives at speeds that are significantly faster than conventional copper wire-based networks. Fixed wireless access broadband technology is designed to be integrated with the existing network backbone to address the last mile bottleneck problem. In addition, certain types of fixed wireless access broadband technology provide an alternative for selective network backbone applications. Broadband wireless systems include point-to-point, point-to-multipoint and satellite-to-multipoint broadband technologies.

The Generic Components Market.    The generic components segment includes the sale of single function components across all market segments, whereas the other segments focus on integrated solutions.

Defense & Space Segment

The Defense and Space segment addresses a broad spectrum of RF and microwave products for systems integrated by prime contractors in military and space applications. These products range from critical components and integrated modules to advanced integrated microwave assemblies for radar, missiles, electronic warfare and communication/navigation systems.

PRODUCTS

Commercial Segment Products

We provide our products to worldwide OEMs and service providers. These products include tower mounted amplifiers and boosters, high power and low noise amplifiers, integrated filtering and combining systems, coverage distribution (distributed antenna) systems, antennas, filters, transceivers, radio outdoor units and fixed wireless access systems.

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Mobile Wireless.    We provide a full range of RF products and system solutions for use in cellular, TDMA, GSM, CDMA, PCS, PCN, EDGE and UMTS infrastructure networks. Our product lines include filter products, antenna line products and amplifier products and subsystems. Our products are designed to improve the capacity, coverage, efficiency, quality and reliability of today’s mobile infrastructure equipment networks.

Broadband Wireless.    We provide a full range of microwave products and system solutions for point-to-point and point-to-multi-point microwave radio, fixed wireless access and very small aperture terminal wireless network systems.

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Components.    We provide a broad selection of single function components including power dividers, filters, amplifiers, mixers and oscillators to external customers in a number of niche markets that are complimentary to our core markets

Defense & Space Products

We provide RF and microwave products for electronic warfare, radar and communication systems for the defense market. We design, build and integrate these products and their microwave functionality into integrated subsystems for defense programs that we believe have the highest probability of follow-on production. Our products are integrated into various defense tactical aircraft, satellites, missile systems and smart weapons that comprise the majority of high priority platforms of our customers. These RF and microwave systems, subsystems and integrated components are comprised of specialized combinations of components that perform a variety of microwave functions that include filters, couplers, power divider switches, amplifiers, voltage controlled oscillators, mixers and multipliers. Defense industry programs for which we provide subsystems and integrated components include the following:

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MANUFACTURING

Commercial

The Commercial segment has the ability to manufacture microwave products in high-volume, including test and critical hybrid circuits. Our manufacturing is organized into three main activities: volume manufacturing, new product introduction and manufacturing support. Volume manufacturing includes those sites that specialize in building our custom designs and those that have expertise in building to customer designs. Our volume manufacturing capabilities are located in several locations:

As part of our corporate strategy to globally manufacture in cost competitive locations that meet our customer’s needs, we commit significant resources to the development of and standardization to best-in-class processes and procedures. These manufacturing standards are developed in close coordination with our plants and our design groups. This allows our engineers to develop highly integrated products using a variety of packaging technologies and our manufacturing facilities to build those products using the most efficient and effective techniques. Additionally, we aggressively pursue automation of key assembly and test processes in order to build on our competitive advantages.

All of our Commercial segment factories and major design centers have been certified to ISO-9001 or ISO-9002, as appropriate.

Defense & Space

The Defense & Space segment conducts its manufacturing activities at three major sites in North America. The primary manufacturing facility is located in San Diego, California. This facility includes design engineering, program management, manufacturing engineering, quality, supply chain management, and other support functions for the U.S. based portion of this business.

The San Diego facility has been recently upgraded and includes a new plant layout to maximize design and manufacturing operational efficiency in accordance with lean manufacturing principles.

REMEC Mexico, SA de CV, located in Tijuana, Mexico, serves as a low-cost manufacturing facility that augments the high production activities of our San Diego site. The close proximity to our San Diego location enables a full range of timely, technical support for our high-volume manufacturing activities. Both locations have well-recognized quality certifications (San Diego to ISO-9001 and Tijuana to ISO-9002). The San Diego location also maintains a MIL-PRF-38534 certification status for manufacturing microwave hybrid assemblies. On-site manufacturing capabilities include:

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Nanowave Technologies, Inc., our majority-owned subsidiary, has the same manufacturing capabilities as our San Diego facility and, in addition, includes a thin film processing capability. The facility is located in Toronto, Canada, and is currently pursuing ISO 9001 certification with a target date for completion in 2003. As a stand-alone operation, this site is supported by research and engineering, manufacturing engineering, quality, supply chain management, and other administrative support functions.

SUPPLY CHAIN

Our products are manufactured from both standard components and parts that are built to specifications by other manufacturers. Our most significant raw materials are aluminum, ceramics and liquid nitrogen. While there have been some shortages in components and other materials, we have generally been able to obtain materials and components from a variety of sources to meet our needs. We develop and maintain alternative sources for essential materials and components. We do not have a concentration of sources of supply materials, labor or services that, if suddenly eliminated, would severely impact our operations.

CUSTOMERS

REMEC derives significant revenues from a limited group of customers. For the fiscal year ended January 31, 2003, our top ten customers comprised approximately 63% of revenues, compared to 60% in 2002 and 70% in 2001. For fiscal year 2003, only one customer accounted for more than 10% of total fiscal revenues. Nokia Telecommunications Company accounted for approximately 16%. We anticipate that we will continue to derive significant revenues from sales to a relatively small group of customers. Our revenues would be significantly reduced if any of these customers cancel, reduce or delay orders or product shipments on account of their manufacturing or supply difficulties, financial difficulties or reduction in demand for their systems and products or otherwise.

We sell our commercial wireless communications products primarily to OEMs, which in turn integrate our products into wireless infrastructure equipment solutions sold to network service providers. In addition, we also sell certain niche products directly to network service providers.

We sell RF and microwave equipment to major U.S. defense prime contractors for integration into larger systems, primarily radar electronic warfare, communications and navigation. Our customers for defense products include BAE Systems PLC, Northrop Grumman Corporation and Raytheon Company.

SALES AND MARKETING

REMEC uses a team-based sales approach to facilitate close management of relationships at multiple levels of a customer’s organization, including management, engineering and purchasing personnel. Our integrated sales approach involves a team consisting of a senior executive, a business development specialist, members of our engineering department and local sales representation. Our executive officers are also involved in all aspects of our relationships with our major customers and work closely with their senior management. To identify sales opportunities, we primarily utilize a direct sales force supplemented by a group of manufacturer sales representatives.

We are expanding our international sales presence with direct sales offices in Europe and Asia. Sales to customers residing outside of the U.S. represented 34%, 24% and 27% of net sales in fiscal years ended January 31, 2003, 2002 and 2001, respectively. Our international sales figures do not include products sold to foreign end users by our domestic customers.

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A summary of our domestic and international net revenue and net property, plant and equipment is set forth in Note 8 to the Consolidated Financial Statements appearing elsewhere in this Form 10-K, which is incorporated herein by reference.

BACKLOG

Our backlog, calculated as the aggregate of the sales price of orders received from customers less revenue recognized, was approximately $132.0 million on both January 31, 2003 and January 31, 2002. Approximately $38.6 million of the January 31, 2003 backlog and approximately $49.1 million of the January 31, 2002 backlog, respectively, was for the Commercial segment.

Product orders in our backlog are frequently subject to changes in delivery schedules or to cancellation at the option of the purchaser without significant penalty. While we regularly review our backlog of orders to ensure that it adequately reflects product orders expected to be shipped within a one-year period, we cannot offer any assurance that such orders will actually be shipped or that such orders will not be cancelled in the future. We make regular adjustments to our backlog as customer delivery schedules change and in response to changes in our production schedule. Accordingly, backlog as of any particular date should not be considered a reliable indicator of sales for any future period and our revenues in any given period may depend substantially on orders booked in that period.

COMPETITION

The markets for our products are extremely competitive and are characterized by rapid technological change, new product development, product obsolescence and evolving industry standards. In addition, price competition is intense and the market prices and margins of our products decline as competitors begin making similar products. We face some competition from component manufacturers who have integration capabilities, but we believe that our primary competition is from the captive manufacturing operations of large wireless communications OEMs, including all of the major telecommunications equipment providers, and defense prime contractors. We believe that our future success depends largely upon the extent to which these OEMs and defense prime contractors elect to purchase subsystems and integrated components from outside sources such as us. OEMs and defense prime contractors could develop greater internal capabilities and manufacture these products exclusively in-house, rather than outsourcing them, which would have a negative impact on our sales.

RESEARCH AND DEVELOPMENT

Our core competencies, including our emphasis on concurrent engineering, rely heavily on our research and development capabilities. These capabilities, including our breadth of engineering skills, have allowed us to develop products that operate at the full range of existing frequencies used in commercial wireless communications. Research and development expenses for the fiscal years ended January 31, 2003, 2002 and 2001 were approximately $34.6 million, $34.3 million and $19.0 million, respectively. We expect that as our commercial business expands, research and development expenses will increase in amount and as a percentage of sales.

Our research and development efforts in the defense industry are conducted in direct response to the unique requirements of a customer’s order and, accordingly, are included in cost of sales and the related funding in net sales. We believe that to remain a technology leader in the future we will need to invest significant financial resources in research and development. The results of the programs continue to enhance and add to our already impressive integration capability.

INTELLECTUAL PROPERTY

REMEC currently has more than sixty patents and approximately twenty-six patents pending. These patents include technologies for improving performance and reducing the cost of power amplifiers, multimode intelligent

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components, filters, transceivers, and microwave communications systems. We believe these patents provide a competitive advantage and are important to our success as a supplier of RF and microwave equipment supplier. Our intellectual property also includes a variety of trade secrets and technology licenses.

In order to protect our intellectual property rights, we rely on a documented intellectual property protection process that includes patents, trade secrets, copyrights and trademarks and employee and third party nondisclosure agreements. We also limit access to and distribution of proprietary information. The steps that we have taken to protect our intellectual property rights may not be adequate to prevent misappropriation of our technology or to preclude competitors from independently developing similar technology. Furthermore, in the future, third parties may assert infringement claims against us or with respect to our products. As to some of our products, we have agreed to indemnify our customers against possible claims by third parties that the products infringe their intellectual property rights. Asserting our rights or defending against third party claims could involve substantial costs and diversion of resources. If a third party was successful in a claim that one of our products infringed that third party’s proprietary rights, we may have to pay substantial royalties or damages or remove that product from the marketplace. We might also have to expend substantial financial and engineering resources in order to modify the product so that it would no longer infringe on those proprietary rights.

GOVERNMENT REGULATIONS

Our products are incorporated into commercial wireless communications systems that are subject to regulation domestically by the FCC and internationally by other government agencies. Although the equipment operators and not us are usually responsible for compliance with these regulations, regulatory changes, including changes in the allocation of available frequency spectrum, could negatively affect our business by restricting development efforts by our customers, making current products obsolete or increasing the opportunity for additional competition. In addition, the increasing demand for wireless telecommunications has exerted pressure on regulatory bodies worldwide to adopt new standards for these products, generally following extensive investigation of and deliberation over competing technologies. The delays inherent in this governmental approval process have in the past caused and may in the future cause the cancellation, postponement or rescheduling of the installation of communications systems by our customers.

We are also subject to a variety of local, state, federal and foreign governmental regulations relating to the storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances used to manufacture our products. The failure to comply with current or future regulations could result in the imposition of substantial fines on us, suspension of production, alteration of our manufacturing processes or cessation of operations.

Because of our participation in the defense industry, we are subject to audit from time to time of our compliance with government regulations by various agencies, including the Defense Contract Audit Agency, the Defense Security Service, the Office of Federal Contract Compliance Programs and the Defense Supply Center Columbus. These and other governmental agencies may also, from time to time, conduct inquiries or investigations that may cover a broad range of our business activity. Responding to any governmental audits, inquiries or investigations may involve significant expense and divert management attention. Also, an adverse finding in any such audit, inquiry or investigation could involve penalties.

We believe that we operate our business in material compliance with applicable government regulations.

EMPLOYEES

As of January 31, 2003, we had a total of 3,278 employees, including 2,063 in manufacturing and operations, 553 in research, development and engineering, 132 in quality assurance, 104 in sales and marketing, and 426 in administration and material procurement. We believe our future performance will depend in large part on our ability to attract and retain highly skilled employees.

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