UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended March 31, 2005
Or

For the transition period from            to

Radyne ComStream Inc.

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

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

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

     The number of shares of the registrant’s common stock, which were outstanding as of the close of business on April 25, 2005 was 16,638,549.

Table of Contents

Part I
FINANCIAL INFORMATION

Item 1. Financial Statements.

Radyne ComStream Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share data)

See Notes to Condensed Consolidated Financial Statements

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See Notes to Condensed Consolidated Financial Statements

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Radyne ComStream Inc.
Condensed Consolidated Statements of Cash Flows
Unaudited
(in thousands)

See Notes to Condensed Consolidated Financial Statements

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Radyne ComStream Inc.
Notes to Condensed Consolidated Financial Statements
(Information for March 31, 2005 and 2004 is Unaudited)

(1)	Basis of Presentation
	The unaudited condensed consolidated financial statements of Radyne ComStream Inc. (the “Company”) for the three months ended March 31, 2005 and 2004 have been prepared in accordance with accounting principles generally accepted in the United States of America and the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements contain all adjustments necessary, all of which are of a normal recurring nature, to present fairly the Company’s financial position, results of operations and cash flows. Interim results are not necessarily indicative of results for a full year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.
	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.
	Certain reclassifications have been made to the prior years condensed consolidated financial statements to conform to the current year presentation.
(2)	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 and earnings per share would have been reduced to the pro forma amounts indicated below:

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The fair value of options granted was estimated on the date of grant with vesting periods ranging from one to three years using the Black-Scholes option-pricing model with the following weighted average assumptions used: no dividend yield, expected volatility of 58 percent — 80 percent, risk free interest rate of 3.5 percent — 3.75 percent and an expected life of three to five years. The per share weighted average fair value of stock options granted for the three months ended March 31, 2005 and 2004 were $3.84 and $5.86, respectively using the Black-Scholes option-pricing model and the assumptions listed above. The pretax value of the fair value of the stock options for the three months period ended March 31, 2005 and March 31, 2004 were both $345,000. The after tax amounts differ mainly due to the change in effective tax rates as further discussed in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

(3)	Earnings Per Share
	A reconciliation of the numerators and the denominators of the basic and diluted per share computations and a description and amount of potentially dilutive securities follows:

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(4)	Inventories

     Inventories consist of the following:

(5)	Property and Equipment

     Property and equipment consist of the following:

(6)	Accrued Expenses

     Accrued expenses consist of the following:

     Lease exit costs of $67,000, relating to restructuring liabilities, were paid in full in February 2005.

(7)	Common Stock
	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 March 31, 2005, 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. There have been no shares purchased under the program for the first quarter of 2005.
(8)	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 $2.7 million 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. The warrants were issued as part of our 2000 secondary offering and were redeemable at $8.75 per share.

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(9)	Concentrations of Risk
	The Company had one customer which comprised 13.6% of total accounts receivable at March 31, 2005 compared to 10.0% at December 31, 2004. The customer who owed the largest amount at March 31, 2005 is the same customer who owed the largest amount at December 31, 2004.
(10)	Acquisition
	On March 3, 2005, the Company announced that it intended to acquire Xicom Technology Inc. for approximately $41 million of cash and stock. The transaction has been approved by the Board of Directors of both companies and is expected to close during the second quarter of 2005. Closing is subject to completion of a satisfactory pre-closing audit, receipt and approval of complete disclosure schedules, and customary closing conditions.

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

     For a description of the Company’s significant accounting policies and an understanding of the significant factors that influenced the Company’s performance during the three months ended March 31, 2005 and 2004, this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) should be read in conjunction with the Condensed Consolidated Financial Statements, including the related notes, appearing in Item 1 of this Report as well as the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

     Except for the historical information contained herein, the following discussion includes statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”) and the Company 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;
•	other “Risk Factors” set forth are in Exhibit 99.1, which is an exhibit to the 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 generally affect our business, results of operations and financial position.

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

     A copy of the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are available, free of charge, through our website found at www.radn.com in the Investor Info section, as soon as reasonably practical after such material is electronically filed with the Securities and Exchange Commission (the “Commission”).

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Overview

     Radyne ComStream Inc. operates primarily in North America in the satellite communications industry. The Company is headquartered in Phoenix, Arizona with manufacturing facilities in both Phoenix and San Diego, California. Additionally, sales offices are located 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, Bangalore, Shanghai and Moscow. The Company employs 168 employees throughout the USA, Europe and Asia.

     The Company designs, manufactures, integrates, installs and sells equipment used in the ground-based portion of satellite communication systems to receive and transmit data, video, audio and Internet over satellite, microwave and cable communications networks. The 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.

     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. Through its Tiernan Communications, Inc. subsidiary, the Company supplies high-definition television (HDTV) and standard definition television encoding and transmission equipment. Its Armer Engineering Services, Inc. subsidiary provides solutions for the integration and installation of turnkey communications systems. Through its network of international offices and service centers, the Company serves 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. The Company sells and distributes its products under the Radyne, Radyne ComStream and Tiernan brands.

     On March 2, 2005 the Company entered into a definitive merger agreement to acquire Xicom Technology Inc. (“Xicom”). The transaction has been approved by the Board of Directors of both companies and is expected to close within the next 30 days. Closing is subject to completion of a satisfactory pre-closing audit, receipt and approval of complete disclosure schedules, and customary closing conditions. Xicom is a leading provider of satellite and microwave power amplifiers and other RF products. 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. The combination of Xicom’s amplifier products and RF technologies with Radyne ComStream’s line of satellite modems and other satellite communications equipment will make the Company a full line supplier of satellite electronic systems. Xicom has manufacturing facilities in Santa Clara, California and a sales office in the United Kingdom.

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

     The following were some of the highlights and recent developments for the three months ended March 31, 2005:

	•	Net earnings for the first three months were $0.08 per fully diluted share compared to net earnings of $0.18 for the first three months of 2004. The decreased profitability resulted primarily from a drop in net sales ($13.7 million in 2005 compared to $15.1 million in 2004), an increase in total operating expense ($5.2 million in 2005 compared to $4.7 million in 2004) and increase in the Company’s tax rate from 6.5% to 33.6%.
	•	Orders received (bookings) during the first three months of 2005 increased 19% over the equivalent period of 2004 ($13.5 million in 2005 compared to $11.3 million in 2004).

Additional information on these and other operating results are described in greater detail below.

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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:

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

     Total research and development expenses increased 16% during first quarter of 2005 from the first quarter of 2004. This was due almost entirely to an increase in new product development for the first quarter of 2005. Management believes that these new products fit our previously stated strategy to invest in the Company’s future through research efforts that will result in new sales and returns to the company well in excess of the current development expense.

     Income Taxes. Income tax expense consists of amounts recognized as payable to the federal government and states in which the Company does business.