##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K


FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

|    |  |                                                                                                                      
|--- |  | ---------------------------------------------------------------------------------------------------------------------
|[X] |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

OR

|     |  |                                                                                                                                  
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------
|[  ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM        TO

Commission file number 000-21770

SIGNAL TECHNOLOGY CORPORATION

(Exact Name Of Registrant As Specified In Its Charter)


|                                                                         |  |                                                
|------------------------------------------------------------------------ |  | -----------------------------------------------
|Delaware
(State Or Other Jurisdiction Of
Incorporation Or Organization)  |  | 04-2758268
(I.R.S. Employer Identification No.)
|                                                                         |  |                                                
|222 Rosewood Drive, Danvers, MA
(Address of principal executive offices) |  | 01923-450
(Zip Code)                           

Registrants telephone number, including area code: (978) 774-2281

Securities registered pursuant to Section 12(b) of the Act:
None

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

Common Stock, par value $0.01 per share

(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 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: x No:o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.x

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

On June 28, 2002, the last business day of the Registrants most recently
completed second fiscal quarter, there were 10,000,969 shares of the
Registrants Common Stock outstanding and the aggregate market value of such
shares held by non-affiliates of the Registrant, based on the closing sale
price of such shares on the Nasdaq National Market on June 28, 2002, was
approximately $93,909,099. Shares of Common Stock held by each executive
officer and director and by each person who beneficially owns more than 5% or
more of the outstanding Common Stock have been excluded in that such persons
may under certain circumstances be deemed to be affiliates. This determination
of executive officer or affiliate status is not necessarily a conclusive
determination for other purposes.

On March 21, 2003, there were 10,752,288 shares of the Registrants Common
Stock issued and outstanding.

Documents Incorporated By Reference

Part III incorporates information by reference from the definitive Proxy
Statement in connection with the Registrants Annual Meeting of Shareholders to
be held on May 28, 2003. Certain exhibits are incorporated by reference from
the Registrants Registration Statement on Form S-1, as amended (File No.
33-61124) and Form 8-K dated November 24, 1993.





---

TABLE OF CONTENTS



|                                           |                                                                                               |  |  |  |  |  |  | 
|------------------------------------------ | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                    
|                                           | Item 1. Business                                                                             
|                                           | Item 2. Properties                                                                           
|                                           | Item 3. Legal Proceedings                                                                    
|                                           | Item 4. Submission of Matters to a Vote of Security Holders                                  
|Part II                                   
|                                           | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|                                           | Item 6. Selected Consolidated Financial Data                                                 
|                                           | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                           | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|                                           | Item 8. Financial Statements and Supplementary Data                                          
|                                           | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|Part III                                  
|                                           | Item 10. Directors and Executive Officers of the Registrant                                  
|                                           | Item 11. Executive Compensation                                                              
|                                           | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                                           | Item 13. Certain Relationships and Related Transactions                                      
|Part IV                                   
|                                           | Item 14. Controls and Procedures                                                             
|                                           | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|SIGNATURES                                
|EX-10.10 CREDIT AND SECURITY AGREEMENT    
|EX-21.1 SUBSIDIARIES                      
|EX-23.1 CONSENT OF INDEPENDENT ACCOUNTANTS
|EX-99.1 CERTIFICATION OF CEO              
|EX-99.2 CETIFICATION OF CFO               



---



##### Table of Contents



Signal Technology Corporation and Subsidiary

INDEX TO ANNUAL REPORT ON FORM 10-K

|           |  |                                                                                       |  |   
|---------- |  | ------------------------------------------------------------------------------------- |  | --
|PART I     |  |                                                                                       |  | 3 
|Item 1.    |  | Business                                                                              |  | 3 
|Item 2.    |  | Properties                                                                            |  | 7 
|Item 3.    |  | Legal Proceedings                                                                     |  | 8 
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                   |  | 9 
|PART II    |  |                                                                                       |  | 10
|Item 5.    |  | Market for Registrants Common Equity and Related Stockholder Matters                 |  | 10
|Item 6.    |  | Selected Consolidated Financial Data                                                  |  | 11
|Item 7.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 12
|Item 7A.   |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 18
|Item 8.    |  | Financial Statements and Supplementary Data                                           |  | 19
|Item 9.    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 41
|PART III   |  |                                                                                       |  | 42
|Item 10.   |  | Directors and Executive Officers of the Registrant                                    |  | 42
|Item 11.   |  | Executive Compensation                                                                |  | 42
|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 42
|Item 13.   |  | Certain Relationships and Related Transactions                                        |  | 42
|PART IV    |  |                                                                                       |  | 42
|Item 14.   |  | Controls and Procedures                                                               |  | 42
|Item 15.   |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       |  | 43
|SIGNATURES |  |                                                                                       |  | 45

2



---



##### Table of Contents






PART I




Item 1. Business

General

Signal Technology Corporation (the Company or Signal) designs,
manufactures, and markets power management products and sophisticated
electronic radio frequency (RF) components and subsystems, as well as provides
the program management and systems integration for wireless networks of
sensors. The Companys products and systems are used in defense applications
and certain space applications. Signals defense electronics experience
includes over 20 years of proven expertise, providing state-of-the-art RF
components and power management systems to the United States government,
defense and aerospace prime contractors, and international customers. The
Companys products are often integrated into complex electronic systems and
subsystems that require precision control, management and generation of radio,
microwave and millimeter-wave frequencies and electrical currents. Current
product lines and markets served are summarized below:



| |  |  | Microwave components and subsystems for defense, space and
communications applications are largely produced in the Arizona and
California operations. Signals high-quality, reliable microwave
components and subsystems are used to send, receive and redirect data,
voice and video transmissions at extremely high frequencies and include
state-of-the-art oscillators, amplifiers, and advanced integrated
assemblies. Signal has earned positions on a significant number of
major United States and foreign defense platforms and systems, satellite
and aerospace programs.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Power management, conditioning and control products and amplifiers
are designed and manufactured at the Keltec operation. Keltec produces
a wide variety of power management components to meet the specialized
needs of customers in the defense and aerospace industries. Keltec has
become a valuable partner for organizations seeking cost-effective
customized power management components, due to Keltecs unique
combination of manufacturing process, technological innovation and
rugged design.                                                                          
|
| |  |  | Signals Olektron operation designs and manufactures passive and
active RF components, as well as state-of-the-art crystal oscillators
and filters, and switch matrices. Olektron produces active RF
components in both standard and customized designs for handling a
variety of signal processing functions, including attenuators,
discriminators, logarithmic amplifiers, modulators and switches.                                                                                                                                                                              
|
| |  |  | In Texas, the newly created Advanced Integrated Systems Division
(AISD) is leading the design and integration of two significant
Department of Defense (DOD) contracts for wireless networks of sensors
for specific Defense Advanced Research Projects Agency (DARPA) related
applications. This new capability is the result of leveraging Signals
former commercial wireless technology and systems engineering expertise
as a prime contractor with a team of academia and industry on DOD
research contracts.                                                                 

Signals defense electronics technology, manufacturing skill and focus on
quality, along with an ability to leverage wireless technology and capability,
has allowed Signal to expand into the DOD wireless market and to bundle complex
RF microelectronic requirements for defense product solutions, integrating
commercial off the shelf cost effective solutions into military applications.
Signals components and subsystems are used for applications such as radar,
communications, and smart weapons and contain technology to receive, transmit
and process wireless data signals. The wireless networks of sensors are used
for specific information gathering applications in support of definitive
military and defense needs. The expertise developed in wireless communications
has been leveraged into a new market area referred to as netted sensor systems
for homeland security and defense applications. At the newly formed AISD,
Signal is providing system design and integration expertise and leading a team
of industry and university partners for two DOD development contracts, as well
as positioning to pursue and capture additional opportunities in this evolving
Homeland Security marketplace.

Signals current lines of business are as follows:



| |  |  | Electronic Warfare and RadarSignal continues to be a leading
supplier of sophisticated, state-of-the-art electronic components and
systems for aircraft and shipboard EW and radar platforms, ground based
radars, electronic countermeasures (ECM), and electronic intelligence
(ELINT). Key programs in ECM include the ALQ-99, ALQ-131, ALQ-135,
ALQ-156, ALQ-165 (ASPJ), ALQ-172, ALQ-184, ALQ-211 (SIRFC), IDECM,
APR-48A (RFIS), APR-39, ALR-66/67 and Salamander. Radar programs
include ARINE, GRIFO, SLQ-32 and a number of active electronically
scanned array (AESA) programs.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Missiles and Precision GuidanceSignal supplies products on key
missile programs such as the AMRAAM, HARM, HARPOON, Tomahawk, Sparrow,
Standard Missile (SM), Patriot and PAC-3 missile systems. These
products support a significant number of US, as well as foreign allied
defense systems.                                                                                                                                                                                                                                                                                            

3



---



##### Table of Contents





| |  |  | Intelligence, Surveillance and Reconnaissance (ISR)Signal provides
products and systems for ISR requirements, including spacecraft and
launch vehicles. Principal space applications include satellite
communications, intelligence, surveillance and sensing. Signal designs,
develops and manufactures frequency components such as isolators,
circulators, oscillators and power components. Signals products are
used in satellite-based communication systems such as Milstar II, Beam
Link, Globalstar, Tempo, GPS (Global Positioning System), SBIRS (Space
Based Infrared Sensor), Hessi (currently High Energy Solar Spectroscopic Imager),
N.E.A.R. (Near Earth Asteroid Rendezvous) and others. Signals AISD
operation in Texas currently focuses on two contracts, Chameleon and Micro Sensor
Systems for force protection, asset protection, perimeter and border
security and information gathering. The technologies that AISD is
employing will potentially improve the cost effectiveness of the state
of the art unattended ground sensors by orders of magnitudes.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Available Information

Signal was incorporated in 1982 in
Delaware. The Companys principal executive office is located at
222 Rosewood Drive, Danvers, MA 01923, and its telephone
number at this location is (979) 774-2281. Signals
Internet website address is www.sigtech.com. The Companys annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and amendments to such reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act are
available, free of charge, on Signals Internet website under
Corporate InformationSEC Filings, as soon as
reasonably practicable after we electronically file such material
with, or furnish it to, the United States Securities and Exchange
Commission, or SEC. Information on Signals website does not constitute a
part of this Annual Report on Form 10-K.

Structure and Organization

During 2002, Signal completed its plan to sell its commercial fixed wireless
and mobile appliance businesses in response to the global weakness in
telecommunication spending. Also in 2002, as described above, the Company
formed AISD which focuses on defense and homeland security wireless unmanned
sensor systems.

As Signal begins 2003, the Company has five operating divisions engaged in the
development, manufacturing and marketing of electronic components and
subsystems. The operating divisions, referred to as Arizona, California,
Keltec, Olektron and AISD, report their operations within five segments:
Microwave Components & Subsystems  Arizona, Microwave Components & Subsystems
- California, Power Management Products (Keltec), Radio Frequency (RF)
Components & Subsystems (Olektron and the former Systems division), and AISD
(Signals new business unit in Texas that focuses on wireless networks of
sensors).

Products and Customers

Signal currently offers a wide range of products to serve the defense
electronics and commercial wireless markets. These products are categorized as
follows:

Defense and Other Products

|                                                                                                                                                                                                     |  |                                                                                                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                   
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Products                                                                                                                                                                                             |  | Description                                                                                                                                                                                                                                                                                                 |  | Application                                                                                                                                                                                                       
|                                                                                                                                                                                                     |  |                                                                                                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                   
|RF, microwave and millimeter wave
components including oscillators,
amplifiers, switches, filters,
mixers, doublers, discriminators,
detectors, isolators, circulators,
power dividers and combiners |  | Frequency and power
determinate
components that are
the basic building
blocks for RF and
microwave modules
and assemblies.                                                                                                                                                                                  |  | Perform the
elementary
functions such as
isolation,
amplification,
switching,
filtering, signal
detection and
frequency and power
steering and
conversion in
military
Multi-Function
Assemblies.                  
|                                                                                                                                                                                                     |  |                                                                                                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                   
|Frequency Synthesizers and Converters                                                                                                                                                                |  | Assemblies and
their integrated
RF, microwave and
millimeter wave
components, with
associated
electronic control
circuits that
perform frequency
and power
determinate
functions,
conversion,
steering and
control.                                                                                         |  | Perform the
critical frequency
steering,
determination and
conversion
functions used in
military
Multi-Function
Assemblies, or
MFAs, and
subsystems.                                                              
|                                                                                                                                                                                                     |  |                                                                                                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                   
|MFAs and Microwave Integrated
Assemblies, or MIAs                                                                                                                                                    |  | Combine the
function of RF,
microwave and
millimeter wave
components and in
most cases
frequency
synthesizers or
oscillator
assemblies and
converters with
associated control
electronics to
perform a high
level of frequency
determinate
conversion and
control, power
steering and
management
functions. |  | When integrated
with other
MFAs/MIAs, form the
subsystems for
military electronic
applications.
Applications
include Electronic
Warfare, or EW,
Radar, ELINT,
COMINT, IFF,
missile and
communications
systems.    
|                                                                                                                                                                                                     |  |                                                                                                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                   
|Power Supplies and DC/DC, AC/DC,
DC/AC Power Converters                                                                                                                                              |  | Perform the
electronic voltage
and
direct/alternating
current and power
steering,
conversion,
amplification,
filtering and
control function
required to power
all electronics.                                                                                                                              |  | Provides power to
electronic devices,
assemblies,
subassemblies,
subsystems and
systems. All
military airborne,
ground-based,
space-based, and
sea-based, defense
electronics require
these assemblies to
operate.
|                                                                                                                                                                                                     |  |                                                                                                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                   
|TWTA, Traveling Wave Tube Amplifiers                                                                                                                                                                 |  | Integrated power
supply electronics
and microwave power
amplifiers. They
perform the
electronic voltage
and
direct/alternating
current and power
steering,
conversion,
amplification,
filtering and
control function
driving power
amplifiers. These
assemblies provide
the output power
for transmitters.  |  | Many military
airborne,
ground-based,
space-based and
sea-based, defense
electronics require
these types of
assemblies.                                                                                           
|                                                                                                                                                                                                     |  |                                                                                                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                   
|Transmitters                                                                                                                                                                                         |  | Integrated power
supply electronics,
TWTAs, power
amplifiers, MFAs
and RF and
microwave
components. They
perform the
function of
transmitting the
frequency and power
for systems.                                                                                                                          |  | Military airborne,
ground-based,
space-based and
sea-based, defense
electronics require
use of these
assemblies.                                                                                                  
|                                                                                                                                                                                                     |  |                                                                                                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                   
|IF/HF/UHF Matrix Switches and Filters                                                                                                                                                                |  | Integrated signal
switching
components and
assemblies, coupled
with associated
control and
management
electronics. They
perform RF, IF, HF,                                                                                                                                                                 |  | When integrated
with other
MFAs/MIAs, form the
subsystems of
electronic
subsystems and
systems.
Applications
include Secure
Communications,                                                                       

4



---



##### Table of Contents



|         |  |                                                                       |  |                                      
|-------- |  | --------------------------------------------------------------------- |  | -------------------------------------
|Products |  | Description                                                           |  | Application                          
|         |  |                                                                       |  |                                      
|         |  | UHF and microwave multi-path signal frequency
steering and filtering. |  | COMINT, EW, Radar, and ELINT systems.

Customers

Signal offers defense electronics
equipment to the United States DOD and to major defense prime contractors for integration into larger
systems. Some of Signals customers for defense electronics equipment include
the following:

|          |  |                                                 |  |         |  |                                              
|--------- |  | ----------------------------------------------- |  | ------- |  | ---------------------------------------------
|



 |  | BAE Systems
Boeing
DMEA
General Dynamics
Harris |  | 


 |  | ITT
Lockheed Martin
Northrop Grumman
Raytheon

Signals principal defense customers are prime contractors and military
agencies of the United States government and certain foreign countries. With
the exception of Raytheon, which accounted for 23%, 16% and 21% of net sales in
2002, 2001 and 2000, respectively, and BAE Systems which accounted for 11% of
net sales in 2002, Signal believes that the loss of any other single customer
would not have a material adverse effect on sales.

The following table displays net sales by business segment for years ending
December 31:

|                                               |  |      |        |      |  |      |        |  |  |   |        | 
|---------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|(dollars in thousands)                         |  | 2002 |        | 2001 |  | 2000
|                                               |  |      |        |      |  |     
|Microwave Components & Subsystems  Arizona    |  | $    | 17,447 |      |  | $    | 15,114 |  |  | $ | 14,975 | 
|Microwave Components & Subsystems  California |  |      | 19,738 |      |  |      | 19,071 |  |  |   | 20,085 | 
|Power Management Products                      |  |      | 29,099 |      |  |      | 28,463 |  |  |   | 27,930 | 
|RF Components & Subsystems                     |  |      | 17,514 |      |  |      | 16,659 |  |  |   | 18,163 | 
|AISD                                           |  |      | 2,887  |      |  |      |       |  |  |   |       | 
|                                               |  |      |        |      |  |      |        |  |  |   |        | 
|Total                                          |  | $    | 86,685 |      |  | $    | 79,307 |  |  | $ | 81,153 | 
|                                               |  |      |        |      |  |      |        |  |  |   |        | 

For selected financial data by business segment see (Segment Information)
Note 15 to the consolidated financial statements.

The following table displays information concerning net sales of products to
categories of customers and geographic markets. The net sales information
includes direct sales to the customer or market and indirect sales to prime
contractors selling to the customer or market.

|                       |              |   |        |        |      |  |                          |    |   |   |        |        |  |  |     |    |   |   |        |        |  |  |     |    |  
|---------------------- | ------------ | - | ------ | ------ | ---- |  | ------------------------ | -- | - | - | ------ | ------ |  |  | --- | -- | - | - | ------ | ------ |  |  | --- | -- | -
|                       |              |   |        |        |      |  | Years Ended December 31, |    |   |   |        |        |  |  |    
|                       |              |   |       
|                       |              |   | 2002   |        | 2001 |  | 2000                    
|                       |              |   |        |        |      |  |                         
|(dollars in thousands) |              |   | $      |        | %    |  | $                        | %  |   | $ |        | %     
|                       |              |   |        |        |      |  |                          |    |   |   |        |        |  |  |     |    |   |   |        |        |  |  |     |   
|U.S. Government        |              |   |        |        |      |  |                          |    |   |   |        |        |  |  |     |    |   |   |        |        |  |  |     |   
|                       | Military     |   | $      | 62,929 |      |  |                          | 73 | % |   | $      | 50,749 |  |  |     | 64 | % |   | $      | 53,386 |  |  |     | 66 | %
|                       | Non-Military |   |        | 2,887  |      |  |                          | 3  |   |   |        | 1,499  |  |  |     | 2  |   |   |        | 843    |  |  |     | 1  |  
|U.S. Commercial        |              |   | 4,082  |        |      |  | 5                        |    |   |   | 8,321  |        |  |  | 10  |    |   |   | 5,127  |        |  |  | 6   |   
|International          |              |   |        |        |      |  |                          |    |   |   |        |        |  |  |     |    |   |   |        |        |  |  |     |   
|                       | Military     |   |        | 14,747 |      |  |                          | 17 |   |   |        | 15,761 |  |  |     | 20 |   |   |        | 18,217 |  |  |     | 23 |  
|                       | Commercial   |   |        | 2,040  |      |  |                          | 2  |   |   |        | 2,977  |  |  |     | 4  |   |   |        | 3,580  |  |  |     | 4  |  
|                       |              |   |        |        |      |  |                          |    |   |   |        |        |  |  |     |    |   |   |        |        |  |  |     |   
|Total                  |              | $ | 86,685 |        |      |  | 100                      | %  |   | $ | 79,307 |        |  |  | 100 | %  |   | $ | 81,153 |        |  |  | 100 | % 
|                       |              |   |        |        |      |  |                          |    |   |   |        |        |  |  |     |    |   |   |        |        |  |  |     |   

Government Contracts

A substantial portion of Signals business is conducted under United States
government contracts and subcontracts. These contracts are either
competitively bid or sole source contracts. Competitively bid contracts are
awarded after a formal bid and proposal competition among suppliers. Sole
source contracts are awarded when a single contractor is deemed to have an
expertise or technology that is superior to that of competing contractors.

Except for AISD, virtually all of the United States government contracts and
subcontracts are fixed price contracts, pursuant to which the Company agrees to
develop a product or to manufacture a product for a fixed price and assume the
risk of any cost overrun. The majority of the Companys net sales are derived
from fixed price manufacturing contracts. Based on historical experience, the
Company believes that the risk of a cost overrun is lower on fixed price
manufacturing contracts than it is on fixed price development contracts.

5



---



##### Table of Contents



Sales and Marketing

Signal markets its products worldwide through its own domestic sales force and
a network of specialized independent sales representatives and distributors.
The sales force is comprised of divisional marketing vice presidents, regional
sales managers, sales personnel and support staff.

Sales managers are responsible for coordinating the independent sales
representatives and have extensive knowledge of government and commercial
programs within their respective regions. They also advise the engineering,
manufacturing and management personnel of anticipated trends and customer
requirements.

The key to the Companys sales and marketing strategy is to develop long-term
relationships with its customers and to have its products designed into
customers systems. This is achieved by regular communications and meetings
between the Companys personnel at all levels and their counterparts in the
customers organization. The Company actively seeks to form strategic
alliances with customers through volume purchase agreements.

Product Engineering and Manufacturing

Signal believes that a principal core competency is the quality of its product
design, engineering, manufacturing and testing capabilities. These
capabilities enable Signal to design and engineer products that meet or exceed
customers demanding specifications for performance and reliability and to
manufacture products at competitive prices.

Since Signals founding in 1982, the Company has been manufacturing products
for the defense industry. As a supplier to the defense industry, the Company
is subject to rigorous specifications. Signal adheres closely to the
principles of total quality management.

Signal maintains engineering product design and related support systems at each
of its operating facilities.

Sources of Raw Materials

Signal attempts to utilize standard parts and components that are available
from multiple vendors. However, certain components used in products are
available from only single sources, and other components are available from
only a limited number of sources. Despite the risks associated with purchasing
components from single sources or from a limited number of sources, Signal has
made the strategic decision to select single source or limited source suppliers
in order to obtain higher quality parts and components and lower pricing, and
to receive more timely delivery and maintain quality control.

Inflation and Costs

The cost of the Companys products is influenced by the cost of a wide variety
of raw materials from several suppliers. In the past, increases in the cost of
raw materials, labor and services have been offset by price increases,
productivity improvements and cost saving programs. There can be no assurance,
however, that the Company will be able to similarly offset such cost increases
in the future.

Research and Development

Continuing investments in research and development are critical to Signals
ongoing product evolution and market position. Signal places strong emphasis
on R&D that improves its existing products and technologies, as well as strong
emphasis on R&D for new product offerings that it believes show the greatest
production potential for the next few years. Signal works closely with its
customers to determine the key product attributes and performance
specifications that are demanded by the marketplace and performs R&D activities
in all of its operations with each location focused to capitalize on its
engineering talents and technology portfolios. A key R&D strategy is to form
alliances with companies which possess key technologies to sustain and refresh
Signals product portfolio. A portion of Signals R&D budget will be devoted
to the development of new technology in order to further position the Company
as a technology leader in selected defense opportunities. Signal also retains
certain rights from customer-sponsored development work. Customer-sponsored
research and development projects are funded and included as sales and cost of
sales. The amounts of company-funded and customer-sponsored development work
performed in each of the last three years are as follows:

|                            |  |                          |       |      |  |      |       |  |  |   |       | 
|--------------------------- |  | ------------------------ | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                            |  | Years Ended December 31,
|                            |  |                         
|(dollars in thousands)      |  | 2002                     |       | 2001 |  | 2000
|                            |  |                          |       |      |  |     
|Company-funded              |  | $                        | 1,437 |      |  | $    | 792   |  |  | $ | 592   | 
|Customer-sponsored (funded) |  |                          | 5,658 |      |  |      | 3,727 |  |  |   | 3,731 | 
|                            |  |                          |       |      |  |      |       |  |  |   |       | 
|Total                       |  | $                        | 7,095 |      |  | $    | 4,519 |  |  | $ | 4,323 | 
|                            |  |                          |       |      |  |      |       |  |  |   |       | 

Backlog

The Company had a backlog of $75.9 million at December 31, 2002 and a backlog
of $57.5 million at December 31, 2001. The Company expects to ship the entire
December 31, 2002 backlog within 2003, except for approximately $17.5 million
which will be shipped in later periods.

6



---



##### Table of Contents



Competition

Signal competes in the defense electronics industry, selling to the United
States government and many of its allies. In the defense market, Signals
primary competitors include Filtronics, Herley, M/A-Com and REMEC.

The Company believes competition is based primarily on price, product
performance, reliability and customer support, and competes effectively in all
of these areas. Signals continued success will depend in part on its ability
to develop and introduce innovative, low cost, quality products that meet or
exceed customers specifications.

It is the Companys opinion that Signals technological legacy and financial
strength will make the Company a strong competitor in the defense electronics
market. Some of Signals competitors have greater financial and operating
resources. In addition, certain customers have technological capabilities in
Signals product areas and could choose to manufacture certain products
themselves rather than to purchase from suppliers such as Signal.

Employees

As of December 31, 2002, the Company had 545 full-time employees. No employees
are represented by unions. The Company believes its relationship with its
employees is good.

Intellectual Property

The Company holds patents issued in the United States and certain European
countries. While Signal considers its patents to be of some value, the Company
believes that its technological position depends primarily on the technical
competence and creative ability of its engineering staff in the areas of
product design and manufacturing processes, as well as on closely held
proprietary information. Signal requires its key personnel to execute
confidentiality agreements and relies on a combination of copyrights and
trademarks to protect certain of Signals intellectual property.

Government Regulation

All of Signals operations are subject to compliance with regulatory
requirements of federal, state and municipal authorities, including regulations
concerning employment obligations and affirmative action, workplace safety and
protection of the environment. While compliance with applicable regulations
has not adversely affected Signals operations in the past, there can be no
assurance that Signal will continue to be in compliance in the future or that
these regulations will not change.

In particular, Signal must comply with detailed government procurement and
contracting regulations and with United States government security regulations,
certain of which carry substantial penalty provisions for non-performance or
misrepresentation in the course of negotiations. Failure to comply with
government procurement, contracting or security obligations could result in
penalties or suspension from government contracting, which would have a
material adverse effect on the Companys results of operations.

Signal is required to maintain a United States government facility security
clearance at each of its locations. This clearance could be suspended or
revoked if found not to be in compliance with applicable security regulations.
Any such revocation or suspension would delay delivery of Signals products to
customers. Although Signal has adopted policies directed at ensuring
compliance with applicable regulations and there have been no suspensions or
revocations of any of the Companys facilities, there can be no assurance that
the approved status of Signals facilities will continue without interruption.
United States government regulations require a license for the export of
advanced weapons systems. Changes in the United States government policies
towards the export of these systems may impact Signals international business.




Item 2. Properties

Signals principal executive offices are located in Danvers, Massachusetts.
Principal operating facilities, containing light manufacturing and associated
engineering and support services, are located in five states:



| |  | Arizona
| |  | -------



| |  |  | Signal owns a modern 84,260 square foot building in Chandler.
| | - |  | -------------------------------------------------------------



| |  | California
| |  | ----------



| |  |  | Signal leases a modern 54,280 square foot building in Sunnyvale.                                                                      
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The lease does not include utilities, maintenance and repairs,
insurance and real estate taxes of approximately $9.00 per square
foot.
|
| |  |  | The lease expires in November 2003.                                                                                                   
|
| |  |  | The current annual rent is $727,897.                                                                                                  

7



---



##### Table of Contents





| |  | Florida
| |  | -------



| |  |  | Signal owns a modern 68,000 square foot building in Fort Walton Beach.
| | - |  | ----------------------------------------------------------------------



| |  | Massachusetts
| |  | -------------



| |  |  | Signal owns a modern 40,350 square foot building in Beverly.
| | - |  | ------------------------------------------------------------



| |  | Texas
| |  | -----



| |  |  | Signal leases a modern 4,197 square foot office in Plano.                                         
| | - |  | --------------------------------------------------------------------------------------------------
|
| |  |  | The lease does not include insurance or electricity exceeding $1.75 per square foot.              
|
| |  |  | The lease expires in September 2005.                                                              
|
| |  |  | The current annual rent is $81,842 with an escalation of 2.6% for the last two years of the lease.

The Company believes that its properties are in good operating condition and
repair and considers its facilities to be suitable and adequate for current and
reasonably foreseeable future activities. The Company believes that there is
capacity at its facilities to absorb acquired businesses of a certain size and
product lines and/or internal growth. The properties owned are all subject to
mortgages. During 2001, the Company consolidated the operations that occupied
its Webster, MA building into its Beverly, MA facility and the 25,000 square
foot building the Company owns in Webster, MA is idle and for sale.




Item 3. Legal Proceedings

From time to time, the Company is involved in litigation incidental to its
business. Ongoing legal proceedings include the following:

Weymouth Environmental Contamination:

In April 1996, the Company sold its manufacturing facility in Weymouth, MA but
retained the environmental liability and responsibility associated with
groundwater contaminants present at and associated with the site. This site has
been classified as a Tier 1A disposal site by the Massachusetts Department of
Environmental Protection, or DEP, as a result of past releases of petroleum
based solvents. Environmental assessment reports prepared by independent
consultants indicate that contaminants present in the Town of Weymouth well
field across the street from the facility are similar to those reportedly
released at the site and still present in the groundwater at the site; however,
these reports also indicate that the contaminants do not exceed safe drinking
water levels in the finished water after normal treatment. Other contaminants,
which did not originate at the facility, have also been detected in the well
field.

In accordance with the applicable provisions of the Massachusetts Contingency
Plan, the Company has completed its investigation of the site and has submitted
an evaluation of remedial alternatives to the DEP. The recommended remedial
alternative involves continued operation of the currently operating groundwater
remediation system, with the addition of a supplemental well and wellhead
treatment at Weymouth Winter Street Well No. 2 through an agreement with the
Town of Weymouth. The Company has been informed that no recovery of costs
incurred in the treatment of the groundwater at the facility is possible under
existing insurance arrangements. No agreement with the Town of Weymouth
relative to wellhead treatment has been reached. It is not possible at this
stage of the proceedings to predict whether the DEP will approve the
recommended alternative and, if not, the specific remedial actions, if any,
that it will require.

Sunnyvale Indemnification
Claim:
Eaton Corporation filed a suit against Signal in U.S. District Court, Northern
District of California, alleging that the Company has a contractual duty to
indemnify Eaton Corporation for costs incurred as a result of environmental
contamination and subsequent remediation. The claim is based upon allegations
that the Company assumed certain liabilities when it acquired one of the
divisions of Eaton Corporation in 1989. The indemnification claim was dismissed
at the trial level, but the Ninth Circuit of the U.S. Court of Appeals reversed
this decision and found that Signal does owe Eaton a duty of indemnification.
In December 2000, the decision by a jury was in favor of an indemnification
claim by Eaton and Eaton was awarded a judgment of $4.2 million, related to
environmental liabilities assumed by the Company when it purchased Eatons
Microwave Products division in 1989. On March 7, 2001, the U.S. District Court
ruled on various motions pending before it, including denying our motion for a
new trial and denying certain of Eatons motions. The U.S. District Court
amended the judgment to increase it to an aggregate of $7.0 million and
clarified that Signal is responsible for fifty percent of the reasonable costs
and expenses of remediation. At December 31, 2000, the Company recorded
liabilities of $9.0 million for anticipated costs including the judgment, legal
and consulting fees, site studies, implementation of remediation plans,
post-remediation monitoring and related activities to be performed during the
next 20 years. Cash deposits of $7.0 million were made during the first nine
months of 2001 with the Clerk, United States District Court by order of the
United States District Court for the Northern District of California. Recorded
liabilities have been reduced by the cash deposits described above and are $2.0
million at December 31, 2002. On April 26, 2001, the U.S. District Court denied
Signals motion to reopen the amended judgment and to amend our answer and
counterclaim. The Company appealed the amended judgment on
May 24, 2001. By Order filed November 26, 2002, the United
States Court of Appeals denied Signals Appeal and Eatons
Cross-Appeal. The judgment of the United States District Court was
affirmed. By Order filed January 6, 2003, the United States
Court of Appeals denied Signals Petition for Panel Rehearing
filed on December 10, 2002. On January 27, 2003, the United
States Court of Appeals forwarded a Certified copy of the Decree of
the Court to the United States District Court, reaffirming the order filed and
entered on November 26, 2002.

8



---



##### Table of Contents



SEC Proceedings:

On March 27, 2002, the Securities
and Exchange Commission (the SEC), with the consent of the Company, entered an order requiring
that Signal cease and desist from committing or causing any violations and any future violations of the periodic reporting, record keeping, and internal control provisions of the federal
securities laws set forth in Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities
Exchange Act of 1934 and Rules 12b-20, 13a-1, and 13a-13
promulgated thereunder, related to the SECs completed investigation of
the Companys financial statements for 1996, 1997 and the first
quarter of 1998.

In connection with the above matter, the SEC has filed a civil injunctive action against several former
officers, directors, and employees of the Company. Some of these individuals are seeking reimbursement
or payment of certain costs or damages allegedly incurred as a result of the SEC investigation or
ensuing civil proceeding.

Claims Related to Signal Wireless
Group:
In mid-September 2002, Richardson Electronics, Ltd., a supplier, issued to
Signal for the first time an invoice for $2.0 million allegedly owed for orders
going back approximately 18 months. The Company informed Richardson that these
were blanket purchase orders requiring subsequent releases, which were never
issued, and that all of these orders were either cancelled or put on hold. On
December 20, 2002, Richardson filed a breach of contract action against Signal
in the United States District Court for the Northern District of Illinois (the
Federal Case). On February 14, 2003, Signal filed motions in the Federal Case
seeking to dismiss the complaint based on lack of subject matter jurisdiction,
lack of personal jurisdiction and improper venue. On the same date, Signal
commenced an action (the Massachusetts State Action) in the Massachusetts Essex
County Superior Court (Signal Technology Corporation vs. Richardson
Electronics, Ltd., No. 3-0335) seeking a declaratory judgment of the relative
rights of the parties. Richardson subsequently withdrew its Federal Case and
filed a new complaint on March 4, 2003 (the Illinois State Action) in the
Circuit Court of Cook County, Illinois (Richardson Electronics, Ltd. vs. Signal
Technologies [sic] Corporation, No. 03 L 002661) seeking damages in excess of
$1.75 million. Both the Massachusetts State Action and the Illinois State
Action are pending. In managements opinion, the Company does not have any
liability to this supplier.

In mid-October 2002, Northrop Grumman
stated that certain milestones related to the Companys
technology license and manufacturing agreement with Northrop Grumman
had been reached and that the Company was obligated to issue Northrop
Grumman an additional 300,776 shares. The Company informed Northrop
Grumman that it believed that
under the terms of such agreement, no additional shares were then due
to be issued and no such shares would become due to be issued to
Northrop Grumman because such milestones had not been and would not
be achieved. On March 20, 2003, the Company entered into a
settlement agreement with Northrop Grumman, whereby all controversies
regarding this matter would be settled and the technology license and
manufacturing agreement would be terminated upon the Company buying
back the 300,776 shares of stock held by Northrop Grumman at an
agreed price of $12.00 per share, which occurred on March 26,
2003. As further stipulated by the settlement agreement, if at any
time on or before February 29, 2004, the Company should sell
shares of its common stock in a transaction or series of related
transactions in which the aggregate gross proceeds to the Company
equal at least $10 million and at which the price per share of
common stock is greater than $12.00 per share, or if the Company
should merge or consolidate with or into another corporation, which
results in the exchange of outstanding shares of the Companys
common stock for securities or other consideration issued or paid by
such other corporation, then the Company will pay to Northrop Grumman
in cash, an amount per share equal to the difference between $12.00
per share and the per share value of the consideration received in
such transaction.

In-mid October 2002, Vitesse sent the
Company an invoice for approximately $1.2 million, in connection with
the Companys manufacturing supply agreement with Vitesse. The
Company informed Vitesse that it believed,
that under the terms of such agreement, no payment was then due and
no further payment would become due to Vitesse because the
requirements set forth in such agreement had not been and would not
become fulfilled. On March 19, 2003, the Company entered into a
settlement agreement with Vitesse, whereby all controversies
regarding this matter would be settled and the manufacturing supply
agreement would be terminated upon the Company buying back 500,000
outstanding Company warrants held by Vitesse at an agreed upon price
of $3.00 per warrant, which occurred on March 19, 2003. As
further stipulated by the settlement agreement, if, at any time on or
before January 31, 2004, the Company should sell shares of its
common stock in a transaction or series of related transactions in
which the aggregate gross proceeds to the Company equals at least $10
million and at which the price per share of common stock is greater
than $12.29 per share, or the Company should merge or consolidate
with or into another corporation, which results in the exchange of
outstanding shares of Signals common stock for securities or
other consideration issued or paid by such other corporation, then as
part of either of such transactions referred to, the Company will
pay, in cash, an amount equal to the difference between $12.29 and
the per share value of the consideration received in such transaction.




Item 4. Submission of Matters to a Vote of Security Holders

None

9



---



##### Table of Contents









Part II

Item 5. Market for Registrants Common Equity and Related Stockholder Matters

Signals common stock is traded on the Nasdaq National Market under the symbol
STCO. The following table sets forth, for the periods indicated, the high
and low closing prices per share of the Companys common stock as reported in the Nasdaq
National Market.

|                              |                |  |      |       |     |  |   |      | 
|----------------------------- | -------------- |  | ---- | ----- | --- |  | - | ---- | 
|                              |                |  | High |       | Low
|                              |                |  |      |       |    
|Year Ended December 31, 2001: |                |  |      |       |     |  |   |     
|                              | First Quarter  |  | $    | 12.25 |     |  | $ | 6.19 | 
|                              | Second Quarter |  |      | 10.80 |     |  |   | 5.00 | 
|                              | Third Quarter  |  |      | 11.00 |     |  |   | 6.06 | 
|                              | Fourth Quarter |  |      | 8.29  |     |  |   | 3.60 | 
|Year Ended December 31, 2002: |                |  |      |       |     |  |   |     
|                              | First Quarter  |  | $    | 8.00  |     |  | $ | 5.04 | 
|                              | Second Quarter |  |      | 9.79  |     |  |   | 7.75 | 
|                              | Third Quarter  |  |      | 9.20  |     |  |   | 6.44 | 
|                              | Fourth Quarter |  |      | 12.74 |     |  |   | 9.01 | 

On March 21, 2003 the last reported sale price of the Companys common stock as
reported on the Nasdaq National Market was $10.20 per share. As of March 21,
2003 there were approximately 77 stockholders of record of the common stock.

Signal has never paid cash dividends on its common stock. The Company
anticipates retaining all available funds for use in operations and expansion
of its business and does not anticipate paying any cash dividends in the
foreseeable future.

10



---



##### Table of Contents






Item 6. Selected Consolidated Financial Data

The following selected consolidated financial data should be read in
conjunction with Signals audited consolidated financial statements and related
notes thereto and with Managements Discussion and Analysis of Financial
Condition and Results of Operations, which are included elsewhere in the Form
10-K.

|                                                                |          |                                                                 |        |        |       |      |         |        |       |      |        |       |       |   |        |       |      |   |        |       |       |  
|--------------------------------------------------------------- | -------- | --------------------------------------------------------------- | ------ | ------ | ----- | ---- | ------- | ------ | ----- | ---- | ------ | ----- | ----- | - | ------ | ----- | ---- | - | ------ | ----- | ----- | -
|(dollars in thousands, except per share amounts)                |          | 2002                                                            |        | 2001   |       | 2000 |         | 1999   |       | 1998
|                                                                |          |                                                                 |        |        |       |      |         |        |       |     
|OPERATIONS                                                      |          |                                                                 |        |        |       |      |         |        |       |      |        |       |       |   |        |       |      |   |        |      
|Net sales                                                       |          | $                                                               | 86,685 |        |       | $    | 79,307  |        |       | $    | 81,153 |       |       | $ | 79,749 |       |      | $ | 91,123 |      
|Operating income                                                |          |                                                                 | 10,761 |        |       |      | 8,058   |        |       |      | 10,748 |       |       |   | 6,118  |       |      |   | (6,511 | )    
|Income (loss) from continuing operations                        |          |                                                                 | 16,133 |        |       |      | (2,423  | )      |       |      | 729    | [1]   |       |   | 5,029  |       |      |   | (7,084 | )    
|Cumulative effect of change in accounting
principle, net of tax |          |                                                                 | (2,070 | )      |       |      |        |        |       |      |       |       |       |   |       |       |      |   |       |      
|Net income (loss)                                               |          |                                                                 | 782    |        |       |      | (17,734 | )      |       |      | (2,523 | )     |       |   | 4,476  |       |      |   | (7,173 | )    
|Per common share:                                               |          |                                                                 |        |        |       |      |         |        |       |      |        |       |       |   |        |       |      |   |        |      
|                                                                | Basic:   |                                                                 |        |        |       |      |         |        |       |      |        |       |       |   |        |       |      |   |        |       |      
|                                                                |          | Income (loss) from continuing operations                        |        | $      | 1.54  |      |         | $      | (0.24 | )    |        | $     | 0.09  |   |        | $     | 0.66 |   |        | $     | (0.96 | )
|                                                                |          | Cumulative effect of change in accounting
principle, net of tax |        |        | (0.20 | )    |         |        |      |      |        |       |      |   |        |       |     |   |        |       |      |  
|                                                                |          | Net income (loss)                                               |        | $      | 0.07  |      |         | $      | (1.77 | )    |        | $     | (0.30 | ) |        | $     | 0.59 |   |        | $     | (0.97 | )
|                                                                | Diluted: |                                                                 |        |        |       |      |         |        |       |      |        |       |       |   |        |       |      |   |        |       |      
|                                                                |          | Income (loss) from continuing operations                        |        | $      | 1.45  |      |         | $      | (0.24 | )    |        | $     | 0.08  |   |        | $     | 0.63 |   |        | $     | (0.96 | )
|                                                                |          | Cumulative effect of change in accounting
principle, net of tax |        |        | (0.20 | )    |         |        |      |      |        |       |      |   |        |       |     |   |        |       |      |  
|                                                                |          | Net income (loss)                                               |        | $      | 0.07  |      |         | $      | (1.77 | )    |        | $     | (0.30 | ) |        | $     | 0.56 |   |        | $     | (0.97 | )
|                                                                |          |                                                                 |        |        |       |      |         |        |       |      |        |       |       |   |        |       |      |   |        |      
|Shares used in calculating net income (loss) per share:         |          |                                                                 |        |        |       |      |         |        |       |      |        |       |       |   |        |       |      |   |        |      
|                                                                | Basic    |                                                                 |        | 10,449 |       |      |         | 10,003 |       |      |        | 8,537 |       |   |        | 7,587 |      |   |        | 7,365 |      
|                                                                | Diluted  |                                                                 |        | 11,121 |       |      |         | 10,003 |       |      |        | 9,505 |       |   |        | 7,986 |      |   |        | 7,365 |      
|                                                                |          |                                                                 |        |        |       |      |         |        |       |      |        |       |       |   |        |       |      |   |        |      

[1] Includes $9.0 million charge for liabilities associated with Eaton Corporation indemnification claim, included in other expense.

|                                        |  |      |         |      |  |      |        |      |  |      |         |  |  |   |        |  |  |   |        | 
|--------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------ | ---- |  | ---- | ------- |  |  | - | ------ |  |  | - | ------ | 
|(dollars in thousands, except per share |  |      |         |      |  |      |        |      |  |      |         |  |  |   |        |  |  |   |        | 
|amounts and employees at year-end)      |  | 2002 |         | 2001 |  | 2000 |        | 1999 |  | 1998
|                                        |  |      |         |      |  |      |        |      |  |     
|FINANCIAL POSITION                      |  |      |         |      |  |      |        |      |  |      |         |  |  |   |        |  |  |   |        | 
|Cash and cash equivalents               |  | $    | 22,675  |      |  | $    | 10,849 |      |  | $    | 31,023  |  |  | $ | 3,431  |  |  | $ | 2,366  | 
|Current assets                          |  |      | 65,210  |      |  |      | 67,688 |      |  |      | 86,273  |  |  |   | 40,558 |  |  |   | 30,736 | 
|Current liabilities                     |  |      | 20,854  |      |  |      | 26,773 |      |  |      | 30,461  |  |  |   | 18,830 |  |  |   | 11,006 | 
|Total assets                            |  |      | 83,453  |      |  |      | 83,395 |      |  |      | 102,393 |  |  |   | 57,601 |  |  |   | 48,983 | 
|Long-term debt, net current maturities  |  |      | 4,065   |      |  |      | 545    |      |  |      | 5,254   |  |  |   | 5,561  |  |  |   | 9,928  | 
|Total debt                              |  |      | 4,357   |      |  |      | 5,154  |      |  |      | 5,764   |  |  |   | 9,071  |  |  |   | 10,408 | 
|Stockholders equity                    |  |      | 57,419  |      |  |      | 53,563 |      |  |      | 65,544  |  |  |   | 31,686 |  |  |   | 26,487 | 
|                                        |  |      |         |      |  |      |        |      |  |      |         |  |  |   |        |  |  |   |        | 
|Shares outstanding at year-end          |  |      | 10,618  |      |  |      | 10,337 |      |  |      | 9,923   |  |  |   | 7,676  |  |  |   | 7,349  | 
|Book value per share                    |  | $    | 5.41    |      |  | $    | 5.18   |      |  | $    | 6.61    |  |  | $ | 4.13   |  |  | $ | 3.60   | 
|                                        |  |      |         |      |  |      |        |      |  |      |         |  |  |   |        |  |  |   |        | 
|SELECTED DATA                           |  |      |         |      |  |      |        |      |  |      |         |  |  |   |        |  |  |   |        | 
|Orders                                  |  | $    | 106,666 |      |  | $    | 74,458 |      |  | $    | 76,660  |  |  | $ | 88,972 |  |  | $ | 66,330 | 
|Year-end backlog                        |  | $    | 75,945  |      |  | $    | 57,469 |      |  | $    | 69,554  |  |  | $ | 72,882 |  |  | $ | 63,502 | 
|Employees at year-end                   |  |      | 545     |      |  |      | 545    |      |  |      | 611     |  |  |   | 581    |  |  |   | 718    | 
|Net sales per employee                  |  | $    | 159     |      |  | $    | 146    |      |  | $    | 133     |  |  | $ | 137    |  |  | $ | 127    | 

11



---



##### Table of Contents






Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note

This Form 10-K may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including without limitation (i)
the anticipated outcome and impact of proceedings in which we are involved,
(ii) the availability of our credit facility and our liquidity, (iii) our
ability to meet operating and capital requirements and to pursue acquisition
opportunities, and (iv) certain other statements identified or qualified by
words such as likely, will, suggests, may, would, could, should,
expects, anticipates, estimates, plans, projects, believes, is
optimistic about, or similar expressions (and variants of such words of
expressions). Investors are cautioned that forward-looking statements are
inherently uncertain. These forward-looking statements represent the best
judgment of the Company as on the date of this Form 10-K, and we caution
readers not to place undue reliance on such statements. Actual performance and
results of operations may differ materially from those projected or suggested
in the forward-looking statements due to certain risks and uncertainties
including, without limitation, risks associated with fluctuations in our
operating results, volume and timing of orders received, changes in the mix of
products sold, competitive pricing pressure, our ability to meet or renegotiate
customer demands, the ability to anticipate changes in the market, our ability
to finance operations on terms that are acceptable, our ability to attract and
retain qualified personnel including our management, changes in the global
economy, changes in regulatory processes, the dependence on certain key
customers (including the United States government), our ability to realize
sufficient margins on sales of its products, the availability and timing of
funding for our current products and the development of future products.

Overview

Signals principal business is the design, development and manufacture of power
management products and electronic radio frequency components and subsystems
that are used in defense electronics. The Company was incorporated in 1982
and has traditionally been a supplier to the defense industry. Signals
sophisticated RF, microwave and millimeter wave electronic components are used
in applications such as radar, communications and smart weapons and contain
technology to receive, transmit and process wireless data signals.

Signal has experienced, and expects to continue to experience, significant
fluctuations in its results of operations. Factors that affect the Companys
results of operations include the volume and timing of orders received, changes
in the mix of products sold, competitive pricing pressures and our ability to
meet customer requirements. As a result of the foregoing or other factors,
there can be no assurance that the Company will not experience material
fluctuations in future operating results on a quarterly or annual basis, which
would materially and adversely affect the Companys business, financial
condition and results of operations.

Results of Operations

The following table sets forth, as a percentage of net sales, consolidated
statements of operations data for the periods indicated.

|                                                                         |                                     |                          |       |       |      |      |       |       |      |  |       |      |      | 
|------------------------------------------------------------------------ | ----------------------------------- | ------------------------ | ----- | ----- | ---- | ---- | ----- | ----- | ---- |  | ----- | ---- | ---- | 
|                                                                         |                                     |                          |       | 2002  |      | 2001 |       | 2000 
|                                                                         |                                     |                          |       |       |      |      |       |      
|Net sales                                                                |                                     |                          | 100.0 | %     |      |      | 100.0 | %     |      |  | 100.0 | %   
|Cost of sales                                                            |                                     |                          | 64.6  |       |      |      | 65.7  |       |      |  | 63.9  |     
|                                                                         |                                     |                          |       |       |      |      |       |       |      |  |       |     
|                                                                         | Gross profit                        |                          |       | 35.4  |      |      |       | 34.3  |      |  |       | 36.1 |     
|                                                                         |                                     |                          |       |       |      |      |       |       |      |  |       |     
|Operating expenses:                                                      |                                     |                          |       |       |      |      |       |       |      |  |       |     
|                                                                         | Selling, general and administrative |                          |       | 21.4  |      |      |       | 23.1  |      |  |       | 22.2 |     
|                                                                         | Research and development            |                          |       | 1.6   |      |      |       | 1.0   |      |  |       | 0.7  |     
|                                                                         |                                     |                          |       |       |      |      |       |       |      |  |       |     
|                                                                         |                                     | Total operating expenses |       |       | 23.0 |      |       |       | 24.1 |  |       |      | 22.9 | 
|                                                                         |                                     |                          |       |       |      |      |       |       |      |  |       |     
|Operating income                                                         |                                     |                          | 12.4  |       |      |      | 10.2  |       |      |  | 13.2  |     
|Other expense                                                            |                                     |                          |      |       |      |      |      |       |      |  | (11.2 | )   
|Interest expense                                                         |                                     |                          | (0.4  | )     |      |      | (0.5  | )     |      |  | (1.3  | )   
|Interest income                                                          |                                     |                          | 0.3   |       |      |      | 0.9   |       |      |  | 1.1   |     
|                                                                         |                                     |                          |       |       |      |      |       |       |      |  |       |     
|Income from continuing operations before income taxes                    |                                     |                          | 12.3  |       |      |      | 10.6  |       |      |  | 1.8   |     
|Provision
for (benefit from) income taxes                                |                                     |                          | (6.3  | )     |      |      | 13.7  |       |      |  | 0.9   |     
|                                                                         |                                     |                          |       |       |      |      |       |       |      |  |       |     
|Income (loss) from continuing operations                                 |                                     |                          | 18.6  |       |      |      | (3.1  | )     |      |  | 0.9   |     
|                                                                         |                                     |                          |       |       |      |      |       |       |      |  |       |     
|Loss on discontinued operations, net of tax                              |                                     |                          | (12.2 | )     |      |      | (19.3 | )     |      |  | (4.0  | )   
|Loss on disposal of discontinued operations, net of tax                  |                                     |                          | (3.1  | )     |      |      |      |       |      |  |      |     
|                                                                         |                                     |                          |       |       |      |      |       |       |      |  |       |     
|                                                                         | Total discontinued operations       |                          |       | (15.3 | )    |      |       | (19.3 | )    |  |       | (4.0 | )   
|                                                                         |                                     |                          |       |       |      |      |       |       |      |  |       |     
|Income (loss) before cumulative effect of change in accounting principle |                                     |                          | 3.3   |       |      |      | (22.4 | )     |      |  | (3.1  | )   
|Cumulative effect of change in accounting principle, net of tax          |                                     |                          | (2.4  | )     |      |      |      |       |      |  |      |     
|                                                                         |                                     |                          |       |       |      |      |       |       |      |  |       |     
|Net income (loss)                                                        |                                     |                          | 0.9   |       |      |      | (22.4 | )     |      |  | (3.1  | )   
|                                                                         |                                     |                          |       |       |      |      |       |       |      |  |       |     

12



---



##### Table of Contents



Fiscal Year Ended December 31, 2002 vs. Fiscal Year Ended December 31, 2001

Net sales. Net sales increased 9.3% from $79.3 million during fiscal year 2001
to $86.7 million during fiscal year 2002. Sales improved across
all segments with the largest increases attributed to a
$2.3 million increase in Microwave Components &
Subsystems-Arizona and $2.9
million in sales generated by the Companys new AISD segment.

Gross profit.Gross profit
increased 12.9% from $27.2 million during fiscal
year 2001 to $30.7 million during fiscal year 2002. The primary reasons for
the $3.5 million increase in gross profit are a $2.5 million increase resulting
from higher sales volume, of which $0.5 million is attributable to the
Companys new AISD segment, and a $1.0 million increase due to improved
margins from a product mix favoring production jobs over development
jobs, primarily in the Power Management Products segment. Production jobs typically produce higher gross margins.

Selling, general and administrative expenses. Selling, general and
administrative expenses increased 0.9% from $18.4 million during fiscal year
2001 to $18.5 million during fiscal year 2002. Though spending was higher in
2002 compared to 2001, as a percentage of net sales these expenses were lower
in 2002, due to the Companys efforts to streamline its operations and
right-size its businesses.

Research and development expenses.Research and development expenses increased
81.4% from $0.8 million during fiscal year 2001 to $1.4 million during fiscal
year 2002 due to increased efforts on defense projects and the lack
of commercial wireless efforts competing for the Companys
R &D resources.

Interest income(expense), net.Interest income (expense), net decreased $0.4
million from $0.3 million of interest income, net during fiscal year 2001 to
$0.1 million of interest expense, net during fiscal year 2002. The overall
decrease in interest income (expense), net is due to lower average cash
balances during the first three quarters of 2002 and lower interest rates on
these balances during 2002.

Income taxes. The provision for
income taxes during fiscal year 2001 was $10.8 million compared
to an income tax benefit of $5.5 million during fiscal year
2002. The provision recorded during 2001 related to a tax provision
of $3.4 million, based on an effective tax rate of approximately
40%, in addition to a provision of $7.4 million due to the
recording of a full valuation allowance, based on the allocation
between continuing and discontinued operations. The Company believed it was more likely than not that the deferred tax assets
may not be realized. The recording of the valuation allowance was
primarily due to the historical and projected losses from the former
Signal Wireless Group (SWG). The components of the SWG were sold in
the second half of
2002 the results of which are presented in discontinued operations.
The benefit recorded during 2002 relates to a tax provision of
$4.2 million based on an effective tax rate of approximately 39%
net of a benefit of $9.7 million due to the full reversal of the
valuation allowance on the Companys deferred tax assets. Upon
completion of the disposal of the Companys wireless businesses, the
valuation allowance was reversed as the Company believes it is more
likely than not the projected results for its continuing operations
will generate sufficient taxable income to fully utilize its deferred
tax assets.

Fiscal Year Ended December 31, 2001 vs. Fiscal Year Ended December 31, 2000

Net sales. Net sales decreased 2.3% from $81.2 million during fiscal year 2000
to $79.3 million during fiscal year 2001. The primary reasons for the decrease
were a combined $2.4 million decrease in sales from Microwave Components &
Subsystems and RF Components & Subsystems, partially offset by a $0.5 million
increase in sales from Power Management Products.

Gross profit.Gross profit decreased 7.2% from $29.3 million during fiscal
year 2000 to $27.2 million during fiscal year 2001. The decrease in gross
profit is primarily attributed to lower overall sales volume, resulting in a
$0.7 million decrease in gross profit, and a $1.4 million decrease in gross
profit driven primarily by low to zero margin engineering development programs
in Power Management Products.

Selling, general and administrative expenses. Selling, general and
administrative expenses increased 2.2% from $18.0 million during fiscal year
2000 to $18.4 million during fiscal year 2001. The increase is primarily due
to an increase in legal expenses related to the SEC investigation,
which was completed in March 2002.

Research and development expenses.Research and development expenses increased
33.8% from $0.6 million during fiscal year 2000 to $0.8 million during fiscal
year 2001. The increase is attributable to managements plan to
update the Companys products across all segments.

Other expense.Other expense was $9.1 million during fiscal year 2000 compared
to zero during fiscal year 2001. Included in other expense during 2000 was a
$9.0 million charge for liabilities associated with Eaton Corporations
indemnification claim. Also included in other expenses was $0.1 million in
expense associated with managing the LogiMetrics power amplifier business
before our acquisition of the business in November 2000.

Interest income(expense), net.Interest income(expense), net increased $0.5
million from $0.2 million net expense during fiscal year 2000 to $0.3 million
net income during fiscal year 2001. The net increase in interest
income(expense), net is due to repayment of borrowings under the Companys
revolving credit facility. During the third quarter of 2000, the Company
issued two million shares of common stock with net proceeds of $35.1 million.
After repaying the revolving credit facility and supporting working capital
requirements, the remaining funds were invested in cash equivalents and
generated $0.7 million in interest income during fiscal year 2001.

Income taxes.The provision for
income taxes during fiscal year 2000 was $0.7 million compared
to an income tax provision of $10.8 million during fiscal year
2001. The income tax provision recorded during 2000 related to a tax
provision, based on an effective tax rate of approximately 50%. The
provision recorded during 2001 related to a tax
provision of $3.4 million, based on an effective tax rate of
approximately 40%, in addition to a provision of $7.4 million
due to the recording of a full
valuation allowance. The Company believed it was more likely than not
that the deferred tax assets may not be realized. The recording of
the valuation allowance was primarily due to the historical and projected
losses from the former Signal Wireless Group (SWG).

13



---



##### Table of Contents



Business Segments

During 2002, the Company completed its plan to sell its commercial wireless and
mobile appliance businesses (formerly part of the Signal Wireless Group), in
response to the global weakness in telecommunication spending. Additionally,
during 2001, in an effort to streamline operations the Company consolidated its
Systems division, formerly located in Webster, MA, into Olektron which is
located in Beverly, MA. As a result of this consolidation, net sales and
operating income related to the Systems division have
been reclassified from Microwave Components & Subsystems to RF Components &
Subsystems for all years presented in these financial statements.
During the fourth quarter of 2002, the Company formed a new division,
Advanced Integrated Systems Division (AISD) which focuses on defense and
homeland security wireless unmanned sensor systems.

At December 31, 2002, the Company
had five operating divisions engaged in the
development, manufacturing and marketing of electronic components and
subsystems. The operating divisions, referred to as Arizona, California,
Keltec, Olektron and AISD, report their operations within five segments:
Microwave Components & Subsystems  Arizona, Microwave Components & Subsystems
- California, Power Management Products (Keltec), Radio Frequency (RF)
Components & Subsystems (Olektron and the former Systems division) and AISD
(our new business unit in Texas that focuses on wireless networks of sensors).

Our reportable segments are as follows:

Microwave Components &
Subsystems - Arizona
Designs and manufactures microwave oscillators, frequency synthesizers and
converters, microwave amplifiers and microwave switch matrices.

Microwave Components &
Subsystems  - California
Designs and manufactures microwave oscillators, converters, space qualified
microwave assemblies, microwave amplifiers and microwave switch matrices.

Power Management
Products
Designs and manufactures military high and low voltage power supplies, DC to DC
converters and military high power amplifiers and transmitters for use in radar
systems.

Radio Frequency (RF) Components
& Subsystems
Designs and manufactures RF and intermediate frequency signal processing
components, integrated multi-function devices and switching systems.

Advanced Integrated Systems
Division (AISD)
Design and integration of wireless unmanned sensor systems for defense and
Homeland Security applications.

The following tables display net sales and operating income by business segment
for the three years ending December 31, which correspond to the segment
information presented in Note 15 to the consolidated financial statements.

|                                                |  |      |        |      |  |      |        |   |  |   |        | 
|----------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | 
|(dollars in thousands)                          |  | 2002 |        | 2001 |  | 2000
|                                                |  |      |        |      |  |     
|Net Sales                                       |  |      |        |      |  |      |        |   |  |   |        | 
|Microwave Components & Subsystems  - Arizona    |  | $    | 17,447 |      |  | $    | 15,114 |   |  | $ | 14,975 | 
|Microwave Components & Subsystems  - California |  |      | 19,738 |      |  |      | 19,071 |   |  |   | 20,085 | 
|Power Management Products                       |  |      | 29,099 |      |  |      | 28,463 |   |  |   | 27,930 | 
|RF Components & Subsystems                      |  |      | 17,514 |      |  |      | 16,659 |   |  |   | 18,163 | 
|AISD                                            |  |      | 2,887  |      |  |      |       |   |  |   |       | 
|                                                |  |      |        |      |  |      |        |   |  |   |        | 
|Total                                           |  | $    | 86,685 |      |  | $    | 79,307 |   |  | $ | 81,153 | 
|                                                |  |      |        |      |  |      |        |   |  |   |        | 
|Operating
Income[1]                             |  |      |        |      |  |      |        |   |  |   |        | 
|Microwave Components & Subsystems  - Arizona    |  | $    | 2,448  |      |  | $    | 2,502  |   |  | $ | 2,678  | 
|Microwave Components & Subsystems  - California |  |      | 2,124  |      |  |      | 2,641  |   |  |   | 2,309  | 
|Power Management Products                       |  |      | 4,866  |      |  |      | 3,409  |   |  |   | 4,666  | 
|RF Components & Subsystems                      |  |      | 1,187  |      |  |      | (494   | ) |  |   | 1,095  | 
|AISD                                            |  |      | 136    |      |  |      |       |   |  |   |       | 
|                                                |  |      |        |      |  |      |        |   |  |   |        | 
|Total                                           |  | $    | 10,761 |      |  | $    | 8,058  |   |  | $ | 10,748 | 
|                                                |  |      |        |      |  |      |        |   |  |   |        | 

[1] Corporate headquarters expenses have been allocated to the business
segments based on a percentage of net sales.

14



---



##### Table of Contents



Business Segments Fiscal Year Ended December 31, 2002 vs. Fiscal Year Ended
December 31, 2001

Microwave Components & Subsystems  - ArizonaNet sales.Net sales of Microwave Components & Subsystems
 - Arizona increased
15.7% from $15.1 million during fiscal year 2001 to $17.4 million during fiscal
year 2002. The increase is primarily due to an overall improvement in
sales across various product areas due to increased spending for
defense electronics.

Operating income.Operating
income of Microwave Components & Subsystems  - Arizona decreased
2.1% from $2.5 million during fiscal year 2001 to $2.4
million during fiscal year 2002. The decrease is primarily the result
of increased costs related to research and development, offset by improved gross margins.

Microwave Components & Subsystems
 - CaliforniaNet sales.Net sales of Microwave Components & Subsystems  - California
increased 3.3% from $19.1 million during fiscal year 2001 to $19.7 million
during fiscal year 2002. The increase is primarily due to development
delays on a certain contract causing sales for that contract to slip
from 2001 to 2002.

Operating income.Operating income of Microwave Components & Subsystems -
California decreased 19.6% from $2.6 million during fiscal year
2001 to $2.1
million during fiscal year 2002. The decrease is primarily due to an
increase in bid and proposal activity resulting from a high volume of
technical proposals.

Power Management ProductsNet sales.Net sales of Power Management Products increased 2.2% from $28.5
million during fiscal year 2001 to $29.1 million during fiscal year 2002. The
primary reason for the increase was a 48% increase in bookings for
2002, resulting from increased orders for aircraft electronic warfare
subsystems.

Operating income.Operating income of Power Management Products increased
42.7% from $3.4 million during fiscal year 2001 to $4.9 million during fiscal
year 2002. The increase was primarily due to increased sales and improved product margins
attributable to a shift in sales mix favoring manufacturing contracts,
which typically have higher gross margins than development contracts.

RF Components & SubsystemsNet sales.Net sales of RF Components & Subsystems increased 5.1% from $16.7
million during fiscal year 2001 to $17.5 million during year 2002. The
increase was primarily due to higher sales volume in the active
devices and filter oscillator lines.

Operating income.RF Components & Subsystems reported an operating loss for
fiscal year 2001 of $0.5 million as compared to an operating income of $1.2
million for fiscal year 2002. The improvement in 2002 is primarily attributed
to increased sales and improved gross margins from a favorable product mix, as well as costs
reductions resulting from the consolidation of the former Systems division into
Olektron.

AISDNet sales.Net sales for the new AISD segment were the result of
the formation of
a new division, Advanced Integrated Systems Division, (AISD) during the fourth
quarter of 2002. Net sales reported for this new segment during 2002 were
$2.9 million, due to the award of two research contracts.

Operating income.Operating income reported for the new AISD segment for
fiscal year 2002 was $0.1 million.

Business Segments Fiscal Year Ended December 31, 2001 vs. Fiscal Year Ended
December 31, 2000

Microwave Components & Subsystems
 - ArizonaNet sales.Net sales of Microwave Components & Subsystems  -
Arizona were essentially flat at $15.0 million during fiscal
year 2000 compared to $15.1 million during fiscal
year 2001, an increase of 0.7%.

Operating income.Operating income of Microwave Components & Subsystems  -
Arizona decreased 6.6% from $2.7 million during fiscal year 2000 to $2.5
million during fiscal year 2001. The decrease is primarily due to
increased spending in research and development.

Microwave Components & Subsystems
 - CaliforniaNet sales.Net sales of Microwave Components & Subsystems  - California
decreased 4.9% from $20.1 million during fiscal year 2000 to $19.1 million
during fiscal year 2001. The decrease in net sales is primarily the
result of a higher volume of development contracts in 2001 which produce
lower sales levels than production contracts.

Operating income.Operating income of Microwave Components & Subsystems -
California increased 14.4% from $2.3 million during fiscal year 2000 to $2.6
million during fiscal year 2001. The increase is primarily due to
efficiencies gained through increased spending on research and development.

Power Management ProductsNet sales.Net sales of Power Management Products increased 1.9% from $27.9
million during fiscal year 2000 to $28.5 million during fiscal year 2001. The
primary reason for the increase in sales is increased shipments of
high-end integrated
power supply electronics and microwave power amplifiers which have
higher unit prices than less sophisticated products.

Operating income.Operating income of Power Management Products decreased
26.9% from $4.7 million during fiscal year 2000 to $3.4 million during fiscal
year 2001. The decrease was primarily due to a $1.0 million
decrease in gross profit due to changes in contract mix favoring development
jobs that typically have lower gross margins than manufacturing jobs,
partially offset by increased sales.

RF Components & SubsystemsNet sales.Net sales of RF Components & Subsystems decreased 8.3% from $18.2
million during fiscal year 2000 to $16.7 million during year 2001. The decrease
is primarily due to a $3.8 million decrease in sales at our former Systems
operation due to lower switch matrix sales and delays in new product
development which in turn delayed shipments and new orders, which was offset by
increased sales of active RF components.

Operating income.Operating income of RF Components & Subsystems decreased
145.1% from operating income of $1.1 million during fiscal year 2000 to an
operating loss of $0.5 million during fiscal year 2001. The decrease is
primarily due to lower sales volume and reduced gross margins due to
a shift in contract mix as well as production and development delays at the Systems operation.

15



---



##### Table of Contents



Discontinued Operations

In response to the global weakness in
the telecom industry and consistent with the Companys desire to
return to its core defense business, the Company completed the sale
of certain assets of its commercial fixed wireless business unit to
Endwave Corporation for approximately $3.4 million in cash on
September 24, 2002. As part of this transaction, the Company
retained the receivables associated with this business, which
amounted to approximately $2.1 million at the time of closing.
As of December 31, 2002, the remaining net receivable balance
was $434. Additionally, on November 20, 2002, the Company completed the
sale of certain assets of its mobile appliance business unit to
Paratek Microwave, Inc. for approximately $1.3 million in cash.

In addition to the net loss from
discontinued operations, the Company recorded a pretax loss on the
sale of both its commercial wireless business unit and mobile
appliance business unit during the year ended December 31, 2002
in the amount of $2.6 million pretax, $1.8 million after
tax and $1.3 million pretax, $0.9 million after tax, respectively. The
benefits for income taxes included in discontinued operations for the
current period reflect expected refunds of prior year taxes resulting
from the carryback of net operating losses.

The Company has no further continuing obligations
related to these two businesses, with the exception of the
outstanding accounts receivable balance discussed above and the
Northrop Grumman, Vitesse, and Richardson legal matters, as discussed
in Item 3. Legal Proceedings.

Liquidity and Capital Resources

At December 31, 2002, the Company had working capital of $47.2 million, including cash
and cash equivalents of $22.7 million, as compared to working capital of $40.9
million, including cash and cash equivalents of $10.8 million at December 31,
2001. Net cash flow provided by continuing operations was $11.2 million during
fiscal year 2002 compared to net cash flow used by continuing operations of
$7.5 million during fiscal year 2001. Net cash flow provided by discontinued
operations in 2002 was $0.6 million compared with a $12.7 million of cash used
in discontinued operations in 2001.

Earnings, adjusted for non-cash items,
totaling $9.4 million was the primary source of operating cash
flow during 2002. During 2001, earnings, adjusted for non-cash items,
totaling $7.3 million was more than offset by a
$13.2 million net change in working capital, resulting in a
$5.9 million use of operating cash flow. The primary uses of
working capital during 2001 were a $7.0 million cash deposit
made with the Clerk, United States District Court by order of the
United States District Court for, the Northern District of California
in association with the Eaton claim and a $3.7 million increase
in inventory.

Net cash of $2.0 million was provided by investing activities during fiscal
year 2002 compared to net cash used in investing activities of $1.9 million
during fiscal year 2001. Proceeds of $4.4 million received from the sale of
discontinued operations was the primary source of cash from investing
activities in 2002. During fiscal year 2001, $1.9 million was used for
additions to property, plant and equipment compared to $2.4 million during
fiscal year 2002.

Net cash used by financing activities was $31 thousand during fiscal year 2002,
and was primarily the result of proceeds from the issuance of common stock and
debt in the amounts of $1.6 million and $4.2 million, respectively, offset by payments on debt
of approximately $5.3 million and restricted cash of $0.6 million. Net cash
provided by financing activities during fiscal year 2001 was $0.2 million which
was primarily the result of $0.8 million of proceeds from issuance of common
stock offset by payments on debt of $0.6 million.

On November 6, 2002, the Company paid off the remaining balance on its
Massachusetts Industrial Revenue Bond. In compliance with the bond agreement,
the Company collateralized the bond with a letter of credit. In addition, the
letter of credit was collateralized by $0.6 million in cash. As required by
the bond agreement, the letter of credit was required to remain in place for a
period of 91 days from the date at which the bond was paid in full. Upon
expiration of the 91 days (February 5, 2003), the letter of credit and the cash
collateral were released. At December 31, 2002, the Company
reflected the $0.6 million of cash collateral as restricted cash on the Companys balance sheet.

The Company has available a $10 million revolving line of credit with a bank
under an agreement dated December 23, 2002. This credit facility, which is an
asset-based senior secured agreement, will expire on December 23, 2003.
Borrowings under the line bear interest at the banks base rate (4.25% at
December 31, 2002) plus 1% and are subject to certain financial covenants and
restrictions on liquidity. As of December 31, 2002, there were no balances
outstanding on the line and the Company was in compliance with all applicable
financial covenants and restrictions. A commitment fee at an annual rate of
0.375% on the amount of the unused facility is payable quarterly.

In conjunction with the new credit facility, the
Company entered into a new real estate term loan agreement with proceeds of
$4.3 million, which were used to repay the previous term loan of
the same amount. The Real Estate term loan is collateralized by real estate with a net book
value of $7.0 million at December 31, 2002. Maturing on December 23, 2007, the Real
Estate term loan is payable in monthly principal payments of $24 thousand, plus
interest at the banks base rate (4.25% at December 31, 2002) plus 1%, with the
last installment equal to the remaining unpaid loan balance.

The Company believes that its expected cash flow
from operations, as well as its existing balance of cash and cash
equivalents will be sufficient to meet the Companys working
capital and anticipated capital expenditure needs for at least the
next 12 months.

Critical Accounting Policies and Estimates

Signals significant accounting policies are described in Note 2 to the consolidated
financial statements. The Company believes its most critical accounting policies and
estimates include revenue recognition and cost estimation on our contracts,
legal contingencies, environmental contingencies, valuation of long-lived and
intangible assets and accounting for income taxes.

Revenue recognition and cost estimation
A significant portion of Signals business is comprised of development and
production contracts which are accounted for under the provisions of the
American Institute of Certified Public Accountants (AICPA) Statement of
Position No. 81-1, Accounting for Performance of Construction-Type and Certain
Production-Type Contracts. Generally revenue on long-term fixed-price
contracts is recorded on a percentage of completion basis using units of
delivery as the measurement basis for progress toward completion. Certain
contracts that provide for delivery of low production quantities or have a
significant amount of product development effort sales may be recorded using
performance milestones or using the cost-to-cost method of percentage of
completion accounting. Sales under cost-reimbursement-type contracts are
recorded as costs are incurred.

Contract accounting requires judgment relative to estimating costs and making
assumptions related to technical issues and delivery schedule. Contract costs
include material, subcontract costs, labor and an allocation of indirect costs.
The Companys materials include high-technology parts and components that may be
specialized in nature or subject to rapid technology obsolescence.
While the Company has programs to minimize the required inventories on hand and consider
technology obsolescence in estimating reserves to reduce recorded amounts to
net realizable value, such estimates could change in the future. The estimation
of cost at completion of a

16



---



##### Table of Contents



contract is subject to numerous variables involving contract costs and
estimates as to the length of time to complete the contract. Given the
significance of the estimation processes and judgments described above, it is
possible that materially different amounts of contract costs could be recorded
if different assumptions were used in the estimation of cost at completion. We
review our operations for compliance and consistency with policies and
practices related to contract accounting. When a change in contract value or
estimated cost is determined, changes are reflected in current period earnings.

In 2002, 2001 and 2000, gross margin
as a percent of net sales for the Companys continuing businesses did
not vary by more than 5%. If the aggregate combined cost
estimates for all of the contracts in the Companys continuing
businesses had been higher or lower by 5% in 2002, the
Companys
gross margin would have changed by approximately $2.5 million to
$3.0 million.

Legal and environmental contingencies

Signal is involved in certain legal proceedings and environmental remediation
activities as discussed in Note 11. The Company records appropriate accruals for legal
costs, environmental remediation and associated activities when they are known
and it is probable that a liability has been incurred and amounts can be
reasonably estimated. Judgment is required relative to estimating costs and
making assumptions for environmental remediation activities. Given the
significance of the estimation process and judgments involved, it is possible
that materially different amounts of costs could be recorded if different
assumptions were used.

Valuation of long-lived and intangible assets and goodwill

On January 1, 2002, the Company adopted Statement of Financial Account
Standards (SFAS) No. 144, Accounting for the Impairment of Long-lived
Assets. Accordingly, upon indication of possible impairment, we evaluate the
recovery of held-for-use long lived assets by measuring the carrying amount of
the assets against the related estimated undiscounted future cash flows. When
an evaluation indicates that the future undiscounted cash flows are not
sufficient to recover the carrying value of the asset, the asset is adjusted to
its estimated fair value. The following circumstances would be considered
important and could lead to an impairment review; significant changes in the
manner of our using the asset, negative industry or economic trends and
underperformance relative to projected operating results.

In January 2002, SFAS No. 142, Goodwill and Other Intangible Assets became
effective and, as a result, the Company ceased to amortize goodwill. The Company
performed an initial impairment review of its goodwill during the first six
months of 2002. As a result of this review, the Company recorded an impairment
charge of $2.1 million, net of taxes. The Company also completed its annual
impairment review at December 31, 2002, which resulted in no
additional impairment being
recorded.

Accounting for income taxes

The Company is required to estimate income taxes in each jurisdiction in which
it operates. Estimates are prepared for the Companys tax exposure, together
with assessing temporary differences resulting from different treatments of
items for accounting and tax purposes. These differences result in deferred
tax assets and liabilities which are included in the Companys balance sheet.
Judgments are made as to the likelihood that the Companys deferred tax assets
will be recovered from future taxable income. If the Company believes that it
is more likely than not that the asset is not recoverable, a valuation
allowance is established, or a change therein is made, and it is included as an
expense for that period within the tax provision in the statement of
operations.

Contractual Obligations and Commercial Commitments

The following table presents our contractual obligations and commercial
commitments as of December 31, 2002 over the next five years and thereafter:

|                                   |  |       |       |      |  |                        |       |           |       |   |       |  |         |   |       |  |  |   |       | 
|---------------------------------- |  | ----- | ----- | ---- |  | ---------------------- | ----- | --------- | ----- | - | ----- |  | ------- | - | ----- |  |  | - | ----- | 
|                                   |  |       |       |      |  | Payments Due by Period |       |           |       |  
|                                   |  |      
|                                   |  |       |       |      |  | Less than 1            |       | 1-3       |       |   |       |  | After 5
|(dollars in thousands)             |  | Total |       | year |  | years                  |       | 4-5 years | years
|                                   |  |       |       |      |  |                        |       |           |      
|Contractual Obligations            |  |       |       |      |  |                        |       |           |       |   |       |  |         |   |       |  |  |   |       | 
|Debt                               |  | $     | 4,300 |      |  | $                      | 287   |           |       | $ | 860   |  |         | $ | 3,153 |  |  | $ |      | 
|Capital lease obligations          |  |       | 57    |      |  |                        | 30    |           |       |   | 27    |  |         |   |      |  |  |   |      | 
|Operating leases                   |  |       | 1,727 |      |  |                        | 994   |           |       |   | 636   |  |         |   | 97    |  |  |   |      | 
|Environmental remediation          |  |       | 2,420 |      |  |                        | 530   |           |       |   | 315   |  |         |   | 210   |  |  |   | 1,365 | 
|                                   |  |       |       |      |  |                        |       |           |       |   |       |  |         |   |       |  |  |   |       | 
|Total contractual cash obligations |  | $     | 8,504 |      |  | $                      | 1,841 |           |       | $ | 1,838 |  |         | $ | 3,460 |  |  | $ | 1,365 | 
|                                   |  |       |       |      |  |                        |       |           |       |   |       |  |         |   |       |  |  |   |       | 

Recent Accounting Pronouncements

In May 2002, the Financial Accounting Standards Board, or FASB, issued SFAS No.
145, Rescission of FASB Statements Nos. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections as of April 2002. Adoption of the
standard is generally required in the fiscal year beginning after May 15, 2002,
with certain provisions becoming effective for financial statements issued on
or after May 15, 2002. Under the standard, transactions currently classified as
extraordinary items will no

17



---



##### Table of Contents



longer be treated as such, but instead will be reported as other non-operating
income or expenses. The Company does not expect any material impact from the
adoption of SFAS No. 145.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which supercedes the FASBs Emerging Issues
Task Force (EITF) 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). The provisions of this Statement are
required to be adopted for exit or disposal activities that are initiated after
December 31, 2002. Under this standard, a liability for a cost associated with
an exit or disposal activity formerly recognized upon the entitys commitment
to an exit plan are now recognized when the liability is incurred. This
standard will impact any future restructuring the Company approves on or after
January 1, 2003.

In November 2002, the EITF reached a consensus on Issue 00-21, Revenue
Arrangements with Multiple Deliverables. EITF 00-21 addresses revenue
recognition on arrangements encompassing multiple elements that are delivered
at different points in time defining criteria that must be met for elements to
be considered to be a separate unit of accounting. If an element is determined
to be a separate unit of accounting, the revenue for the element is recognized
at the time of delivery. The pronouncement is not expected to have a material
impact on our financial position or results of operations.

In November 2002, the FASB issued FASB Interpretation (FIN) No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN No. 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
It also clarifies that a guarantor is required to recognize, at the inception
of a guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The disclosure requirements of this
interpretation are effective for fiscal years ended after December
15, 2002. The Company is currently assessing the impact
of the recognition and measurement provisions of this interpretation on the Companys results of operations and
financial position and have not yet determined the impact of adoption.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
CompensationTransition and Disclosurean amendment of FASB Statement No. 123.
SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation,
to provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS No.148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. As provided for in SFAS No.
123, the Company has elected to apply Accounting Principles Board (APB) No.
25 Accounting for Stock Issued to Employees and related interpretations in
accounting for our stock based compensation plans. APB No. 25 does not require
stock options to be expensed when granted with an exercise price equal to fair
market value. We intend to continue to apply the provisions of APB No. 25.
See Note 2 Significant Accounting Policies  Stock-Based Compensation to our
Consolidated Financial Statements.




Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The Company does not engage in trading market risk sensitive instruments or
purchasing hedging instruments or other than trading instruments that are
likely to expose the Company to market risk, whether interest rate, foreign
currency exchange, commodity price or equity price risk. The Company has not
purchased options or entered into swaps, forward or future contracts. Signals
primary market risk exposure would be interest rate risk on borrowings under
the senior secured revolving and term loan credit facilities, which are subject
to interest rates based on the banks base rate. A change in the applicable
interest rate on these loans would affect the rate at which the Company could
borrow funds. The aggregate hypothetical loss in earnings for one year of
those borrowings held by the Company at December 31, 2002 and 2001 which are
subject to interest rate risk resulting from a hypothetical 10% increase
in interest rates is approximately $23 thousand and $40 thousand, respectively. The hypothetical
loss was determined by calculating the aggregate impact of a 10%
increase in each of our variable financial instruments held by the Company at
December 31, 2002 and 2001.

18



---



##### Table of Contents






Item 8. Financial Statements and Supplementary Data

Report of Independent Accountants

To the Board of Directors and Stockholders of Signal Technology Corporation:

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders equity and cash flows
present fairly, in all material respects, the financial position of Signal
Technology Corporation and its subsidiaries at December 31, 2002 and 2001, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Companys management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, in 2002 the
Company changed its method of accounting for long-lived assets and discontinued
operations in accordance with Statement of Financial Accounting Standards No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets.

As discussed in Note 8 to the consolidated financial statements, in 2002 the
Company changed its method of accounting for goodwill and other intangible
assets in accordance with Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts
February 14, 2003, except as to the third and fourth paragraphs
of Note 8, which are as of March 20, 2003

19



---



##### Table of Contents



Signal Technology Corporation and Subsidiaries

CONSOLIDATED BALANCE SHEETS

|                                           |                                                                                                                                                                                              |                                                                                              |        |              |        |   |        |     |        |  
|------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------- | ------ | ------------ | ------ | - | ------ | --- | ------ | -
|                                           |                                                                                                                                                                                              |                                                                                              |        | December 31,
|                                           |                                                                                                                                                                                              |                                                                                              |        |             
|(dollars in thousands)                     |                                                                                                                                                                                              | 2002                                                                                         |        | 2001        
|                                           |                                                                                                                                                                                              |                                                                                              |        |             
|ASSETS                                     |                                                                                                                                                                                              |                                                                                              |        |              |        |   |        |    
|Current assets:                            |                                                                                                                                                                                              |                                                                                              |        |              |        |   |        |    
|                                           |                                                                                                                                                                                              | Cash and cash equivalents                                                                    |        | $            | 22,675 |   |        | $   | 10,849 |  
|                                           |                                                                                                                                                                                              | Restricted cash                                                                              |        |              | 600    |   |        |     |       |  
|                                           |                                                                                                                                                                                              | Accounts receivable, net of allowance for doubtful
accounts of $243 in 2002 and $280 in 2001 |        |              | 16,675 |   |        |     | 11,673 |  
|                                           |                                                                                                                                                                                              | Inventories,
net of progress payments and reserve                                            |        |              | 12,580 |   |        |     | 13,970 |  
|                                           |                                                                                                                                                                                              | Deferred income taxes                                                                        |        |              | 9,216  |   |        |     | 1,234  |  
|                                           |                                                                                                                                                                                              | Refundable income taxes                                                                      |        |              | 2,254  |   |        |     | 2,298  |  
|                                           |                                                                                                                                                                                              | Prepaid expenses and other current assets                                                    |        |              | 776    |   |        |     | 356    |  
|                                           |                                                                                                                                                                                              | Assets from discontinued operations                                                          |        |              | 434    |   |        |     | 27,308 |  
|                                           |                                                                                                                                                                                              |                                                                                              |        |              |        |   |        |    
|Total current assets                       |                                                                                                                                                                                              |                                                                                              | 65,210 |              |        |   | 67,688 |    
|Property, plant and equipment, net         |                                                                                                                                                                                              |                                                                                              | 14,644 |              |        |   | 13,937 |    
|Goodwill                                   |                                                                                                                                                                                              |                                                                                              | 1,222  |              |        |   | 910    |    
|Deferred
income taxes                      |                                                                                                                                                                                              |                                                                                              | 1,534  |              |        |   |       |    
|Other assets                               |                                                                                                                                                                                              |                                                                                              | 843    |              |        |   | 860    |    
|                                           |                                                                                                                                                                                              |                                                                                              |        |              |        |   |        |    
|Total assets                               |                                                                                                                                                                                              | $                                                                                            | 83,453 |              |        | $ | 83,395 |    
|                                           |                                                                                                                                                                                              |                                                                                              |        |              |        |   |        |    
|LIABILITIES AND STOCKHOLDERS EQUITY       |                                                                                                                                                                                              |                                                                                              |        |              |        |   |        |    
|Current liabilities:                       |                                                                                                                                                                                              |                                                                                              |        |              |        |   |        |    
|                                           |                                                                                                                                                                                              | Accounts payable                                                                             |        | $            | 4,131  |   |        | $   | 3,507  |  
|                                           |                                                                                                                                                                                              | Accrued expenses                                                                             |        |              | 10,812 |   |        |     | 9,033  |  
|                                           |                                                                                                                                                                                              | Customer advances                                                                            |        |              | 3,050  |   |        |     | 2,055  |  
|                                           |                                                                                                                                                                                              | Current maturities of long-term debt                                                         |        |              | 292    |   |        |     | 4,609  |  
|                                           |                                                                                                                                                                                              | Liabilities from discontinued operations                                                     |        |              | 2,569  |   |        |     | 7,569  |  
|                                           |                                                                                                                                                                                              |                                                                                              |        |              |        |   |        |    
|Total current liabilities                  |                                                                                                                                                                                              |                                                                                              | 20,854 |              |        |   | 26,773 |    
|Deferred income taxes                      |                                                                                                                                                                                              |                                                                                              |       |              |        |   | 1,234  |    
|Long-term environmental liabilities        |                                                                                                                                                                                              |                                                                                              | 1,115  |              |        |   | 1,280  |    
|Long-term debt, net of current maturities  |                                                                                                                                                                                              |                                                                                              | 4,065  |              |        |   | 545    |    
|                                           |                                                                                                                                                                                              |                                                                                              |        |              |        |   |        |    
|Total liabilities                          |                                                                                                                                                                                              |                                                                                              | 26,034 |              |        |   | 29,832 |    
|                                           |                                                                                                                                                                                              |                                                                                              |        |              |        |   |        |    
|Commitments and contingencies (Note 11)    |                                                                                                                                                                                              |                                                                                              |        |              |        |   |        |    
|Stockholders equity:                      |                                                                                                                                                                                              |                                                                                              |        |              |        |   |        |    
|                                           | Preferred stock, $0.01 par value; 5,000,000 shares authorized; none issued                                                                                                                   |                                                                                              |        |              |        |   |        |     |       
|                                           | Common stock, $0.01 par value;
30,000,000 authorized; 10,772,915 shares in 2002 and 10,491,739 shares in 2001 issued
and 10,617,978 shares in 2002 and 10,336,802 shares
in 2001 outstanding |                                                                                              |        | 108          |        |   |        | 105 |       
|                                           |                                                                                                                                                                                              | Additional paid-in-capital                                                                   |        |              | 58,916 |   |        |     | 55,845 |  
|                                           |                                                                                                                                                                                              | Accumulated deficit                                                                          |        |              | (634   | ) |        |     | (1,416 | )
|                                           |                                                                                                                                                                                              |                                                                                              |        |              |        |   |        |    
|                                           |                                                                                                                                                                                              |                                                                                              | 58,390 |              |        |   | 54,534 |    
|                                           |                                                                                                                                                                                              | Less treasury stock; 154,937 shares in 2002 and 2001, at cost                                |        |              | (971   | ) |        |     | (971   | )
|                                           |                                                                                                                                                                                              |                                                                                              |        |              |        |   |        |    
|Total stockholders equity                 |                                                                                                                                                                                              |                                                                                              | 57,419 |              |        |   | 53,563 |    
|                                           |                                                                                                                                                                                              |                                                                                              |        |              |        |   |        |    
|Total liabilities and stockholders equity |                                                                                                                                                                                              | $                                                                                            | 83,453 |              |        | $ | 83,395 |    
|                                           |                                                                                                                                                                                              |                                                                                              |        |              |        |   |        |    

The accompanying notes are an integral part of the consolidated financial
statements.

20



---



##### Table of Contents



Signal Technology Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                         |          |                                              |                                                                   |                          |         |                          |         |   |         |       |        |   |        |       |        | 
|------------------------------------------------------------------------ | -------- | -------------------------------------------- | ----------------------------------------------------------------- | ------------------------ | ------- | ------------------------ | ------- | - | ------- | ----- | ------ | - | ------ | ----- | ------ | 
|                                                                         |          |                                              |                                                                   |                          |         | Years Ended December 31,
|                                                                         |          |                                              |                                                                   |                          |         |                         
|(dollars in thousands, except per share data)                            |          | 2002                                         |                                                                   | 2001                     |         | 2000                    
|                                                                         |          |                                              |                                                                   |                          |         |                         
|Net sales                                                                |          | $                                            | 86,685                                                            |                          |         | $                        | 79,307  |   |         | $     | 81,153 |  
|Cost of sales                                                            |          |                                              | 55,963                                                            |                          |         |                          | 52,092  |   |         |       | 51,837 |  
|                                                                         |          |                                              |                                                                   |                          |         |                          |         |   |         |       |        |  
|                                                                         |          | Gross profit                                 |                                                                   |                          | 30,722  |                          |         |   | 27,215  |       |        |   | 29,316 |      
|                                                                         |          |                                              |                                                                   |                          |         |                          |         |   |         |       |        |  
|Operating expenses:                                                      |          |                                              |                                                                   |                          |         |                          |         |   |         |       |        |  
|                                                                         |          | Selling, general and administrative expenses |                                                                   |                          | 18,524  |                          |         |   | 18,365  |       |        |   | 17,976 |      
|                                                                         |          | Research and development expenses            |                                                                   |                          | 1,437   |                          |         |   | 792     |       |        |   | 592    |      
|                                                                         |          |                                              |                                                                   |                          |         |                          |         |   |         |       |        |  
|                                                                         |          |                                              |                                                                   | Total operating expenses |         |                          | 19,961  |   |         |       | 19,157 |   |        |       | 18,568 | 
|                                                                         |          |                                              |                                                                   |                          |         |                          |         |   |         |       |        |  
|Operating income                                                         |          |                                              | 10,761                                                            |                          |         |                          | 8,058   |   |         |       | 10,748 |  
|Other expense                                                            |          |                                              |                                                                  |                          |         |                          |        |   |         |       | (9,105 | )
|Interest expense                                                         |          |                                              | (363                                                              | )                        |         |                          | (421    | ) |         |       | (1,058 | )
|Interest income                                                          |          |                                              | 262                                                               |                          |         |                          | 745     |   |         |       | 881    |  
|                                                                         |          |                                              |                                                                   |                          |         |                          |         |   |         |       |        |  
|Income from continuing operations before income taxes                    |          |                                              | 10,660                                                            |                          |         |                          | 8,382   |   |         |       | 1,466  |  
|Provision for (benefit from) income taxes                                |          |                                              | (5,473                                                            | )                        |         |                          | 10,805  |   |         |       | 737    |  
|                                                                         |          |                                              |                                                                   |                          |         |                          |         |   |         |       |        |  
|Income (loss) from continuing operations                                 |          |                                              | 16,133                                                            |                          |         |                          | (2,423  | ) |         |       | 729    |  
|                                                                         |          |                                              |                                                                   |                          |         |                          |         |   |         |       |        |  
|Loss from discontinued operations, net of taxes                          |          |                                              | (10,615                                                           | )                        |         |                          | (15,311 | ) |         |       | (3,252 | )
|Loss on disposal of discontinued operations, net of taxes                |          |                                              | (2,666                                                            | )                        |         |                          |        |   |         |       |       |  
|                                                                         |          |                                              |                                                                   |                          |         |                          |         |   |         |       |        |  
|                                                                         |          | Total discontinued operations                |                                                                   |                          | (13,281 | )                        |         |   | (15,311 | )     |        |   | (3,252 | )    
|                                                                         |          |                                              |                                                                   |                          |         |                          |         |   |         |       |        |  
|Income (loss) before cumulative effect of change in accounting
principle |          |                                              | 2,852                                                             |                          |         |                          | (17,734 | ) |         |       | (2,523 | )
|Cumulative effect of change in accounting principle, net of taxes        |          |                                              | (2,070                                                            | )                        |         |                          |        |   |         |       |       |  
|                                                                         |          |                                              |                                                                   |                          |         |                          |         |   |         |       |        |  
|Net income (loss)                                                        |          | $                                            | 782                                                               |                          |         | $                        | (17,734 | ) |         | $     | (2,523 | )
|                                                                         |          |                                              |                                                                   |                          |         |                          |         |   |         |       |        |  
|Per common share:                                                        |          |                                              |                                                                   |                          |         |                          |         |   |         |       |        |  
|                                                                         | Basic :  |                                              |                                                                   |                          |         |                          |         |   |         |       |        |   |       
|                                                                         |          |                                              | Income (loss) from continuing operations                          |                          | $       | 1.54                     |         |   | $       | (0.24 | )      |   | $      | 0.09  |       
|                                                                         |          |                                              | Discontinued operations                                           |                          |         | (1.27                    | )       |   |         | (1.53 | )      |   |        | (0.39 | )     
|                                                                         |          |                                              | Cumulative effect of change in accounting principle, net of taxes |                          |         | (0.20                    | )       |   |         |      |        |   |        |      |       
|                                                                         |          |                                              | Net income (loss)                                                 |                          | $       | 0.07                     |         |   | $       | (1.77 | )      |   | $      | (0.30 | )     
|                                                                         |          |                                              |                                                                   |                          |         |                          |         |   |         |       |        |  
|                                                                         | Diluted: |                                              |                                                                   |                          |         |                          |         |   |         |       |        |   |       
|                                                                         |          |                                              | Income (loss) from continuing operations                          |                          | $       | 1.45                     |         |   | $       | (0.24 | )      |   | $      | 0.08  |       
|                                                                         |          |                                              | Discontinued operations                                           |                          |         | (1.27                    | )       |   |         | (1.53 | )      |   |        | (0.39 | )     
|                                                                         |          |                                              | Cumulative effect of change in accounting principle, net of taxes |                          |         | (0.20                    | )       |   |         |      |        |   |        |      |       
|                                                                         |          |                                              | Net income (loss)                                                 |                          | $       | 0.07                     |         |   | $       | (1.77 | )      |   | $      | (0.30 | )     
|                                                                         |          |                                              |                                                                   |                          |         |                          |         |   |         |       |        |  
|Shares used in calculating net income (loss) per share                   |          |                                              |                                                                   |                          |         |                          |         |   |         |       |        |  
|                                                                         |          |                                              |                                                                   | Basic                    |         |                          | 10,449  |   |         |       | 10,003 |   |        |       | 8,537  | 
|                                                                         |          |                                              |                                                                   | Diluted                  |         |                          | 11,121  |   |         |       | 10,003 |   |        |       | 9,505  | 
|                                                                         |          |                                              |                                                                   |                          |         |                          |         |   |         |       |        |  

The accompanying notes are an integral part of the consolidated financial statements.

21



---



##### Table of Contents



Signal Technology Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

|                           |  |                                              |            |            |         |          |              |                |        |   |         |  |               |   |         |   |  |  |          |   |  |   |      |   |  |   |         |  
|-------------------------- |  | -------------------------------------------- | ---------- | ---------- | ------- | -------- | ------------ | -------------- | ------ | - | ------- |  | ------------- | - | ------- | - |  |  | -------- | - |  | - | ---- | - |  | - | ------- | -
|                           |  | Years Ended December 31, 2002, 2001 and 2000
|                           |  |                                             
|                           |  | Common Stock                                 |            |            |         | Retained |              | Treasury Stock |        |   |        
|                           |  |                                              |            | Additional |         | Earnings |              |                |        |  
|                           |  | Shares                                       |            |            | Paid-in |          | (Accumulated |                |        |   | Amount  |  | Stockholders
|(dollars in thousands)     |  | Issued                                       |            | Amount     |         | Capital  |              | Deficit)       | Shares |   | at cost |  | Equity       
|                           |  |                                              |            |            |         |          |              |                |        |   |         |  |               |  
|December 31, 1999          |  |                                              | 7,828,189  |            |         | $        | 78           |                |        | $ | 13,667  |  |               | $ | 18,841  |   |  |  | (152,100 | ) |  | $ | (900 | ) |  | $ | 31,686  |  
|Exercise of stock options  |  |                                              | 175,207    |            |         |          | 1            |                |        |   | 748     |  |               |   |         |   |  |  |          |   |  |   |      |   |  |   | 749     |  
|Issuance of common stock   |  |                                              | 2,074,289  |            |         |          | 21           |                |        |   | 35,450  |  |               |   |         |   |  |  |          |   |  |   |      |   |  |   | 35,471  |  
|Stock repurchase program   |  |                                              |            |            |         |          |              |                |        |   |         |  |               |   |         |   |  |  | (2,837   | ) |  |   | (71  | ) |  |   | (71     | )
|Stock compensation expense |  |                                              |            |            |         |          |              |                |        |   | 232     |  |               |   |         |   |  |  |          |   |  |   |      |   |  |   | 232     |  
|Net loss                   |  |                                              |            |            |         |          |              |                |        |   |         |  |               |   | (2,523  | ) |  |  |          |   |  |   |      |   |  |   | (2,523  | )
|                           |  |                                              |            |            |         |          |              |                |        |   |         |  |               |   |         |   |  |  |          |   |  |   |      |   |  |   |         |  
|December 31, 2000          |  |                                              | 10,077,685 |            |         |          | 100          |                |        |   | 50,097  |  |               |   | 16,318  |   |  |  | (154,937 | ) |  |   | (971 | ) |  |   | 65,544  |  
|Exercise of stock options  |  |                                              | 37,667     |            |         |          | 1            |                |        |   | 200     |  |               |   |         |   |  |  |          |   |  |   |      |   |  |   | 201     |  
|Issuance of common stock   |  |                                              | 376,387    |            |         |          | 4            |                |        |   | 3,433   |  |               |   |         |   |  |  |          |   |  |   |      |   |  |   | 3,437   |  
|Issuance of warrants       |  |                                              |            |            |         |          |              |                |        |   | 2,048   |  |               |   |         |   |  |  |          |   |  |   |      |   |  |   | 2,048   |  
|Stock compensation expense |  |                                              |            |            |         |          |              |                |        |   | 67      |  |               |   |         |   |  |  |          |   |  |   |      |   |  |   | 67      |  
|Net loss                   |  |                                              |            |            |         |          |              |                |        |   |         |  |               |   | (17,734 | ) |  |  |          |   |  |   |      |   |  |   | (17,734 | )
|                           |  |                                              |            |            |         |          |              |                |        |   |         |  |               |   |         |   |  |  |          |   |  |   |      |   |  |   |         |  
|December 31, 2001          |  |                                              | 10,491,739 |            |         |          | 105          |                |        |   | 55,845  |  |               |   | (1,416  | ) |  |  | (154,937 | ) |  |   | (971 | ) |  |   | 53,563  |  
|Exercise of stock options  |  |                                              | 183,399    |            |         |          | 2            |                |        |   | 1,145   |  |               |   |         |   |  |  |          |   |  |   |      |   |  |   | 1,147   |  
|Issuance of common stock   |  |                                              | 97,777     |            |         |          | 1            |                |        |   | 474     |  |               |   |         |   |  |  |          |   |  |   |      |   |  |   | 475     |  
|Stock compensation expense |  |                                              |            |            |         |          |              |                |        |   | 1,452   |  |               |   |         |   |  |  |          |   |  |   |      |   |  |   | 1,452   |  
|Net income                 |  |                                              |            |            |         |          |              |                |        |   |         |  |               |   | 782     |   |  |  |          |   |  |   |      |   |  |   | 782     |  
|                           |  |                                              |            |            |         |          |              |                |        |   |         |  |               |   |         |   |  |  |          |   |  |   |      |   |  |   |         |  
|December 31, 2002          |  |                                              | 10,772,915 |            |         | $        | 108          |                |        | $ | 58,916  |  |               | $ | (634    | ) |  |  | (154,937 | ) |  | $ | (971 | ) |  | $ | 57,419  |  
|                           |  |                                              |            |            |         |          |              |                |        |   |         |  |               |   |         |   |  |  |          |   |  |   |      |   |  |   |         |  

The accompanying notes are an integral part of the consolidated financial
statements.

22



---



##### Table of Contents



Signal Technology Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                                          |                                                                          |      |                          |         |   |      |         |        |   |   |         |         |  
|------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | ---- | ------------------------ | ------- | - | ---- | ------- | ------ | - | - | ------- | ------- | -
|                                                                                                                          |                                                                          |      | Years Ended December 31,
|                                                                                                                          |                                                                          |      |                         
|(dollars in thousands)                                                                                                    |                                                                          | 2002 |                          | 2001    |   | 2000
|                                                                                                                          |                                                                          |      |                          |         |   |     
|Cash flows from operating activities:                                                                                     |                                                                          |      |                          |         |   |      |         |        |   |   |         |        
|Net income (loss)                                                                                                         |                                                                          | $    | 782                      |         |   | $    | (17,734 | )      |   | $ | (2,523  | )      
|                                                                                                                          | Total loss from discontinued operations                                  |      |                          | 13,281  |   |      |         | 15,311 |   |   |         | 3,252   |  
|                                                                                                                          | Cumulative effect of accounting change                                   |      |                          | 2,070   |   |      |         |       |   |   |         |        |  
|                                                                                                                          |                                                                          |      |                          |         |   |      |         |        |   |   |         |        
|Income (loss) from continuing operations                                                                                  |                                                                          |      | 16,133                   |         |   |      | (2,423  | )      |   |   | 729     |        
|Adjustments to reconcile income (loss) from continuing operations to net
cash provided by (used in) operating activities: |                                                                          |      |                          |         |   |      |         |        |   |   |         |        
|                                                                                                                          | Depreciation and amortization                                            |      |                          | 2,536   |   |      |         | 3,022  |   |   |         | 2,758   |  
|                                                                                                                          | Non-cash compensation                                                    |      |                          | 1,266   |   |      |         | 133    |   |   |         | 232     |  
|                                                                                                                          | Deferred taxes                                                           |      |                          | (10,569 | ) |      |         | 7,382  |   |   |         | (4,772  | )
|                                                                                                                          | Gain (loss) on disposal of property, plant and equipment                 |      |                          | (10     | ) |      |         | (801   | ) |   |         | 303     |  
|Changes in operating assets and liabilities, net of effects of purchase of
LogiMetrics in 2000:                           |                                                                          |      |                          |         |   |      |         |        |   |   |         |        
|                                                                                                                          | Accounts receivable                                                      |      |                          | (5,002  | ) |      |         | 2,758  |   |   |         | (2,046  | )
|                                                                                                                          | Inventory                                                                |      |                          | 1,390   |   |      |         | (3,726 | ) |   |         | (727    | )
|                                                                                                                          | Refundable income taxes                                                  |      |                          | 44      |   |      |         | (2,298 | ) |   |         | 638     |  
|                                                                                                                          | Prepaid expenses and other current assets                                |      |                          | (162    | ) |      |         | (21    | ) |   |         | 7       |  
|                                                                                                                          | Accounts payable                                                         |      |                          | 1,039   |   |      |         | (1,979 | ) |   |         | 1,225   |  
|                                                                                                                          | Accrued expenses                                                         |      |                          | 1,614   |   |      |         | (8,517 | ) |   |         | 7,937   |  
|                                                                                                                          | Customer advances                                                        |      |                          | 995     |   |      |         | 322    |   |   |         | 120     |  
|                                                                                                                          | Other long-term liabilities                                              |      |                          |        |   |      |         | 286    |   |   |         | 994     |  
|                                                                                                                          |                                                                          |      |                          |         |   |      |         |        |   |   |         |        
|Net cash provided by (used in) operating activities                                                                       |                                                                          |      | 9,274                    |         |   |      | (5,862  | )      |   |   | 7,398   |        
|                                                                                                                          |                                                                          |      |                          |         |   |      |         |        |   |   |         |        
|Cash flows from investing activities:                                                                                     |                                                                          |      |                          |         |   |      |         |        |   |   |         |        
|                                                                                                                          | Acquisitions and associated costs                                        |      |                          |        |   |      |         |       |   |   |         | 2,054   |  
|                                                                                                                          | Additions to property, plant and equipment                               |      |                          | (2,422  | ) |      |         | (1,905 | ) |   |         | (2,514  | )
|                                                                                                                          | Proceeds
from disposal of property, plant and equipment and other assets |      |                          | 23      |   |      |         | 18     |   |   |         | 14      |  
|                                                                                                                          | Proceeds from sale of discontinued operations                            |      |                          | 4,405   |   |      |         |       |   |   |         |        |  
|                                                                                                                          | Issuance of loan to employee                                             |      |                          |        |   |      |         |       |   |   |         | (140    | )
|                                                                                                                          |                                                                          |      |                          |         |   |      |         |        |   |   |         |        
|Net cash provided by (used in) investing activities                                                                       |                                                                          |      | 2,006                    |         |   |      | (1,887  | )      |   |   | (586    | )      
|                                                                                                                          |                                                                          |      |                          |         |   |      |         |        |   |   |         |        
|Cash flows from financing activities:                                                                                     |                                                                          |      |                          |         |   |      |         |        |   |   |         |        
|                                                                                                                          | Restricted cash                                                          |      |                          | (600    | ) |      |         |       |   |   |         |        |  
|                                                                                                                          | Proceeds from issuance of debt, net of issuance costs                    |      |                          | 4,209   |   |      |         |       |   |   |         |        |  
|                                                                                                                          | Proceeds from exercise of stock options                                  |      |                          | 1,147   |   |      |         | 201    |   |   |         | 749     |  
|                                                                                                                          | Purchase of treasury stock                                               |      |                          |        |   |      |         |       |   |   |         | (71     | )
|                                                                                                                          | Proceeds from issuance of common stock, net of issuance costs            |      |                          | 475     |   |      |         | 640    |   |   |         | 35,471  |  
|                                                                                                                          | Borrowings under bank revolving credit facilities                        |      |                          |        |   |      |         |       |   |   |         | 14,500  |  
|                                                                                                                          | Payments on borrowings under bank revolving credit facilities            |      |                          |        |   |      |         |       |   |   |         | (17,500 | )
|                                                                                                                          | Payments of debt                                                         |      |                          | (5,262  | ) |      |         | (610   | ) |   |         | (326    | )
|                                                                                                                          |                                                                          |      |                          |         |   |      |         |        |   |   |         |        
|Net cash provided by (used in) financing activities                                                                       |                                                                          |      | (31                      | )       |   |      | 231     |        |   |   | 32,823  |        
|                                                                                                                          |                                                                          |      |                          |         |   |      |         |        |   |   |         |        
|Net cash provided by (used in) continuing operations                                                                      |                                                                          |      | 11,249                   |         |   |      | (7,518  | )      |   |   | 39,635  |        
|Net cash provided by (used in) discontinued operations                                                                    |                                                                          |      | 577                      |         |   |      | (12,656 | )      |   |   | (12,043 | )      
|                                                                                                                          |                                                                          |      |                          |         |   |      |         |        |   |   |         |        
|Net increase (decrease) in cash                                                                                           |                                                                          |      | 11,826                   |         |   |      | (20,174 | )      |   |   | 27,592  |        
|Cash, beginning of year                                                                                                   |                                                                          |      | 10,849                   |         |   |      | 31,023  |        |   |   | 3,431   |        
|                                                                                                                          |                                                                          |      |                          |         |   |      |         |        |   |   |         |        
|Cash, end of year                                                                                                         |                                                                          | $    | 22,675                   |         |   | $    | 10,849  |        |   | $ | 31,023  |        
|                                                                                                                          |                                                                          |      |                          |         |   |      |         |        |   |   |         |        

The accompanying notes are an integral part of the financial statements.

23



---



##### Table of Contents



Signal Technology Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)



|1. |  | NATURE OF OPERATIONS
|-- |  | --------------------

Signal Technology Corporations principal business is the design, development
and manufacture of power management products and sophisticated electronic radio
frequency (RF), components and subsystems, as well as providing program
management and systems integration for wireless networks of sensors. Signal
was incorporated in 1982 and has traditionally been a supplier to the defense
industry. Signals sophisticated RF, microwave and millimeter wave electronic
components are used in applications such as radar, communications,
and smart
weapons and contain technology to receive, transmit and process wireless data
signals.



|2. |  | SIGNIFICANT ACCOUNTING POLICIES
|-- |  | -------------------------------

Basis of Presentation

The consolidated financial statements include the accounts of Signal Technology
Corporation and its wholly-owned subsidiaries. Intercompany accounts and
transactions have been eliminated. Certain items in the prior years
consolidated financial statements have been reclassified to conform to the
current years presentation.

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make 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 and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Revenue Recognition and Cost Estimation

A significant portion of Signals business is comprised of development and
production contracts which are accounted for under the provisions of the
American Institute of Certified Public Accountants (AICPA) Statement of
Position No. 81-1, Accounting for Performance of Construction-Type and Certain
Production-Type Contracts. Generally, revenue on long-term fixed-price
contracts is recorded on a percentage of completion basis using units of
delivery as the measurement basis for progress toward completion. Certain
contracts that provide for delivery of low production quantities or have a
significant amount of product development effort sales may be recorded using
performance milestones or using the cost-to-cost method of percentage of
completion accounting. Sales under cost-reimbursement-type contracts are
recorded as costs are incurred. Certain amounts included in receivables
represent the recognized sales value of performance under long-term contracts
where such amounts had not been billed and were not billable to customers at
the balance sheet dates. The amount of such unbilled receivables at December
31, 2002 and December 31, 2001 were $685 and $329, respectively.

Contract accounting requires judgment relative to estimating costs and making
assumptions related to technical issues and delivery schedule. Contract costs
include material, subcontract costs, labor and an allocation of indirect costs.
Our materials include high-technology parts and components that may be
specialized in nature or subject to rapid technology obsolescence. While we
have programs to minimize the required inventories on hand and consider
technology obsolescence in estimating reserves to reduce recorded amounts to
net realizable value, such estimates could change in the future. The estimation
of cost at completion of a contract is subject to numerous variables involving
contract costs and estimates as to the length of time to complete the contract.
Estimated losses on contracts are recognized in full when they become known.

Cash and Cash Equivalents

All highly liquid investments which have an original maturity of three months
or less are considered to be cash equivalents.

Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts to provide for the
estimated amount of accounts receivable that will not be collected. The
allowance is based upon an assessment of customer credit worthiness, historical
payment experience and the age of outstanding receivables. Activity related to
the allowance for doubtful accounts was as follows:

|                             |              |   |     |      |  
|---------------------------- | ------------ | - | --- | ---- | -
|Balance at December 31, 1999 |              | $ | 195 |     
|                             | Provisions   |   |     | 178  |  
|                             | Utilizations |   |     | (58  | )
|                             |              |   |     |     
|Balance at December 31, 2000 |              | $ | 315 |     
|                             | Provisions   |   |     | 77   |  
|                             | Utilizations |   |     | (112 | )
|                             |              |   |     |     
|Balance at December 31, 2001 |              | $ | 280 |     
|                             | Provisions   |   |     | 90   |  
|                             | Utilizations |   |     | (127 | )
|                             |              |   |     |     

24



---



##### Table of Contents



|                             |  |   |     |  | 
|---------------------------- |  | - | --- |  | 
|Balance at December 31, 2002 |  | $ | 243 | 
|                             |  |   |     | 

Inventories

Inventories, other than inventoried costs relating to contracts and programs,
are stated at the lower of cost (principally first-in, first-out) or market.
Inventoried costs relating to contracts are stated at the actual production
cost, including overhead incurred to date reduced by amounts identified with
revenue recognized on units delivered or progress completed. Inventoried costs
relating to long-term contracts and programs are reduced by charging any
amounts in excess of estimated realizable value to cost of sales.

Inventories may include amounts relating to contracts and programs having
production cycles longer than one year and a portion thereof will not be
realized within one year.

The Company maintains a reserve for inventory items to provide for the
estimated amount of inventory that is excess. The reserve is
based upon an assessment of inventory materials on hand as compared to its
estimated future usage. Activity related to the inventory reserve was as
follows:

|                             |              |   |       |        |  
|---------------------------- | ------------ | - | ----- | ------ | -
|Balance at December 31, 1999 |              | $ | 4,476 |       
|                             | Provisions   |   |       | 615    |  
|                             | Utilizations |   |       | (1,371 | )
|                             |              |   |       |       
|Balance at December 31, 2000 |              | $ | 3,720 |       
|                             | Provisions   |   |       | 197    |  
|                             | Utilizations |   |       | 138    |  
|                             |              |   |       |       
|Balance at December 31, 2001 |              | $ | 4,055 |       
|                             | Provisions   |   |       | 602    |  
|                             | Utilizations |   |       | (85    | )
|                             |              |   |       |       
|Balance at December 31, 2002 |              | $ | 4,572 |       
|                             |              |   |       |       

Property, Plant and Equipment

Property, plant and equipment are carried at cost less accumulated depreciation
and amortization. Depreciation is provided using the straight-line method over
the estimated useful life of the asset. Leasehold improvements are amortized
over the lesser of their useful lives or the life of the lease. Useful lives
are as follows:

|                        |  |           |  | 
|----------------------- |  | --------- |  | 
|Buildings               |  | 33 years 
|Leasehold improvements  |  | 15 years 
|Machinery and equipment |  | 2-8 years
|Furniture and fixtures  |  | 5-7 years

Maintenance and repairs are charged to expense as incurred; improvements are
capitalized. Upon retirement or sale, the cost of the assets disposed of and
the related accumulated depreciation are removed from the accounts; any
resulting gain or loss is credited or charged to income.

Goodwill and Purchased Intangible Assets

Purchased intangible assets with finite lives are amortized using the
straight-line method over the estimated economic lives of the assets. Purchased intangible assets determined to have indefinite useful lives and goodwill are
not amortized but are regularly reviewed for potential impairment.

Impairment of Long-Lived Assets

On January 1, 2002, the Company adopted Statement of Financial Account
Standards (SFAS) No. 144, Accounting for the Impairment of Long-lived
Assets. Accordingly, upon indication of possible impairment, we evaluate the
recovery of held-for-use long lived assets by measuring the carrying amount of
the assets against the related estimated undiscounted future cash flows. When
an evaluation indicates that the future undiscounted cash flows are not
sufficient to recover the carrying value of the asset, the asset is adjusted to
its estimated fair value. The following circumstances would be considered
important and could lead to an impairment review; significant changes in the
manner of our using the asset, negative industry or economic trends and
underperformance relative to projected operating results.

Research and Development

Expenditures for company-sponsored research and development projects are
expensed as incurred. Customer-sponsored research and development projects are
funded and included as revenue and cost of revenue. The Company retains the
right to all intellectual property associated with these efforts, including
intellectual property, drawings, processes, and know-how.

During the three years ended December 31, 2002, 2001 and 2000, the Company
incurred $5,658, $3,727 and $3,731, respectively, of costs for research and
development contracts on behalf of customers.

25



---



##### Table of Contents



Income Taxes

Deferred tax assets and liabilities consist of differences between the tax
basis of assets and liabilities and their basis for financial reporting
purposes and are measured based on the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. Deferred tax assets are
stated at their estimated realizable value. The provision for income taxes
consists of estimated federal and state income taxes currently payable adjusted
for changes between periods in the measurement of deferred tax assets and
liabilities. If the Company believes that it is more likely than not that the
asset is not recoverable, a valuation allowance is established, or a change
therein is made, and it is included as an expense for that period within the
tax provision in the statement of operations.

Earnings Per Share

Basic net income (loss) per share
is computed by dividing net income (loss) available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted net income (loss) is computed giving
effect to all dilutive potential common shares that were outstanding during the
period. Dilutive potential common shares consist of the incremental common
shares issuable upon the exercise of stock options and warrants outstanding for
all periods using the treasury stock method.

The weighted average shares outstanding for both basic and diluted EPS is as
follows:

|                                                   |  |      |        |      |  |      |        |  |  |  |       | 
|-------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  |  | ----- | 
|                                                   |  | 2002 |        | 2001 |  | 2000
|                                                   |  |      |        |      |  |     
|Basic EPS  - common shares outstanding             |  |      | 10,449 |      |  |      | 10,003 |  |  |  | 8,537 | 
|Effect of dilutive securities Common stock options |  |      | 672    |      |  |      |       |  |  |  | 968   | 
|                                                   |  |      |        |      |  |      |        |  |  |  |       | 
|Diluted EPS  - common shares outstanding           |  |      | 11,121 |      |  |      | 10,003 |  |  |  | 9,505 | 
|                                                   |  |      |        |      |  |      |        |  |  |  |       | 

As of December 31, 2002, 2001 and 2000, the number of additional dilutive shares was 1,726, 2,251 and 302, respectively, and such shares have
not been included in the above calculation as the effect would be antidilutive.

Stock-Based Compensation

Employee stock compensation plans are accounted for in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees and related interpretations, including Financial
Accounting Standards Board (FASB) Interpretation No. (FIN) 44,
Accounting for Certain Transactions Involving Stock Compensation. The
Company adopted the disclosure requirements of SFAS No. 123, Accounting for
Stock-Based Compensation. All stock based awards to non-employees are
accounted for at their fair value as prescribed by SFAS No. 123 (see Note 13).
Accordingly, no compensation cost has been recognized under SFAS No. 123 for
the Companys employee stock option plans. Had compensation cost for the awards
under the plans been determined based on the grant date fair values, consistent
with the method required under SFAS No. 123, the Companys net loss and net
loss per share would have been reduced to the pro forma amounts indicated
below:

The following information concerning the stock option and employee stock
purchase plans is provided in accordance with SFAS No. 123, Accounting for
Stock-Based Compensation. The Company accounts for such plans in accordance
with APB No. 25 and related Interpretations.

The fair value of each option grant has been estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions are as follows:

|                         |  |           |      |           |  |           |      |   |  |  |      |  
|------------------------ |  | --------- | ---- | --------- |  | --------- | ---- | - |  |  | ---- | -
|                         |  | 2002      |      | 2001      |  | 2000     
|                         |  |           |      |           |  |          
|Risk-free Interest Rates |  |           | 2.8  | %         |  |           | 4.5  | % |  |  | 5.0  | %
|Expected Life            |  | 6.7 years |      | 7.5 years |  | 6.6 years
|Volatility               |  |           | 0.74 |           |  |           | 0.76 |   |  |  | 0.72 |  
|Dividend Yield           |  |           |     |           |  |           |     |   |  |  |     |  

The weighted average fair value of those options granted in 2002, 2001 and 2000
was $6.91, $2.74 and $13.57, respectively.

|                                     |                                                                                                   |   |        |        |      |   |         |        |   |   |        |        |  
|------------------------------------ | ------------------------------------------------------------------------------------------------- | - | ------ | ------ | ---- | - | ------- | ------ | - | - | ------ | ------ | -
|                                     |                                                                                                   |   | 2002   |        | 2001 |   | 2000   
|                                     |                                                                                                   |   |        |        |      |   |        
|Net income (loss)  as reported      |                                                                                                   | $ | 782    |        |      | $ | (17,734 | )      |   | $ | (2,523 | )     
|                                     | Add: Stock-based employee
compensation expense included in net income, net of related tax
effects |   |        | 114    |      |   |         | 36     |   |   |        | 153    |  
|                                     | Deduct:
Stock-based employee
compensation expense, net of
related tax effects                     |   |        | (2,561 | )    |   |         | (4,177 | ) |   |        | (1,588 | )
|                                     |                                                                                                   |   |        |        |      |   |         |        |   |   |        |       
|Net loss  pro forma                 |                                                                                                   | $ | (1,665 | )      |      | $ | (21,875 | )      |   | $ | (3,958 | )     
|                                     |                                                                                                   |   |        |        |      |   |         |        |   |   |        |       
|Basic net income (loss) per share:   |                                                                                                   |   |        |        |      |   |         |        |   |   |        |       
|                                     | As reported                                                                                       |   | $      | 0.07   |      |   | $       | (1.77  | ) |   | $      | (0.30  | )
|                                     | Pro forma                                                                                         |   | $      | (0.16  | )    |   | $       | (2.19  | ) |   | $      | (0.46  | )
|Diluted net income (loss) per share: |                                                                                                   |   |        |        |      |   |         |        |   |   |        |       
|                                     | As reported                                                                                       |   | $      | 0.07   |      |   | $       | (1.77  | ) |   | $      | (0.30  | )
|                                     | Pro forma                                                                                         |   | $      | (0.16  | )    |   | $       | (2.19  | ) |   | $      | (0.46  | )
|                                     |                                                                                                   |   |        |        |      |   |         |        |   |   |        |       

Comprehensive Income (Loss)

There were no differences between net income (loss) and comprehensive income
(loss) for the years ended December 31, 2002, 2001 and 2000.

Legal and Environmental Costs

The Company is involved in certain legal proceedings. An estimate of probable
costs for these claims is accrued, in consultation with outside counsel
handling our defense in these matters. Environmental expenditures related to
existing conditions from past or current operations are expensed. Any
liability is determined on a site by site basis and is recorded at the time it
is probable and can be reasonably estimated. Such liability is reduced to
reflect the anticipated participation of other responsible parties
when it is both probable that such parties are legally responsible and
financially capable of paying their respective share of the relevant cost. The
estimated liability is calculated using a discounted cash flow method
(See Note 11).

26



---



##### Table of Contents



Recent Accounting Pronouncements

In May 2002, the FASB issued SFAS No.
145, Rescission of FASB Statements Nos. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections as of April 2002. Adoption of the
standard is generally required in the fiscal year beginning after May 15, 2002,
with certain provisions becoming effective for financial statements issued on
or after May 15, 2002. Under the standard, transactions currently classified as
extraordinary items will no longer be treated as such, but instead will be
reported as other non-operating income or expenses. The Company does not expect
any material impact from the adoption of SFAS No. 145.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which supercedes the FASBs Emerging Issues
Task Force (EITF) 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). The provisions of this Statement are
required to be adopted for exit or disposal activities that are initiated after
December 31, 2002. Under this standard, a liability for a cost associated with
an exit or disposal activity formerly recognized upon the entitys commitment
to an exit plan are now recognized when the liability is incurred. This
standard will impact any future restructuring the Company approves on or after
January 1, 2003.

In November 2002, the EITF reached a consensus on Issue 00-21, Revenue
Arrangements with Multiple Deliverables. EITF 00-21 addresses revenue
recognition on arrangements encompassing multiple elements that are delivered
at different points in time defining criteria that must be met for elements to
be considered to be a separate unit of accounting. If an element is determined
to be a separate unit of accounting, the revenue for the element is recognized
at the time of delivery. The pronouncement is not expected to have a material
impact on our financial position or results of operations.

In November 2002, the FASB issued FIN 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
It also clarifies that a guarantor is required to recognize, at the inception
of a guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The disclosure requirements of this
interpretation are effective for fiscal years ended after December
15, 2002. The Company is currently assessing the impact
of the recognition and measurement provisions of this interpretation on the Companys results of operations
and financial position and have not yet determined the impact of
adoption.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
CompensationTransition and Disclosurean amendment of FASB Statement No. 123.
SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation,
to provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. As provided for in SFAS No.
123, the Company has elected to apply Accounting Principles Board (APB) No.
25 Accounting for Stock Issued to Employees and related interpretations in
accounting for our stock based compensation plans. APB No. 25 does not require
stock options to be expensed when granted with an exercise price equal to fair
market value. We intend to continue to apply the provisions of APB No. 25.

Concentrations of Risk

The market for Signals defense electronics products is largely dependent on
the availability of new contracts from United States Government authorities to
prime contractors to which we provide components. Any decline in expenditures
by United States government authorities may have an adverse effect on our
financial performance. Credit is generally extended to customers and,
therefore, collection of receivables is affected by the defense industry
economy. Extensions of credit are closely monitored, and reserves are
maintained for
potential credit losses. Such potential losses are frequently reviewed by
management to ensure the adequacy of the reserve.

International sales are denominated in United States currency. Consequently,
changes in exchange rates that strengthen the United States dollar could
increase the price in local currencies of Signals products in foreign markets
and make these products relatively more expensive than competitors products
that are denominated in local currencies, leading to a potential reduction in
sales or profitability in those foreign markets.

Amounts reported for cash equivalents, receivables and other financial
instruments are considered to be approximate fair values based upon comparable
market information available at the respective balance sheet dates. Financial
instruments that potentially subject the Company to concentrations of credit
risks consist principally of cash and note and trade receivables. Substantially
all of the Companys cash is invested in short-term United States Treasury
bills.

The Company must comply with detailed government procurement and contracting
regulations and with United States government security regulations, certain of
which carry substantial penalty provisions for nonperformance or
misrepresentation in the course of negotiations. Failure on the part of the
Company to comply with government procurement, contracting or security
obligations could result in penalties or suspension from government
contracting, which would have a material adverse
effect on the Companys results of operations.

27



---



##### Table of Contents



3.      ACQUISITIONS AND DISPOSALS

Acquisition
In November 2000, the Company received $2,090 in exchange for assuming
substantially all the assets and liabilities of LogiMetrics power amplifier
business previously located in Bohemia, New York. The transaction was
accounted for as a purchase and results of operations since the acquisition
date are included in the consolidated statements of operations. From February
2000 through the acquisition date, Signal managed the business, which was a
security interest for a loan under an agreement with LogiMetrics, and results
from operations were reported as other expense. This loan was repaid in July
2000.

The assets and liabilities recorded in connection with the acquisition of
LogiMetrics power amplifier business are based upon estimates of fair value.
The asset and liabilities recorded were $26 and $1,614, respectively. Excess
of acquired net assets over cost of $502 was being amortized on a straight-line
basis over three years until January 2002, at which time amortization ceased in
accordance with SFAS No. 142, Goodwill and Other Intangible Assets and the
Company reversed the remaining negative goodwill into income.

Assuming the acquisition described above had been made on January 1, 2000, the
Companys unaudited pro forma condensed results of operations would have been
as follows:

|                    |         |   |                   |       |  
|------------------- | ------- | - | ----------------- | ----- | -
|                    |         |   | Year Ended       
|                    |         |   | December 31, 2000
|                    |         |   |                  
|Net sales           |         | $ | 82,219            |      
|Net loss            |         | $ | (2,517            | )    
|Net loss per share: |         |   |                   |      
|                    | Basic   |   | $                 | (0.30 | )
|                    | Diluted |   | $                 | (0.30 | )

The pro forma results have been prepared for comparative purposes only and do
not purport to be indicative of what would have occurred had the acquisition
been made on January 1, 2000, or of results which may occur in the future.

Discontinued Operations
In response to the global weakness in the telecom industry and consistent with
the Companys desire to return to its core defense business, the Company
completed the sale of certain assets of its commercial fixed wireless business
unit to Endwave Corporation for approximately $3,400 in cash on September 24,
2002. As part of this transaction, the Company retained the receivables
associated with this business, which amounted to approximately $2,100 at the
time of closing. As of December 31, 2002, the remaining net
receivable balance was $434. Additionally, on November 20, 2002, the Company completed the
sale of certain assets of its mobile appliance business unit to Paratek
Microwave, Inc. for approximately $1,300 in cash.

In addition to the net loss from discontinued operations, the Company recorded
a pretax loss on the disposal of both these discontinued operations during the year ended December 31, 2002 in the
amount of $2,608 pretax, $1,802 after tax and $1,251 pretax and $864 after tax,
respectively. The benefits for income taxes included in discontinued
operations for the current period reflect expected refunds of prior year taxes
resulting from the carryback of net operating losses.

The Company has no further continuing
obligations related to these two businesses, with the exception of
the outstanding accounts receivable balance discussed above and the
Northrop Grumman, Vitesse and Richardson legal matters, as discussed
in Note 11.

The Company recognized
approximately $1.0 million of stock-based compensation during 2002, related to
the accelerated vesting of stock options held by employees of the two
discontinued operations. This compensation charge was included in the
loss on sale for each of the discontinued businesses during 2002.

On January 1, 2002, the Company adopted SFAS No. 144, Accounting for the
Impairment of Long-lived Assets. The summary of operating results from
discontinued operations is as follows:

|                                      |                     |   |         |     |      |   |         |        |   |   |        |       | 
|------------------------------------- | ------------------- | - | ------- | --- | ---- | - | ------- | ------ | - | - | ------ | ----- | 
|                                      |                     |   | 2002    |     | 2001 |   | 2000   
|                                      |                     |   |         |     |      |   |        
|Net sales                             |                     | $ | 4,173   |     |      | $ | 11,244  |        |   | $ | 17,334 |      
|Cost of sales                         |                     |   | 3,815   |     |      |   | 20,445  |        |   |   | 14,745 |      
|                                      | Gross profit (loss) |   |         | 358 |      |   |         | (9,201 | ) |   |        | 2,589 | 
|Operating expenses                    |                     |   | 15,179  |     |      |   | 12,349  |        |   |   | 7,877  |      
|Operating loss                        |                     |   | (14,821 | )   |      |   | (21,550 | )      |   |   | (5,288 | )    
|Other expenses                        |                     |   | 30      |     |      |   | 42      |        |   |   |       |      
|                                      |                     |   |         |     |      |   |         |        |   |   |        |      
|Loss
before benefit from income taxes |                     |   | (14,851 | )   |      |   | (21,592 | )      |   |   | (5,288 | )    
|Benefit
from income taxes             |                     |   | 4,236   |     |      |   | 6,281   |        |   |   | 2,036  |      
|                                      |                     |   |         |     |      |   |         |        |   |   |        |      
|Loss from discontinued operations     |                     | $ | (10,615 | )   |      | $ | (15,311 | )      |   | $ | (3,252 | )    
|                                      |                     |   |         |     |      |   |         |        |   |   |        |      

Net assets (liabilities) from discontinued operations consisted of the
following at December 31,

|                                                      |  |      |        |      |  |   |        | 
|----------------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | 
|                                                      |  | 2002 |        | 2001
|                                                      |  |      |        |     
|Accounts
receivable                                   |  | $    | 434    |      |  | $ | 2,123  | 
|Inventory,
net of reserve                             |  |      |       |      |  |   | 4,705  | 
|Property,
plant and equipment, net                    |  |      |       |      |  |   | 3,866  | 
|Intangibles,
net                                      |  |      |       |      |  |   | 13,607 | 
|Other
assets                                          |  |      |       |      |  |   | 3,007  | 
|                                                      |  |      |        |      |  |   |        | 
|Total
current assets                                  |  | $    | 434    |      |  | $ | 27,308 | 
|                                                      |  |      |        |      |  |   |        | 
|Accounts
payable                                      |  | $    | 31     |      |  | $ | 1,144  | 
|Accrued
expenses                                      |  |      | 2,538  |      |  |   | 2,158  | 
|Other
liabilities                                     |  |      |       |      |  |   | 4,267  | 
|                                                      |  |      |        |      |  |   |        | 
|Total
current liabilities                             |  | $    | (2,569 | )    |  | $ | 7,569  | 
|                                                      |  |      |        |      |  |   |        | 
|Net
assets (liabilities) from discontinued operations |  | $    | (2,135 | )    |  | $ | 19,739 | 
|                                                      |  |      |        |      |  |   |        | 

28



---



##### Table of Contents



4.      OTHER ASSETS

At December 31, 2002 and 2001 other assets includes a mortgage receivable in
the amount of $767 and $782, respectively. In April 1996, the Company issued
the mortgage related to the sale of its former operating facility in Weymouth,
Massachusetts and retained an environmental liability present at the site. The
mortgage receivable matures on September 1, 2023, and principal and interest
payments of approximately $6 are due monthly. The Company earns
interest on the mortgage receivable at a rate of 8.0% per annum and interest
income for the years ended December 31, 2002, 2001 and 2000 amounted to $63,
$64 and $65, respectively. Also included in other assets at December 31,
2002, is an employee note receivable in the amount of $4. The note receivable
accrues interest at the average rate of interest earned on the Companys cash
equivalents. In exchange for continued employment until January 2003, and
under certain conditions, the note and accrued interest will be forgiven.

5.      STATEMENTS OF CASH FLOWS

|                                                                                                    |  |                          |     |      |  |      |       |  |  |   |       | 
|--------------------------------------------------------------------------------------------------- |  | ------------------------ | --- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                                                                                    |  | Years Ended December 31,
|                                                                                                    |  |                         
|                                                                                                    |  | 2002                     |     | 2001 |  | 2000
|                                                                                                    |  |                          |     |      |  |     
|Cash paid during period for:                                                                        |  |                          |     |      |  |      |       |  |  |   |       | 
|Interest                                                                                            |  | $                        | 382 |      |  | $    | 427   |  |  | $ | 999   | 
|Taxes                                                                                               |  |                          | 5   |      |  | $    | 1,692 |  |  |   | 2,673 | 
|                                                                                                   
|Supplemental
disclosure of non-cash financing activities:                                           |  |                          |     |      |  |      |       |  |  |   |       | 
|Non-cash
financing activity related to stock-based compensation included in discontinued operations |  | $                        |    |      |  | $    | 2,797 |  |  | $ |      | 

6.      INVENTORIES

|                                     |  |              |        |      |  |   |        |  
|------------------------------------ |  | ------------ | ------ | ---- |  | - | ------ | -
|                                     |  | December 31,
|                                     |  |             
|                                     |  | 2002         |        | 2001
|                                     |  |              |        |     
|Raw materials                        |  | $            | 5,209  |      |  | $ | 5,429  |  
|Work in progress                     |  |              | 12,777 |      |  |   | 13,795 |  
|Finished goods                       |  |              |       |      |  |   | 14     |  
|                                     |  |              |        |      |  |   |        |  
|                                     |  |              | 17,986 |      |  |   | 19,238 |  
|Less: Unliquidated progress payments |  |              | (834   | )    |  |   | (1,213 | )
|Reserve
for excess inventory         |  |              | (4,572 | )    |  |   | (4,055 | )
|                                     |  |              |        |      |  |   |        |  
|                                     |  | $            | 12,580 |      |  | $ | 13,970 |  
|                                     |  |              |        |      |  |   |        |  

7.      PROPERTY, PLANT AND EQUIPMENT

|                                    |  |              |         |      |  |   |         |  
|----------------------------------- |  | ------------ | ------- | ---- |  | - | ------- | -
|                                    |  | December 31,
|                                    |  |             
|                                    |  | 2002         |         | 2001
|                                    |  |              |         |     
|Land                                |  | $            | 992     |      |  | $ | 992     |  
|Building and leasehold improvements |  |              | 10,810  |      |  |   | 10,631  |  
|Machinery and equipment             |  |              | 30,634  |      |  |   | 28,250  |  
|Furniture and fixtures              |  |              | 5,272   |      |  |   | 4,470   |  
|                                    |  |              |         |      |  |   |         |  
|                                    |  |              | 47,708  |      |  |   | 44,343  |  
|Less: Accumulated depreciation      |  |              | (33,064 | )    |  |   | (30,406 | )
|                                    |  |              |         |      |  |   |         |  
|Net property, plant and equipment   |  | $            | 14,644  |      |  | $ | 13,937  |  
|                                    |  |              |         |      |  |   |         |  

During December 2001, the Company consolidated its operations that occupied the
Webster, MA facility into the Beverly, MA facility. The 25,000 square foot
building in Webster, MA is idle and for sale. The net book value of the land and building for sale is $728 at
December 31, 2002.

Depreciation expense included in operations amounted to $2,536 in 2002, $2,771
in 2001 and $2,336 in 2000.

8.      INTANGIBLE ASSETS AND GOODWILL

Intangible Assets
On August 3, 2001, the Company entered into technology license and
manufacturing agreements with Northrop Grumman Corporation and Vitesse
Semiconductor Corporation. Under the technology license agreement, Northrop Grumman was
eligible to receive up to 1,003 shares of the Companys
common stock based on the achievement of certain milestones. At contract signing, Northrop Grumman was issued 301 shares of stock, which were recorded
as an intangible asset valued at $2,794 (See Note 16).

29



---



##### Table of Contents



In connection with the manufacturing
agreement, Vitesse was to provide the Company with a high-volume
supply of GaAs wafers incorporating Northrop
Grummans GaAs technologies and Signals MMIC and RFIC designs through the year
2010. The Company paid Vitesse $3,000 in cash for this agreement. Vitesse also
received a warrant for 500 shares of our common stock in
return for the supply agreement. The warrant was initially valued at $2,048
using a Black-Scholes option pricing model with the following assumptions:
risk-free rate of 3.9%, expected life of two years, volatility of 74% and no
dividend yield. The value of the warrant was recorded as an intangible asset.

During the fourth quarter of 2002, the Company sold its mobile appliance
business as disclosed in Note 3. As a result of this sale, the above
transaction is included in discontinued operations at December 31, 2002. The
Company has entered into a settlement agreement with Northrop Grumman on March
20, 2003, whereby the Company will buy back the 301 shares of stock held by
Northrop Grumman at an agreed upon price of $12.00 per share. At December 31,
2002, the Company recorded an expense for this transaction in the amount of
$472, based on the difference between the $12.00 per share and Signals stock
price of $10.43 on March 20, 2003. As further stipulated by the agreement
with Northrop Grumman, if, at any time on or before February 29,
2004, the Company should sell shares of its common stock in a
transaction or series of related transactions in which the aggregate
gross proceeds to the Company equal at least $10,000 and at which the
price per share of common stock is greater than $12.00 per share, or
if the Company should merge or consolidate with or into another
corporation, which results in the exchange of outstanding shares of
the Companys common stock for securities or other consideration
issued or paid by such other corporation, then the Company will pay
to Northrop Grumman in cash, an amount per share equal to the
difference between $12.00 per share and the per share value of the
consideration received in such transaction.

The Company also entered into a settlement
agreement dated March 19, 2003 with Vitesse, whereby the Company will buy back
the 500 outstanding warrants held by Vitesse at an agreed upon price of $3.00
per warrant. At December 31, 2002, the Company recorded an expense of $1,500
related to the settlement. As further stipulated by the agreement with Vitesse, if, at any time
on or before January 31, 2004, the Company should sell shares of
its common stock in a transaction or series of related transactions
in which the aggregate gross proceeds to the Company equals at least
$10,000 and at which the price per share of common stock is greater
than $12.29 per share, or the Company should merge or consolidate
with or into another corporation, which results in the exchange of
outstanding shares of Signals common stock for securities or
other consideration issued or paid by such other corporation, then as
part of either of such transactions referred to, the Company will
pay, in cash, an amount equal to the difference between $12.29 and
the per share value of the consideration received in such transaction.

All previously recorded intangible
assets related to these agreements are included in discontinued operations and have been sold as part of the disposal.

Goodwill
During the second quarter of 2002, the Company completed the
transitional impairment test upon adoption of SFAS
No. 142, Goodwill and Other Intangible Assets, and recorded the impact
retroactive to the first quarter of 2002, in accordance with the provisions of
this standard. SFAS No. 142 requires, among other things, the discontinuance of
goodwill amortization and the requirement to test goodwill and other intangible
assets for impairment at least annually. In addition, the standard includes
provisions for the reclassification of certain existing recognized intangibles
as goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of previously reported
goodwill and the identification of reporting units for purposes of assessing
potential future impairments of goodwill. As part of the adoption of SFAS No.
142, the Company reassessed the useful lives of existing intangible assets and
determined an adjustment was not necessary.

The Company has identified the following reporting units (by operating segment)
for the purposes of assessing impairments of goodwill:

|                                                                                |  |                                                                                                                                                                                                              
|------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Reporting Unit                                                                  |  | Segment                                                                                                                                                                                                      
|                                                                                |  |                                                                                                                                                                                                              
|Arizona Operation
California Operation
Keltec Operation
Olektron Operation
AISD |  | Microwave Components & Subsystems  Arizona
Microwave Components & Subsystems  California
Power Management Products
Radio Frequency (RF) Components & Subsystems
Advanced Integrated Systems Division (AISD)

A two-step impairment test is used to first identify potential goodwill
impairment and then to measure the amount of goodwill impairment loss.
Impairment losses that arise due to the initial application of this standard
will be reported as a cumulative effect of change in accounting principle.

The Company utilized a discounted cash flow method to
determine the fair value of all reporting units with recorded goodwill. The
Company completed the transitional impairment test and recorded a goodwill
impairment of $3,366, or $2,070, net of tax, as a cumulative effect of
change in accounting principle in the first quarter of 2002. This
charge consisted of $23 related to the Olektron Operation and $4,093 related
to the former Signal Wireless reporting unit. In addition, the Company
reversed into income the excess of acquired net assets over cost in the amount
of $750 in connection with the Keltec Operation as a cumulative effect of
change in accounting principle in the first quarter of 2002. The Company
completed its annual impairment test as of December 31, 2002. As a result of
this review, no goodwill impairment was recorded.

The following tables present a
rollforward of the Companys goodwill balance from December 31, 2001
to December 31, 2002 and December 31, 2000 to
December 31, 2001, by reporting unit:

|                     |       |                   |               |                   |          |                     |                     |                   |                       |   |     |     |  |   |     |       | 
|-------------------- | ----- | ----------------- | ------------- | ----------------- | -------- | ------------------- | ------------------- | ----------------- | --------------------- | - | --- | --- |  | - | --- | ----- | 
|                     |       |                   |               |                   |          |                     | Adjustments to      |                   | Reversal of excess of |   |     |     | 
|                     |       |                   | Balance as of |                   | Goodwill |                     | Acquired Net Assets |                   | Balance as of        
|Reporting Unit (1)   |       | December 31, 2001 |               | During the Period |          | & Impairment Losses |                     | December 31, 2002
|                     |       |                   |               |                   |          |                     |                     |                  
|California Operation |       | $                 | 462           |                   |          | $                   |                    |                   |                       | $ |    |     |  | $ | 462 |      
|Keltec Operation     |       |                   | 425           |                   |          |                     | (415                | )                 |                       |   | 750 |     |  |   | 760 |      
|Olektron Operation   |       |                   | 23            |                   |          |                     |                    |                   |                       |   | (23 | )   |  |   |    |      
|                     |       |                   |               |                   |          |                     |                     |                   |                       |   |     |     |  |   |     |      
|                     | Total |                   | $             | 910               |          |                     | $                   | (415              | )                     |   | $   | 727 |  |   | $   | 1,222 | 
|                     |       |                   |               |                   |          |                     |                     |                   |                       |   |     |     |  |   |     |      

|                     |       |                   |               |              |  |                     |                     |                   |                       |   |   |   |  |   |     |     | 
|-------------------- | ----- | ----------------- | ------------- | ------------ |  | ------------------- | ------------------- | ----------------- | --------------------- | - | - | - |  | - | --- | --- | 
|                     |       |                   |               |              |  |                     |                     |                   | Reversal of excess of |   |   |   | 
|                     |       |                   | Balance as of |              |  |                     | Acquired Net Assets |                   | Balance as of        
|Reporting Unit (1)   |       | December
31, 2000 |               | Amortization |  | & Impairment Losses |                     | December
31, 2001
|                     |       |                   |               |              |  |                     |                     |                  
|California Operation |       | $                 | 675           |              |  | $                   | 213                 |                   |                       | $ |  |   |  | $ | 462 |    
|Keltec Operation     |       |                   | 428           |              |  |                     | 3                   |                   |                       |   |  |   |  |   | 425 |    
|Olektron Operation   |       |                   | 58            |              |  |                     | 35                  |                   |                       |   |  |   |  |   | 23  |    
|                     |       |                   |               |              |  |                     |                     |                   |                       |   |   |   |  |   |     |    
|                     | Total |                   | $             | 1,161        |  |                     | $                   | 251               |                       |   | $ |  |  |   | $   | 910 | 
|                     |       |                   |               |              |  |                     |                     |                   |                       |   |   |   |  |   |     |    



---

|(1) |  | Goodwill was allocated to the reporting units based on the reporting unit
associated with the initial acquisition. Based on this
|--- |  | --------------------------------------------------------------------------------------------------------------------------------

30



---



##### Table of Contents



methodology, no goodwill is assigned to the Arizona or AISD reporting units.

The following is a reconciliation of previously reported financial information
to show the pro forma effect on net loss and net loss per share had SFAS No.
142 been in effect for the following periods:

|                                  |  |                    |         |                    |  |                    |       |          |  |       |       |                    |  |   |        |   |  |   |       |   |  |   |       |  
|--------------------------------- |  | ------------------ | ------- | ------------------ |  | ------------------ | ----- | -------- |  | ----- | ----- | ------------------ |  | - | ------ | - |  | - | ----- | - |  | - | ----- | -
|                                  |  | For the Year Ended |         | For the Year Ended
|                                  |  | December 31, 2001  |         | December 31, 2000 
|                                  |  |                    |         |                   
|                                  |  |                    |         |                    |  | Net Loss Per Share |       |          |  |       |       | Net Loss Per Share
|                                  |  |                    |         |                    |  |                    |       |          |  |       |       |                   
|                                  |  | Net Loss           |         | Basic              |  | Diluted            |       | Net Loss |  | Basic |       | Diluted           
|                                  |  |                    |         |                    |  |                    |       |          |  |       |       |                   
|Reported net loss                 |  | $                  | (17,734 | )                  |  | $                  | (1.77 | )        |  | $     | (1.77 | )                  |  | $ | (2,523 | ) |  | $ | (0.30 | ) |  | $ | (0.30 | )
|Goodwill amortization, net of tax |  |                    | 251     |                    |  |                    | 0.02  |          |  |       | 0.02  |                    |  |   | 422    |   |  |   | 0.05  |   |  |   | 0.05  |  
|                                  |  |                    |         |                    |  |                    |       |          |  |       |       |                    |  |   |        |   |  |   |       |   |  |   |       |  
|Adjusted net loss                 |  | $                  | (17,483 | )                  |  | $                  | (1.75 | )        |  | $     | (1.75 | )                  |  | $ | (2,101 | ) |  | $ | (0.25 | ) |  | $ | (0.25 | )
|                                  |  |                    |         |                    |  |                    |       |          |  |       |       |                    |  |   |        |   |  |   |       |   |  |   |       |  

9.      ACCRUED EXPENSES

|                            |  |              |        |      |  |   |       | 
|--------------------------- |  | ------------ | ------ | ---- |  | - | ----- | 
|                            |  | December 31,
|                            |  |             
|                            |  | 2002         |        | 2001
|                            |  |              |        |     
|Payroll & employee benefits |  | $            | 1,693  |      |  | $ | 1,498 | 
|Bonus                       |  |              | 1,438  |      |  |   | 151   | 
|Vacation                    |  |              | 1,779  |      |  |   | 1,567 | 
|Warranty                    |  |              | 963    |      |  |   | 948   | 
|Commissions                 |  |              | 703    |      |  |   | 732   | 
|Litigation                  |  |              | 2,031  |      |  |   | 2,031 | 
|Environmental               |  |              | 530    |      |  |   | 530   | 
|Other                       |  |              | 1,675  |      |  |   | 1,576 | 
|                            |  |              |        |      |  |   |       | 
|                            |  | $            | 10,812 |      |  | $ | 9,033 | 
|                            |  |              |        |      |  |   |       | 

10.      LONG-TERM DEBT AND NOTES PAYABLE

|                                                                                                                                                                                                                                      |  |              |       |      |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ----- | ---- |  | - | ------ | -
|                                                                                                                                                                                                                                      |  | December 31,
|                                                                                                                                                                                                                                      |  |             
|                                                                                                                                                                                                                                      |  | 2002         |       | 2001
|                                                                                                                                                                                                                                      |  |              |       |     
|Massachusetts Industrial Revenue Bond,
     maturing in 2009, interest at 62% of the prime
rate plus 1/2%     effective interest rate of 2.3%
and 4.3% in 2002 and 2001     respectively, payable
in annual principal payments of $80 |  | $            |      |      |  | $ | 568    |  
|Capital lease obligations (Note 11)                                                                                                                                                                                                   |  |              | 57    |      |  |   | 86     |  
|Bank real estate term loan facility                                                                                                                                                                                                   |  |              | 4,300 |      |  |   | 4,500  |  
|                                                                                                                                                                                                                                      |  |              |       |      |  |   |        |  
|                                                                                                                                                                                                                                      |  |              | 4,357 |      |  |   | 5,154  |  
|Less: current maturities                                                                                                                                                                                                              |  |              | (292  | )    |  |   | (4,609 | )
|                                                                                                                                                                                                                                      |  |              |       |      |  |   |        |  
|                                                                                                                                                                                                                                      |  | $            | 4,065 |      |  | $ | 545    |  
|                                                                                                                                                                                                                                      |  |              |       |      |  |   |        |  

On November 6, 2002, the Company paid off the remaining balance on its
Massachusetts Industrial Revenue Bond. In compliance with the bond agreement,
the Company collateralized the bond with a letter of credit. In addition, the
letter of credit was collateralized by $600 in cash. As required by the bond
agreement, the letter of credit was required to remain in place for a period of
91 days from the date at which the bond was paid in full. Upon expiration of
the 91 days (February 5, 2003), the letter of credit and the cash collateral
were released. At December 31, 2002, the Company reflected the $600 of cash
collateral as restricted cash on the Companys balance sheet.

The Company has available a $10,000 revolving line of credit with a bank under
an agreement dated December 23, 2002. This credit facility, which is an
asset-based senior secured agreement, will expire on December 23, 2003.
Borrowings under the line bear interest at the banks base rate (4.25% at
December 31, 2002) plus 1% and are subject to certain financial covenants and
restrictions on liquidity. As of December 31, 2002, there were no balances
outstanding on the line and the Company was in compliance with all applicable
financial covenants and restrictions. A commitment fee at an annual rate of
0.375% on the amount of the unused facility is payable quarterly.

In conjunction with the new credit
facility, the Company entered into a new real estate term loan agreement with
proceeds of $4,300, which were used to repay the previous term loan
of the same amount. The Real Estate term loan is collateralized by real estate with a net book
value of $6,966 at December 31, 2002. Maturing on December 23, 2007, the Real
Estate term loan is payable in monthly principal payments of $24, plus interest
at the banks base rate (4.25% at December 31, 2002) plus 1%, with the last
installment equal to the remaining unpaid loan balance.

31



---



##### Table of Contents



11.      COMMITMENTS AND CONTINGENCIES

Lease Obligations:
The Company leases real estate and equipment under operating leases, expiring
at various dates through 2008. The leases include provisions for rent
escalation, which are inflationary in nature, renewals and purchase options.
The Company is generally responsible for taxes, maintenance and repairs.
Aggregate rental expense included in operations amounted to $563 in 2002, $638
in 2001 and $755 in 2000. Additionally, the Company leased equipment under
capital leases.

Equipment under capital leases included in property, plant and equipment are as
follows:

|                               |  |              |     |      |  |   |     |  
|------------------------------ |  | ------------ | --- | ---- |  | - | --- | -
|                               |  | December 31,
|                               |  |             
|                               |  | 2002         |     | 2001
|                               |  |              |     |     
|Machinery and equipment        |  | $            | 148 |      |  | $ | 148 |  
|Less: accumulated amortization |  |              | (91 | )    |  |   | (62 | )
|                               |  |              |     |      |  |   |     |  
|Net capital lease assets       |  | $            | 57  |      |  | $ | 86  |  
|                               |  |              |     |      |  |   |     |  

The following is a schedule by year of future minimum lease payments at
December 31, 2002:

|                                   |                                                                           |        |    |        |         |   |           |   |     |  | 
|---------------------------------- | ------------------------------------------------------------------------- | ------ | -- | ------ | ------- | - | --------- | - | --- |  | 
|                                   |                                                                           |        |    |        | Capital |   | Operating
|Fiscal Year                        |                                                                           | Leases |    | Leases
|                                   |                                                                           |        |    |       
|                                   |                                                                           | 2003   |    | $      | 37      |   |           | $ | 994 | 
|                                   |                                                                           | 2004   |    |        | 33      |   |           |   | 254 | 
|                                   |                                                                           | 2005   |    |        |        |   |           |   | 251 | 
|                                   |                                                                           | 2006   |    |        |        |   |           |   | 131 | 
|Thereafter                         |                                                                           |        |   |        |         |   | 97        |  
|                                   |                                                                           |        |    |        |         |   |           |   |     | 
|                                   |                                                                           | $      | 70 |        |         | $ | 1,727     |  
|                                   |                                                                           |        |    |        |         |   |           |  
|Less amounts representing interest |                                                                           |        | 13 |        |         |   |           |  
|                                   |                                                                           |        |    |        |         |   |           |   |     | 
|                                   | Present value of minimum lease
payments (includes current
portion of $30) |        | $  | 57     |         |   |           |   |    
|                                   |                                                                           |        |    |        |         |   |           |   |     | 

Weymouth Environmental
Contamination:
In April 1996, the Company sold its manufacturing facility in Weymouth, MA but
retained the environmental liability and responsibility associated with
groundwater contaminants present at and associated with the site. This site has
been classified as a Tier 1A disposal site by the Massachusetts Department of
Environmental Protection, or DEP, as a result of past releases of petroleum
based solvents. Environmental assessment reports prepared by independent
consultants indicate that contaminants present in the Town of Weymouth well
field across the street from the facility are similar to those reportedly
released at the site and still present in the groundwater at the site; however,
these reports also indicate that the contaminants do not exceed safe drinking
water levels in the finished water after normal treatment. Other contaminants,
which did not originate at the facility, have also been detected in the well
field.

In accordance with the applicable provisions of the Massachusetts Contingency
Plan, the Company has completed its investigation of the site and has submitted
an evaluation of remedial alternatives to the DEP. The recommended remedial
alternative involves continued operation of the currently operating groundwater
remediation system, with the addition of a supplemental well and wellhead
treatment at Weymouth Winter Street Well No. 2 through an agreement with the
Town of Weymouth. The Company has been informed that no recovery of costs
incurred in the treatment of the groundwater at the facility is possible under
existing insurance arrangements. No agreement with the Town of Weymouth
relative to wellhead treatment has been reached. It is not possible at this
stage of the proceedings to predict whether the DEP will approve the
recommended alternative and, if not, the specific remedial actions, if any,
that it will require.

The Company has recorded liabilities of $1,645 calculated on the discounted
cash flow method using a 5.43% discount rate for anticipated costs, including
legal and consulting fees, site studies and design and implementation of
remediation plans, post-remediation monitoring and related activities to be
performed during the next 15 years. Cash payments for Weymouth environmental
contamination are expected to be $530 in 2003, $105 per year for 2004-2006 and
$800 in total for 2007 and beyond. The recorded liability is the
Companys estimate and there is a reasonable possibility that changes
to this estimate may occur in the near term.

Sunnyvale Indemnification
Claim:
Eaton Corporation filed a suit against Signal in U.S. District Court, Northern
District of California, alleging that the Company has a contractual duty to
indemnify Eaton Corporation for costs incurred as a result of environmental
contamination and subsequent remediation. The claim is based upon allegations
that the Company assumed certain liabilities when it acquired one of the
divisions

32



---



##### Table of Contents



of Eaton Corporation in 1989. The indemnification claim was dismissed
at the trial level, but the Ninth Circuit of the U.S. Court of Appeals reversed
this decision and found that Signal does owe Eaton a duty of indemnification.
In December 2000, the decision by a jury was in favor of an indemnification
claim by Eaton and Eaton was awarded a judgment of $4,229, related to
environmental liabilities assumed by the Company when it purchased Eatons
Microwave Products division in 1989. On March 7, 2001, the U.S. District Court
ruled on various motions pending before it, including denying our motion for a
new trial and denying certain of Eatons motions. The U.S. District Court
amended the judgment to increase it to an aggregate of $6,969 and clarified
that Signal is responsible for fifty percent of the reasonable costs and
expenses of remediation. At December 31, 2000, the Company recorded liabilities
of $9,000 for anticipated costs including the judgment, legal and consulting
fees, site studies, implementation of remediation plans, post-remediation
monitoring and related activities to be performed during the next 20 years.
Cash deposits of
$6,969 were made during the first nine months of 2001 with the Clerk, United
States District Court by order of the United States District Court for the
Northern District of California. Recorded liabilities have been reduced by the
cash deposits described above and are $2,031 at December 31, 2002. On April 26,
2001, the U.S. District Court denied Signals motion to reopen the amended
judgment and to amend our answer and counterclaim. The Company appealed the
amended judgment on May 24, 2001. By Order filed
November 26, 2002, the United States Court of Appeals denied
Signals Appeal and Eatons Cross-Appeal. The judgment of
the United States District Court was affirmed. By Order filed
January 6, 2003, the United States Court of Appeals denied
Signals Petition for Panel Rehearing filed on December 10,
2002. On January 27, 2003, the United States Court of Appeals
forwarded a Certified copy of the Decree of the Court to the United
States District Court, reaffirming the order filed and entered on
November 26, 2002.

SEC Proceedings:
On March 27, 2002, the Securities and Exchange Commission (the
SEC), with the consent of the Company, entered an order
requiring that Signal cease and desist from committing or causing any
violations and any future violations of the periodic reporting, record
keeping, and internal control provisions of the federal securities
laws set forth in Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of
the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1,
and 13a-13 promulgated thereunder, related to the SECs
completed investigation of the Companys financial statements
for 1996, 1997 and the first quarter of 1998.

In connection with the above matter, the SEC has filed a civil injunctive
action against several former officers, directors, and employees of
the Company. Some of these individuals are seeking reimbursement or
payment of certain costs or damages allegedly incurred as a result of
the SEC investigation or ensuing civil proceeding.

Claims Related to Signal Wireless
Group:
In mid-September 2002, Richardson Electronics, Ltd., a supplier, issued to
Signal for the first time an invoice for $2,042 allegedly owed for orders going
back approximately 18 months. The Company informed Richardson that these were
blanket purchase orders requiring subsequent releases, which were never issued,
and that all of these orders were either cancelled or put on hold. On December
20, 2002, Richardson filed a breach of contract action against Signal in the
United States District Court for the Northern District of Illinois (the Federal
Case). On February 14, 2003, Signal filed motions in the Federal Case seeking
to dismiss the complaint based on lack of subject matter jurisdiction, lack of
personal jurisdiction and improper venue. On the same date, Signal commenced
an action (the Massachusetts State Action) in the Massachusetts Essex County
Superior Court (Signal Technology Corporation vs. Richardson Electronics, Ltd.,
No. 3-0335) seeking a declaratory judgment of the relative rights of the
parties. Richardson subsequently withdrew its Federal Case and filed a new
complaint on March 4, 2003 (the Illinois State Action) in the Circuit Court of
Cook County, Illinois (Richardson Electronics, Ltd. vs. Signal Technologies
[sic] Corporation, No. 03 L 002661) seeking damages in excess of $1,750. Both
the Massachusetts State Action and the Illinois State Action are pending. In
managements opinion, the Company does not have any liability to this supplier.

In mid-October 2002, Northrop Grumman
stated that certain milestones related to the Company's technology
license and manufacturing agreement with Northrop Grumman had been
reached and that the Company was obligated to issue Northrop Grumman
an additional 301 shares. The Company informed Northrop Grumman that
it believed that under the terms
of such agreement, no additional shares were then due to be issued
and no such shares would become due to be issued to Northrop Grumman
because such milestones had not been and would not be achieved. On
March 20, 2003, the Company entered into a settlement agreement with
Northrop Grumman, whereby all controversies regarding this matter
would be settled and the technology license and manufacturing
agreement would be terminated upon the Company buying back the 301
shares of stock held by Northrop Grumman at an agreed price of $12.00
per share, which occurred on March 26, 2003. As further stipulated by
the settlement agreement, if at any time on or before February 29,
2004, the Company should sell shares of its common stock in a
transaction or series of related transactions in which the aggregate
gross proceeds to the Company equal at least $10,000 and at which the
price per share of common stock is greater than $12.00 per share, or
if the Company should merge or consolidate with or into another
corporation, which results in the exchange of outstanding shares of
the Company's common stock for securities or other consideration
issued or paid by such other corporation, then the Company will pay
no Northrop Grumman in cash, an amount per share equal to the
difference between $12.00 per share and the per share value of the
consideration received in such transaction.

In mid-October 2002, Vitesse sent the
Company an invoice for approximately $1,200, in connection with the
Companys manufacturing supply agreement with Vitesse. The
Company informed Vitesse that it believed that under the terms of such agreement, no payment was then due and
no further payment would become due to Vitesse because the
requirements set forth in such agreement had not been and would not
become fulfilled. On March 19, 2003, the Company entered into a
settlement agreement with Vitesse, whereby all controversies
regarding this matter would be settled and the manufacturing supply
agreement would be terminated upon the Company buying back 500
outstanding Company warrants held by Vitesse at an agreed upon price
of $3.00 per warrant, which occurred on March 19, 2003. As further
stipulated by the settlement agreement, if, at any time on or before
January 31, 2004, the Company should sell shares of its common stock
in a transaction or series of related transactions in which the
aggregate gross proceeds to the Company equals at least $10,000 and
at which the price per share of common stock is greater than $12.29
per share, or the Company should merge or consolidate with or into
another corporation, which results in the exchange of outstanding
shares of Signal's common stock for securities or other consideration
issued or paid by such other corporation, then as part of either of
such transactions referred to, the Company will pay, in cash, an
amount equal to the difference between $12.29 and the per share
value of the consideration received in such transaction.

Guarantees, Including Indirect
Guarantees of Indebtedness of Others
The Company, as required by Delaware law, indemnifies its officers and
directors for certain events or occurrences while the officer or director is,
or was serving, at the Companys request in such capacity. The term of the
indemnification period is for the officers or directors lifetime. The
potential amount of future payments the Company could be required to make under
these indemnification agreements is unlimited. In no instance, however, will
indemnification be granted to a director otherwise entitled thereto who is
determined to have (a) committed a breach of loyalty to the Company or its
stockholders, (b) committed acts or omissions not in good faith or which
involved intentional misconduct or a knowing violation of the law, or (c)
derived any

33



---



##### Table of Contents



improper personal benefit in connection with a particular
transaction. Other than claims by certain former employees pursuant to our SEC
proceedings, as noted above, no claim for indemnification has been made by
any person covered by said agreements, and/or the relevant provisions of the
Companys Articles or By-laws, the Company believes that its estimated exposure
for these indemnification obligations is currently minimal. Accordingly, the
Company has no liabilities recorded for these indemnity agreements, except for
the $454 accrual related to the SEC proceedings referenced above, as of
December 31, 2002.

Product Warranties
The Company provides product warranties in conjunction with certain product
sales.

Generally, product sales are accompanied by a one year warranty period and cover
systems, accessories, equipment, parts, and software manufactured by the
Company to certain contractual specifications. These warranties cover factors
such as non-conformance to specifications and defects in material and
workmanship.

Estimated standard warranty costs are recorded in the period in which the
related product sales occur. The warranty liability recorded at each balance
sheet date reflects the estimated number of months of warranty coverage
outstanding for products delivered times the average of historical monthly
warranty payments, as well as additional amounts for certain major warranty
issues that exceed a normal claims level. The following table summarizes
product warranty activity recorded during 2002.

|                             |  |              |     |                |  |                |     |              |  |  |       |   |  |   |     | 
|---------------------------- |  | ------------ | --- | -------------- |  | -------------- | --- | ------------ |  |  | ----- | - |  | - | --- | 
|                             |  | December 31, |     | Additions for  |  | Reductions for |     | December 31,
|                             |  | 2001         |     | new warranties |  | payments made  |     | 2002        
|                             |  |              |     |                |  |                |     |             
|Product warranty
liabilities |  | $            | 948 |                |  | $              | 900 |              |  |  | ($885 | ) |  | $ | 963 | 
|                             |  |              |     |                |  |                |     |              |  |  |       |   |  |   |     | 

12.      INCOME TAXES

|                                          |                           |   |                          |        |      |   |        |        |   |   |     |        |  
|----------------------------------------- | ------------------------- | - | ------------------------ | ------ | ---- | - | ------ | ------ | - | - | --- | ------ | -
|                                          |                           |   | Years Ended December 31,
|                                          |                           |   |                         
|                                          |                           |   | 2002                     |        | 2001 |   | 2000  
|                                          |                           |   |                          |        |      |   |       
|Current provision                         |                           |   |                          |        |      |   |        |        |   |   |     |       
|                                          | Federal                   |   | $                        | 3,415  |      |   | $      | 2,824  |   |   | $   | 4,819  |  
|                                          | State                     |   |                          | 416    |      |   |        | 599    |   |   |     | 642    |  
|                                          | Foreign Sales Corporation |   |                          |       |      |   |        |       |   |   |     | 48     |  
|                                          |                           |   |                          |        |      |   |        |        |   |   |     |        |  
|Deferred provision (benefit)              |                           |   |                          |        |      |   |        |        |   |   |     |       
|                                          | Federal                   |   |                          | 8      |      |   |        | (1,909 | ) |   |     | (4,236 | )
|                                          | State                     |   |                          | 321    |      |   |        | (629   | ) |   |     | (536   | )
|                                          |                           |   |                          |        |      |   |        |        |   |   |     |        |  
|Valuation allowance                       |                           |   |                          |        |      |   |        |        |   |   |     |       
|                                          | Federal                   |   |                          | (8,167 | )    |   |        | 8,428  |   |   |     |       |  
|                                          | State                     |   |                          | (1,466 | )    |   |        | 1,492  |   |   |     |       |  
|                                          |                           |   |                          |        |      |   |        |        |   |   |     |        |  
|Provision
for (benefit from) income taxes |                           | $ | (5,473                   | )      |      | $ | 10,805 |        |   | $ | 737 |       
|                                          |                           |   |                          |        |      |   |        |        |   |   |     |        |  

Upon completion of the disposal of the
Companys wireless businesses, the valuation allowance was reversed as the Company believes it is more likely than not the projected results for its continuing operations will generate sufficient taxable income to fully utilize its deferred tax assets.

The Companys effective tax rate differs from the statutory federal income tax rate as
follows:

|                                           |  |                          |       |     |  |      |  |  |  |  |       |      |  |  |  |  |  |  |      |   |  |  |  | 
|------------------------------------------ |  | ------------------------ | ----- | --- |  | ---- |  |  |  |  | ----- | ---- |  |  |  |  |  |  | ---- | - |  |  |  | 
|                                           |  | Years Ended December 31,
|                                           |  |                         
|                                           |  | 2002                     |       |     |  | 2001 |  |  |  |  |       | 2000 |  |  |  | 
|                                           |  |                          |       |     |  |      |  |  |  |  |       |      |  |  |  | 
|Income tax at U.S. statutory tax rate      |  |                          | 34.0  | %   |  |      |  |  |  |  | 34.0  | %    |  |  |  |  |  |  | 34.0 | % |  |  |  | 
|State income taxes, net of federal benefit |  |                          | 4.6   |     |  |      |  |  |  |  | 4.7   |      |  |  |  |  |  |  | 4.8  |   |  |  |  | 
|Benefit from Foreign Sales Corporation     |  |                          |      |     |  |      |  |  |  |  |      |      |  |  |  |  |  |  | (6.1 | ) |  |  |  | 
|Non-deductible expenses and other          |  |                          |      |     |  |      |  |  |  |  | 2.2   |      |  |  |  |  |  |  | 17.6 |   |  |  |  | 
|Change in valuation allowance              |  |                          | (90.0 | )   |  |      |  |  |  |  | 88.0  |      |  |  |  |  |  |  |     |   |  |  |  | 
|                                           |  |                          |       |     |  |      |  |  |  |  |       |      |  |  |  |  |  |  |      |   |  |  |  | 
|Effective tax rate                         |  |                          | (51.4 | ) % |  |      |  |  |  |  | 128.9 | %    |  |  |  |  |  |  | 50.3 | % |  |  |  | 
|                                           |  |                          |       |     |  |      |  |  |  |  |       |      |  |  |  |  |  |  |      |   |  |  |  | 

The non-deductible expenses consist principally of goodwill resulting from
certain of the Companys acquisitions and other amounts not deductible for tax purposes.

34



---



##### Table of Contents



The tax effect of temporary differences that give rise to the net deferred tax
assets and liabilities are as follows:

|                                                  |                                      |   |                          |        |      |   |        |        |  
|------------------------------------------------- | ------------------------------------ | - | ------------------------ | ------ | ---- | - | ------ | ------ | -
|                                                  |                                      |   | Years Ended December 31,
|                                                  |                                      |   |                         
|                                                  |                                      |   | 2002                     |        | 2001
|                                                  |                                      |   |                          |        |     
|Current
deferred tax assets:                      |                                      |   |                          |        |      |   |        |       
|                                                  | Net operating losses and credits     |   | $                        | 1,115  |      |   | $      | 464    |  
|                                                  | Vacation accrual                     |   |                          | 612    |      |   |        | 543    |  
|                                                  | Inventories                          |   |                          | 1,534  |      |   |        | 2,270  |  
|                                                  | Warranty                             |   |                          | 371    |      |   |        | 391    |  
|                                                  | Environmental and litigation reserve |   |                          | 3,669  |      |   |        | 4,100  |  
|                                                  | Contract reserves and other          |   |                          | 1,801  |      |   |        | 2,481  |  
|                                                  | Amortization                         |   |                          | 114    |      |   |        | 905    |  
|                                                  |                                      |   |                          |        |      |   |        |        |  
|Current
deferred tax assets                       |                                      |   | 9,216                    |        |      |   | 11,154 |       
|Valuation allowance                               |                                      |   |                         |        |      |   | (9,920 | )     
|                                                  |                                      |   |                          |        |      |   |        |        |  
|Current
net deferred tax assets                   |                                      |   | 9,216                    |        |      |   | 1,234  |       
|Non-current
deferred tax assets/(liabilities):    |                                      |   |                          |        |      |   |        |       
|                                                  | Net
operating losses and credits     |   |                          | 2,403  |      |   |        |       |  
|                                                  | Environmental
and litigation reserve |   |                          | 429    |      |   |        |       |  
|                                                  | Depreciation                         |   |                          | (1,298 | )    |   |        | (1,234 | )
|                                                  |                                      |   |                          |        |      |   |        |        |  
|Non-current
net deferred tax assets/(liabilities) |                                      |   | 1,534                    |        |      |   | (1,234 | )     
|                                                  |                                      |   |                          |        |      |   |        |        |  
|Net
deferred tax assets                           |                                      | $ | 10,750                   |        |      | $ |       |       
|                                                  |                                      |   |                          |        |      |   |        |        |  

At December 31, 2002 and 2001 the Company has federal net operating loss
carryforwards of approximately $7,300 and zero, respectively. The federal net
operating loss carryforwards will expire at various dates through 2022. At
December 31, 2002 and 2001, the Company has state net operating loss
carryforwards of approximately $19,600 and $6,600, respectively. The state net
operating loss carryforwards will expire at various dates through 2022.
Utilization of net operating loss carryforwards may be subject to an annual limitation due to the ownership change limitations provided by the
Internal Revenue Code.

13.      STOCKHOLDERS EQUITY

The Company has stock option plans (the Plans) under which options of the
Companys common stock may be granted generally at prices not less than 100
percent of the fair market value of our common stock at the date of option
grant. During 2002, 2001 and 2000, the Company recorded compensation expense
of $84, $76 and $77, respectively, for options issued below fair market value.
Options vest in increments and over periods determined by the Compensation
Committee of the Companys Board of Directors and expire not more than ten
years from date of grant. At December 31, 2002, 3,854 shares of common stock
were reserved for future issuance under the plans and 390 were available for
future grant. Additionally, non-qualified options to purchase a total of 175
shares of our common stock are outstanding to certain directors and other
non-employees. These options were generally granted at the fair market value of
our common stock at the date of option grant, vest generally over a five-year
period and expire between 2000 and 2005. During 2002, 2001 and 2000, the
Company recorded compensation expense of $88, $(40) and $155, respectively for
options granted to non-employees.

Information concerning the plans and non-qualified stock options is as follows:

|                  |                                          |  |           |       |        |  |              |      |                |   |      |      |  |  |   |   |  |   |       |       |  |   |      |       | 
|----------------- | ---------------------------------------- |  | --------- | ----- | ------ |  | ------------ | ---- | -------------- | - | ---- | ---- |  |  | - | - |  | - | ----- | ----- |  | - | ---- | ----- | 
|                  |                                          |  | Available |       | Option |  | Option Price |      | Weighted Avg. 
|                  |                                          |  | for Grant |       | Shares |  | per Share    |      | Exercise Price
|                  |                                          |  |           |       |        |  |              |      |               
|December 31, 1999 |                                          |  | 171       |       |        |  | 1,391        |      |                | $ | 1.80 |      |  |  | - |   |  | $ | 8.25  |       |  | $ | 3.80 |      
|                  |                                          |  |           |       |        |  |              |      |                |   |      |      |  |  |   |  
|                  | Options granted                          |  |           | (595  | )      |  |              | 595  |                |   |      | 9.44 |  |  |   | - |  |   |       | 25.38 |  |   |      | 19.28 | 
|                  | Options canceled                         |  |           | 81    |        |  |              | (81  | )              |   |      | 2.94 |  |  |   | - |  |   |       | 19.88 |  |   |      | 10.03 | 
|                  | Options exercised                        |  |           |      |        |  |              | (175 | )              |   |      | 1.80 |  |  |   | - |  |   |       | 8.25  |  |   |      | 4.24  | 
|                  | Increase in available options, 1992 Plan |  |           | 600   |        |  |              |     |                |   |      |     |  |  |   | - |  |   |       |      |  |   |      |      | 
|                  |                                          |  |           |       |        |  |              |      |                |   |      |      |  |  |   |  
|December 31, 2000 |                                          |  | 257       |       |        |  | 1,730        |      |                | $ | 2.00 |      |  |  | - |   |  | $ | 25.38 |       |  | $ | 8.86 |      
|                  |                                          |  |           |       |        |  |              |      |                |   |      |      |  |  |   |  
|                  | Options granted                          |  |           | (911  | )      |  |              | 911  |                |   |      | 3.85 |  |  |   | - |  |   |       | 10.38 |  |   |      | 9.56  | 
|                  | Options canceled                         |  |           | 81    |        |  |              | (81  | )              |   |      | 4.00 |  |  |   | - |  |   |       | 19.88 |  |   |      | 10.91 | 
|                  | Options exercised                        |  |           |      |        |  |              | (38  | )              |   |      | 2.36 |  |  |   | - |  |   |       | 6.75  |  |   |      | 5.41  | 
|                  | Increase in available options, 2001 Plan |  |           | 1,500 |        |  |              |     |                |   |      |     |  |  |   | - |  |   |       |      |  |   |      |      | 
|                  |                                          |  |           |       |        |  |              |      |                |   |      |      |  |  |   |  
|December 31, 2001 |                                          |  | 927       |       |        |  | 2,522        |      |                | $ | 2.50 |      |  |  | - |   |  | $ | 25.38 |       |  | $ | 9.10 |      
|                  |                                          |  |           |       |        |  |              |      |                |   |      |      |  |  |   |  
|                  | Options granted                          |  |           | (628  | )      |  |              | 628  |                |   |      | 5.69 |  |  |   | - |  |   |       | 10.48 |  |   |      | 8.03  | 
|                  | Options canceled                         |  |           | 154   |        |  |              | (154 | )              |   |      | 4.00 |  |  |   | - |  |   |       | 21.75 |  |   |      | 11.90 | 
|                  | Options exercised                        |  |           |      |        |  |              | (183 | )              |   |      | 2.94 |  |  |   | - |  |   |       | 9.95  |  |   |      | 6.25  | 
|                  | Termination of 1992 Plan                 |  |           | (63   | )      |  |              |     |                |   |      |     |  |  |   | - |  |   |       |      |  |   |      |      | 
|                  |                                          |  |           |       |        |  |              |      |                |   |      |      |  |  |   |  
|December 31, 2002 |                                          |  | 390       |       |        |  | 2,813        |      |                | $ | 2.50 |      |  |  | - |   |  | $ | 25.38 |       |  | $ | 8.90 |      
|                  |                                          |  |           |       |        |  |              |      |                |   |      |      |  |  |   |  

35



---



##### Table of Contents



A total of 1,625 options were exercisable at December 31, 2002 at a weighted
average price of $7.73.

A total of 954 options were exercisable at December 31, 2001 at a weighted
average price of $5.84.


A total of 603 options were exercisable at December 31, 2000 at a weighted
average price of $3.35.


The table below summarizes information with respect to stock options
outstanding as of December 31, 2002:

|                |       |             |  |                  |  |                  |   |             |  |                     |       |       |  |  |     |                  |  |   |      |       |  |  |       |     |  |                  |      |       |  | 
|--------------- | ----- | ----------- |  | ---------------- |  | ---------------- | - | ----------- |  | ------------------- | ----- | ----- |  |  | --- | ---------------- |  | - | ---- | ----- |  |  | ----- | --- |  | ---------------- | ---- | ----- |  | 
|                |       |             |  |                  |  |                  |   |             |  |                     |       |       |  |  |     | Weighted-Average |  |   |      |       |  |  |       |     |  | Weighted-Average
|Range of        |       | Options     |  | Remaining        |  | Weighted-Average |   | Options     |  | Exercise Price of  
|Exercise Prices |       | Outstanding |  | Contractual Life |  | Exercise Price   |   | Exercisable |  | Exercisable Options
|                |       |             |  |                  |  |                  |   |             |  |                    
|$               | 2.50  |             |  | -                |  |                  | $ | 3.94        |  |                     |       | 618   |  |  |     | 5.4              |  |   | $    | 2.62  |  |  |       | 618 |  |                  | $    | 2.62  | 
|$               | 4.00  |             |  | -                |  |                  | $ | 5.75        |  |                     |       | 366   |  |  |     | 2.7              |  |   | $    | 4.36  |  |  |       | 307 |  |                  | $    | 4.34  | 
|$               | 6.06  |             |  | -                |  |                  | $ | 7.00        |  |                     |       | 71    |  |  |     | 3.7              |  |   | $    | 6.53  |  |  |       | 46  |  |                  | $    | 6.35  | 
|$               | 7.25  |             |  | -                |  |                  | $ | 10.25       |  |                     |       | 1,256 |  |  |     | 7.3              |  |   | $    | 9.24  |  |  |       | 346 |  |                  | $    | 9.58  | 
|$               | 12.68 |             |  | -                |  |                  | $ | 17.77       |  |                     |       | 39    |  |  |     | 7.9              |  |   | $    | 14.16 |  |  |       | 18  |  |                  | $    | 14.47 | 
|$               | 17.78 |             |  | -                |  |                  | $ | 20.30       |  |                     |       | 430   |  |  |     | 6.0              |  |   | $    | 19.69 |  |  |       | 274 |  |                  | $    | 19.68 | 
|$               | 20.31 |             |  | -                |  |                  | $ | 25.38       |  |                     |       | 33    |  |  |     | 3.5              |  |   | $    | 22.13 |  |  |       | 16  |  |                  | $    | 22.13 | 
|                |       |             |  |                  |  |                  |   |             |  |                     |       |       |  |  |     |                  |  |   |      |       |  | 
|Total           |       |             |  |                  |  |                  |   |             |  |                     | 2,813 |       |  |  | 6.0 |                  |  | $ | 8.90 |       |  |  | 1,625 |     |  | $                | 7.73 |      
|                |       |             |  |                  |  |                  |   |             |  |                     |       |       |  |  |     |                  |  |   |      |       |  |  |       |     |  |                  |      |      



|14. |  | EMPLOYEE BENEFIT PLANS
|--- |  | ----------------------

The Company maintains a 401(k) plan covering substantially all employees.
Eligible employees may contribute up to 15% of their annual compensation, as
defined, to this plan. The Company may also make a discretionary contribution.
Company contributions to this plan totaled $672 in 2002, $675 in 2001 and $697
in 2000.

The Company also has an Employee Stock Purchase Plan (the Purchase Plan)
under which 468 shares of common stock have been reserved for issuance under
the plan and 57 shares are available and can be issued in the future. Eligible
employees may designate not more than 10% of their cash compensation to be
deducted each pay period for the purchase of common stock under the Purchase
Plan, and participants may purchase not more than $25 of common stock in any
one calendar year. On the last business day of each six month offering period
shares of common stock are purchased with the employees payroll deductions
over the immediately preceding six months at a price per share of 85% of the
lesser of the market price of the common stock on the purchase date or the
market price on the first day of the period. The Purchase Plan will terminate
on June 30, 2003, unless its term is extended. Common stock issued under the
Purchase Plan was 98 in 2002, 76 in 2001 and 74 in 2000.



|15. |  | SEGMENT INFORMATION
|--- |  | -------------------

During 2002, the Company completed its plan to sell its commercial wireless and
mobile appliance businesses (formerly part of the Signal Wireless Group), in
response to the global weakness in telecommunication spending. Additionally,
during 2001, in an effort to streamline operations the Company consolidated its
Systems division, formerly located in Webster, MA, into Olektron which is
located in Beverly, MA. As a result of this consolidation, net sales and
operating income of the Systems division have
been reclassified from Microwave Components & Subsystems to RF Components &
Subsystems for all years presented in these financial statements.
During the fourth quarter of 2002, the Company formed a new division,
Advanced Integrated Systems Division (AISD) which focuses on defense and
homeland security wireless unmanned sensor systems.

At December 31, 2002, the Company
had five operating divisions engaged in the
development, manufacturing and marketing of electronic components and
subsystems. The operating divisions, referred to as Arizona, California,
Keltec, Olektron and AISD, report their operations within five segments:
Microwave Components & Subsystems  Arizona, Microwave
Components & Subsystems  - California, Power Management Products (Keltec), Radio Frequency
(RF) Components & Subsystems (Olektron and

36



---



##### Table of Contents



the former Systems division) and
AISD (our new business unit in Texas that focuses on wireless networks of
sensors). In reporting business segment operating income, corporate
headquarters expenses have been allocated to the business segments based on a
percentage of net sales.

Our reportable segments are as follows:

Microwave Components &
Subsystems  - Arizona

Designs and manufactures microwave oscillators, frequency synthesizers and
converters, microwave amplifiers and microwave switch matrices.

Microwave Components &
Subsystems  - California

Designs and manufactures microwave oscillators, converters, space qualified
microwave assemblies, microwave amplifiers and microwave switch matrices.

Power Management Products

Designs and manufactures military high and low voltage power supplies, DC to DC
converters and military high power amplifiers and transmitters for use in radar
systems.

Radio Frequency (RF) Components & Subsystems

Designs and manufactures RF and intermediate frequency signal processing
components, integrated multi-function devices, and switching systems.

Advanced Integrated Systems Division (AISD)

Design and integration of wireless unmanned sensor systems for defense and
Homeland Security applications.

The accounting policies of the segments are the same as those described in the
Summary of Significant Accounting Policies. Segment data includes a charge
for allocating a portion of corporate headquarters costs.

Selected Financial Data by Business Segment

The following table presents selected financial data by business segment for
the years ending December 31:

|                                               |  |      |        |      |  |      |        |   |  |   |         | 
|---------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------- | 
|(amounts in thousands)                         |  | 2002 |        | 2001 |  | 2000
|                                               |  |      |        |      |  |     
|Net Sales                                      |  |      |        |      |  |      |        |   |  |   |         | 
|Microwave Components & Subsystems  Arizona    |  | $    | 17,447 |      |  | $    | 15,114 |   |  | $ | 14,975  | 
|Microwave Components & Subsystems  California |  |      | 19,738 |      |  |      | 19,071 |   |  |   | 20,085  | 
|Power Management Products                      |  |      | 29,099 |      |  |      | 28,463 |   |  |   | 27,930  | 
|RF Components & Subsystems                     |  |      | 17,514 |      |  |      | 16,659 |   |  |   | 18,163  | 
|AISD                                           |  |      | 2,887  |      |  |      |       |   |  |   |        | 
|                                               |  |      |        |      |  |      |        |   |  |   |         | 
|                                               |  | $    | 86,685 |      |  | $    | 79,307 |   |  | $ | 81,153  | 
|                                               |  |      |        |      |  |      |        |   |  |   |         | 
|Operating Income                               |  |      |        |      |  |      |        |   |  |   |         | 
|Microwave Components & Subsystems  Arizona    |  | $    | 2,448  |      |  | $    | 2,502  |   |  | $ | 2,678   | 
|Microwave Components & Subsystems  California |  |      | 2,124  |      |  |      | 2,641  |   |  |   | 2,309   | 
|Power Management Products                      |  |      | 4,866  |      |  |      | 3,409  |   |  |   | 4,666   | 
|RF Components & Subsystems                     |  |      | 1,187  |      |  |      | (494   | ) |  |   | 1,095   | 
|AISD                                           |  |      | 136    |      |  |      |       |   |  |   |        | 
|                                               |  |      |        |      |  |      |        |   |  |   |         | 
|                                               |  | $    | 10,761 |      |  | $    | 8,058  |   |  | $ | 10,748  | 
|                                               |  |      |        |      |  |      |        |   |  |   |         | 
|Total Assets                                   |  |      |        |      |  |      |        |   |  |   |         | 
|Microwave Components & Subsystems  Arizona    |  | $    | 8,916  |      |  | $    | 9,050  |   |  | $ | 9,252   | 
|Microwave Components & Subsystems  California |  |      | 6,542  |      |  |      | 6,700  |   |  |   | 6,148   | 
|Power Management Products                      |  |      | 18,680 |      |  |      | 12,803 |   |  |   | 13,789  | 
|RF Components & Subsystems                     |  |      | 10,988 |      |  |      | 12,178 |   |  |   | 10,815  | 
|AISD                                           |  |      | 505    |      |  |      |       |   |  |   |        | 
|Other                                          |  |      | 37,822 |      |  |      | 42,664 |   |  |   | 62,389  | 
|                                               |  |      |        |      |  |      |        |   |  |   |         | 
|                                               |  | $    | 83,453 |      |  | $    | 83,395 |   |  | $ | 102,393 | 
|                                               |  |      |        |      |  |      |        |   |  |   |         | 
|Long-lived Assets  - net                       |  |      |        |      |  |      |        |   |  |   |         | 
|Microwave Components & Subsystems  Arizona    |  | $    | 4,459  |      |  | $    | 4,272  |   |  | $ | 4,435   | 
|Microwave Components & Subsystems  California |  |      | 1,771  |      |  |      | 1,813  |   |  |   | 1,828   | 
|Power Management Products                      |  |      | 3,920  |      |  |      | 3,451  |   |  |   | 3,650   | 
|RF Components & Subsystems                     |  |      | 5,030  |      |  |      | 5,157  |   |  |   | 5,048   | 

37



---



##### Table of Contents



|                       |  |      |        |      |  |      |        |  |  |   |        | 
|---------------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|(amounts in thousands) |  | 2002 |        | 2001 |  | 2000
|                       |  |      |        |      |  |     
|AISD                   |  |      | 215    |      |  |      |       |  |  |   |       | 
|Other                  |  |      | 2,848  |      |  |      | 1,014  |  |  |   | 1,159  | 
|                       |  |      |        |      |  |      |        |  |  |   |        | 
|                       |  | $    | 18,243 |      |  | $    | 15,707 |  |  | $ | 16,120 | 
|                       |  |      |        |      |  |      |        |  |  |   |        | 

During December 2001, the Company consolidated the operations that occupied its
Webster, MA building into its Beverly, MA facility. The 25,000 square foot
building in Webster, MA is idle and for sale. The building is actively being
marketed. The net book value of the land and building for sale is $728 at
December 31, 2002, and is included in the RF Components & Subsystems business
segment. The Company estimates that the net realizable value of the facility
is in excess of its net book value.

|                                               |  |      |       |      |  |      |       |  |  |   |       | 
|---------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|(amounts in thousands)                         |  | 2002 |       | 2001 |  | 2000
|                                               |  |      |       |      |  |     
|Long-lived Asset Additions                     |  |      |       |      |  |      |       |  |  |   |       | 
|Microwave Components & Subsystems  Arizona    |  | $    | 421   |      |  | $    | 395   |  |  | $ | 613   | 
|Microwave Components & Subsystems  California |  |      | 430   |      |  |      | 271   |  |  |   | 578   | 
|Power Management Products                      |  |      | 593   |      |  |      | 304   |  |  |   | 514   | 
|RF Components & Subsystems                     |  |      | 526   |      |  |      | 901   |  |  |   | 776   | 
|AISD                                           |  |      |      |      |  |      |      |  |  |   |      | 
|Other                                          |  |      | 452   |      |  |      | 34    |  |  |   | 33    | 
|                                               |  |      |       |      |  |      |       |  |  |   |       | 
|                                               |  | $    | 2,422 |      |  | $    | 1,905 |  |  | $ | 2,514 | 
|                                               |  |      |       |      |  |      |       |  |  |   |       | 
|Depreciation and Amortization Expense          |  |      |       |      |  |      |       |  |  |   |       | 
|Microwave Components & Subsystems  Arizona    |  | $    | 597   |      |  | $    | 556   |  |  | $ | 548   | 
|Microwave Components & Subsystems  California |  |      | 536   |      |  |      | 1,095 |  |  |   | 623   | 
|Power Management Products                      |  |      | 457   |      |  |      | 506   |  |  |   | 822   | 
|RF Components & Subsystems                     |  |      | 792   |      |  |      | 781   |  |  |   | 675   | 
|AISD                                           |  |      | 18    |      |  |      |      |  |  |   |      | 
|Other                                          |  |      | 136   |      |  |      | 84    |  |  |   | 90    | 
|                                               |  |      |       |      |  |      |       |  |  |   |       | 
|                                               |  | $    | 2,536 |      |  | $    | 3,022 |  |  | $ | 2,758 | 
|                                               |  |      |       |      |  |      |       |  |  |   |       | 

38



---



##### Table of Contents



Net Sales by Customer Category

|                                               |  |      |        |      |  |      |        |  |  |   |        | 
|---------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|(amounts in thousands)                         |  | 2002 |        | 2001 |  | 2000
|                                               |  |      |        |      |  |     
|U.S. Government Military                       |  |      |        |      |  |      |        |  |  |   |        | 
|Microwave Components & Subsystems  Arizona    |  | $    | 12,443 |      |  | $    | 12,972 |  |  | $ | 10,680 | 
|Microwave Components & Subsystems  California |  |      | 14,364 |      |  |      | 8,942  |  |  |   | 11,380 | 
|Power Management Products                      |  |      | 22,234 |      |  |      | 19,459 |  |  |   | 17,548 | 
|RF Components & Subsystems                     |  |      | 13,888 |      |  |      | 9,376  |  |  |   | 13,778 | 
|AISD                                           |  |      |       |      |  |      |       |  |  |   |       | 
|                                               |  |      |        |      |  |      |        |  |  |   |        | 
|                                               |  | $    | 62,929 |      |  | $    | 50,749 |  |  | $ | 53,386 | 
|                                               |  |      |        |      |  |      |        |  |  |   |        | 
|U.S. Government Non-Military                   |  |      |        |      |  |      |        |  |  |   |        | 
|Microwave Components & Subsystems  Arizona    |  | $    |       |      |  | $    | 372    |  |  | $ | 118    | 
|Microwave Components & Subsystems  California |  |      |       |      |  |      |       |  |  |   |       | 
|Power Management Products                      |  |      |       |      |  |      |       |  |  |   | 320    | 
|RF Components & Subsystems                     |  |      |       |      |  |      | 1,127  |  |  |   | 405    | 
|AISD                                           |  |      | 2,887  |      |  |      |       |  |  |   |       | 
|                                               |  |      |        |      |  |      |        |  |  |   |        | 
|                                               |  | $    | 2,887  |      |  | $    | 1,499  |  |  | $ | 843    | 
|                                               |  |      |        |      |  |      |        |  |  |   |        | 
|U.S. Commercial                                |  |      |        |      |  |      |        |  |  |   |        | 
|Microwave Components & Subsystems  Arizona    |  | $    | 767    |      |  | $    | 285    |  |  | $ | 273    | 
|Microwave Components & Subsystems  California |  |      | 2,961  |      |  |      | 6,920  |  |  |   | 3,582  | 
|Power Management Products                      |  |      |       |      |  |      | 220    |  |  |   | 593    | 
|RF Components & Subsystems                     |  |      | 354    |      |  |      | 896    |  |  |   | 679    | 
|AISD                                           |  |      |       |      |  |      |       |  |  |   |       | 
|                                               |  |      |        |      |  |      |        |  |  |   |        | 
|                                               |  | $    | 4,082  |      |  | $    | 8,321  |  |  | $ | 5,127  | 
|                                               |  |      |        |      |  |      |        |  |  |   |        | 
|International Military                         |  |      |        |      |  |      |        |  |  |   |        | 
|Microwave Components & Subsystems  Arizona    |  | $    | 3,407  |      |  | $    | 1,352  |  |  | $ | 3,578  | 
|Microwave Components & Subsystems  California |  |      | 1,852  |      |  |      | 1,586  |  |  |   | 2,780  | 
|Power Management Products                      |  |      | 6,865  |      |  |      | 8,368  |  |  |   | 9,324  | 
|RF Components & Subsystems                     |  |      | 2,623  |      |  |      | 4,455  |  |  |   | 2,535  | 
|AISD                                           |  |      |       |      |  |      |       |  |  |   |       | 
|                                               |  |      |        |      |  |      |        |  |  |   |        | 
|                                               |  | $    | 14,747 |      |  | $    | 15,761 |  |  | $ | 18,217 | 
|                                               |  |      |        |      |  |      |        |  |  |   |        | 
|International Commercial                       |  |      |        |      |  |      |        |  |  |   |        | 
|Microwave Components & Subsystems  Arizona    |  | $    | 830    |      |  | $    | 133    |  |  | $ | 326    | 
|Microwave Components & Subsystems  California |  |      | 562    |      |  |      | 1,623  |  |  |   | 2,343  | 
|Power Management Products                      |  |      |       |      |  |      | 416    |  |  |   | 145    | 
|RF Components & Subsystems                     |  |      | 648    |      |  |      | 805    |  |  |   | 766    | 
|AISD                                           |  |      |       |      |  |      |       |  |  |   |       | 
|                                               |  |      |        |      |  |      |        |  |  |   |        | 
|                                               |  | $    | 2,040  |      |  | $    | 2,977  |  |  | $ | 3,580  | 
|                                               |  |      |        |      |  |      |        |  |  |   |        | 
|Total                                          |  | $    | 86,685 |      |  | $    | 79,307 |  |  | $ | 81,153 | 
|                                               |  |      |        |      |  |      |        |  |  |   |        | 

Significant Customer

For the years ended December 31, 2002,
2001 and 2000, approximately 23%, 16% and 21%, of net sales were
attributable to Raytheon Company, respectively. Also, for the year
ended December 31, 2002, approximately 11% of net sales was
attributable to BAE Systems. In addition, Raytheon Company accounted
for approximately 20% and 19% of the Company's outstanding accounts
receivable balance at December 31, 2002 and 2001, respectively.

39



---



##### Table of Contents





|16. |  | UNAUDITED QUARTERLY FINANCIAL INFORMATION
|--- |  | -----------------------------------------

The following quarterly financial information should be read in conjunction
with Notes 1 and 2. The first three quarters in each year consist of thirteen
week periods with the fourth quarter ending on December 31.

The Company has restated its condensed consolidated financial statements for
the first three quarters of 2002 due to discontinued operations and a change in
accounting for the previously disclosed transaction with Northrop Grumman
Corporation as announced in the Companys February 13, 2003 press release.
Upon re-evaluating the transaction with Northrop Grumman in the
fourth quarter of 2002, the Company believes that the milestones
within the agreement that would have led to the issuance of
additional shares of Signal common stock to Northrop Grumman were
under Signals control. Therefore, the asset and liability
initially recorded for these shares should not have been recorded. The impact of this
adjustment reduced amortization expense related to the
recorded asset in the first three quarters of 2002, and as a result the
gain recorded in the third quarter of 2002 should not have been
recognized. These adjustments had no effect on the cumulative year to
date results. The effect of these adjustments is reflected in the table below by
quarter.

The adjusted amounts for the Northrop Grumman transaction are reflected in
discontinued operations due to the sale of the Companys semiconductor/mobile
appliance business unit in the fourth quarter of 2002 (See Note 3).

Results of Operations

|                                          |  |            |        |          |  |           |        |            |  |           |        |          |  |            |        |   |  |   |        |   |  |   |        |   |  |   |        |  
|----------------------------------------- |  | ---------- | ------ | -------- |  | --------- | ------ | ---------- |  | --------- | ------ | -------- |  | ---------- | ------ | - |  | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                          |  | First      |        | Second   |  | Third     |        | Fourth    
|                                          |  | Quarter    |        | Quarter  |  | Quarter   |        | Quarter   
|                                          |  |            |        |          |  |           |        |           
|                                          |  | Previously |        |          |  |           |        | Previously |  |           |        |          |  | Previously |        |   |  |   |        |   |  |  
|2002                                      |  | reported*  |        | Restated |  | reported* |        | Restated   |  | reported* |        | Restated |  |            |        |  
|                                          |  |            |        |          |  |           |        |            |  |           |        |          |  |            |        |  
|Net sales                                 |  | $          | 18,265 |          |  | $         | 18,265 |            |  | $         | 19,817 |          |  | $          | 19,817 |   |  | $ | 21,092 |   |  | $ | 21,092 |   |  | $ | 27,511 |  
|Cost of sales                             |  |            | 12,528 |          |  |           | 12,528 |            |  |           | 13,100 |          |  |            | 13,100 |   |  |   | 12,716 |   |  |   | 12,716 |   |  |   | 17,619 |  
|Operating income                          |  |            | 785    |          |  |           | 785    |            |  |           | 1,643  |          |  |            | 1,643  |   |  |   | 3,444  |   |  |   | 3,444  |   |  |   | 4,889  |  
|Provision
for (benefit from) income taxes |  |            | 295    |          |  |           | 295    |            |  |           | 626    |          |  |            | 626    |   |  |   | 1,332  |   |  |   | 1,332  |   |  |   | (7,726 | )
|Net income (loss)                         |  | $          | (5,093 | )        |  | $         | (4,736 | )          |  | $         | (1,490 | )        |  | $          | (974   | ) |  | $ | (4,750 | ) |  | $ | (5,623 | ) |  | $ | 12,115 |  
|                                          |  |            |        |          |  |           |        |            |  |           |        |          |  |            |        |   |  |   |        |   |  |   |        |   |  |   |        |  
|Basic net income (loss)
per share         |  | $          | (0.49  | )        |  | $         | (0.46  | )          |  | $         | (0.14  | )        |  | $          | (0.09  | ) |  | $ | (0.45  | ) |  | $ | (0.54  | ) |  | $ | 1.15   |  
|Diluted net income (loss)
per share       |  | $          | (0.49  | )        |  | $         | (0.46  | )          |  | $         | (0.14  | )        |  | $          | (0.09  | ) |  | $ | (0.45  | ) |  | $ | (0.54  | ) |  | $ | 1.05   |  
|                                          |  |            |        |          |  |           |        |            |  |           |        |          |  |            |        |   |  |   |        |   |  |   |        |   |  |   |        |  

|                                          |  |          |        |          |  |          |        |          |  |   |         |   |  |   |        |  
|----------------------------------------- |  | -------- | ------ | -------- |  | -------- | ------ | -------- |  | - | ------- | - |  | - | ------ | -
|                                          |  | First    |        | Second   |  | Third    |        | Fourth  
|2001                                      |  | Quarter* |        | Quarter* |  | Quarter* |        | Quarter*
|                                          |  |          |        |          |  |          |        |         
|Net sales                                 |  | $        | 17,260 |          |  | $        | 19,632 |          |  | $ | 19,024  |   |  | $ | 23,391 |  
|Cost of sales                             |  |          | 11,272 |          |  |          | 13,602 |          |  |   | 12,269  |   |  |   | 14,949 |  
|Operating income                          |  |          | 1,777  |          |  |          | 1,055  |          |  |   | 2,127   |   |  |   | 3,099  |  
|Provision
for (benefit from) income taxes |  |          | 819    |          |  |          | 452    |          |  |   | 8,307   |   |  |   | 1,227  |  
|Net income (loss)                         |  | $        | 170    |          |  | $        | (846   | )        |  | $ | (16.126 | ) |  | $ | (932   | )
|                                          |  |          |        |          |  |          |        |          |  |   |         |   |  |   |        |  
|Basic net income (loss)
per share         |  | $        | 0.02   |          |  | $        | (0.08  | )        |  | $ | (1.61   | ) |  | $ | (0.09  | )
|Diluted net income (loss)
per share       |  | $        | 0.02   |          |  | $        | (0.08  | )        |  | $ | (1.61   | ) |  | $ | (0.09  | )
|                                          |  |          |        |          |  |          |        |          |  |   |         |   |  |   |        |  

*The previously reported information for 2002 and 2001 have been restated to
reflect the effect of the discontinued operations discussed in Note 3.

40



---



##### Table of Contents






Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

None

41



---



##### Table of Contents






Part III




Item 10. Directors and Executive Officers of the Registrant




Item 11. Executive Compensation




Item 12. Security Ownership of Certain Beneficial Owners and Management




Item 13. Certain Relationships and Related Transactions

All information required by Items 10, 11, 12 and 13 is incorporated herein by
reference to the Companys definitive proxy statement for its annual meeting of
stockholders to be held on May 28, 2003, which will be filed with the
Securities and Exchange Commission pursuant to Regulation 14A.




Part IV




Item 14. Controls and Procedures

Within the 90-day period prior to the filing date of this report, an evaluation
was conducted under the supervision of and with the participation of Signals
management, including the Chief Executive Officer and the Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on that evaluation, the Chief Executive Officer
and the Chief Financial Officer have concluded that our disclosure controls and
procedures are effective to ensure that all material information related to the
Company and its consolidated subsidiary is made known to them, particularly
during the period when our periodic reports are being prepared. It should be
noted that the design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote.

Subsequent to the date the Chief Executive Officer and Chief Financial Officer
completed their evaluation, there have been no significant changes in our
internal controls, or in other factors that could significantly affect the
internal controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.

42



---



##### Table of Contents






Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)(1) Index to Financial Statements

|                                                                           |                                                 |      |    |    | 
|-------------------------------------------------------------------------- | ----------------------------------------------- | ---- | -- | -- | 
|                                                                           |                                                 | Page
|                                                                           |                                                 |     
|Report of Independent Accountants                                          |                                                 |      | 19 |   
|Financial Statements for the Years Ended December 31, 2002, 2001 and 2000: |                                                 |      |    |   
|                                                                           | Consolidated Balance Sheets                     |      |    | 20 | 
|                                                                           | Consolidated Statements of Operations           |      |    | 21 | 
|                                                                           | Consolidated Statements of Stockholders Equity |      |    | 22 | 
|                                                                           | Consolidated Statements of Cash Flows           |      |    | 23 | 
|Notes to Consolidated Financial Statements                                 |                                                 |      | 24 |   

All schedules are omitted because they are not applicable, nor required under the instructions, or all the information required is set forth in the consolidated financial
statements or notes thereto.



|(2) |  | The following described exhibits are filed herewith or incorporated herein by reference indicated:
|--- |  | --------------------------------------------------------------------------------------------------

|        |  |                                                                                                                                                                                  
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                  
|Number  |  | Description                                                                                                                                                                      
|        |  |                                                                                                                                                                                  
|3.1     |  | Certificate of Incorporation, as amended to date.*                                                                                                                               
|        |  |                                                                                                                                                                                  
|3.2     |  | By-Laws, as amended to date.**                                                                                                                                                   
|        |  |                                                                                                                                                                                  
|10.1    |  | Employee Incentive Stock Option Plan  1982.*                                                                                                                                    
|        |  |                                                                                                                                                                                  
|10.2    |  | 1992 Equity Incentive Plan.*                                                                                                                                                     
|        |  |                                                                                                                                                                                  
|10.3    |  | 2001 Equity Incentive Plan *******                                                                                                                                               
|        |  |                                                                                                                                                                                  
|10.4    |  | Signal Technology Corporation 401(k) Plan.*                                                                                                                                      
|        |  |                                                                                                                                                                                  
|10.5    |  | Lease dated as of October 18, 1990 by and between Benecia Associates and ST Microwave Corp.*                                                                                     
|        |  |                                                                                                                                                                                  
|10.6    |  | Purchase and Sale Agreement by and between Tecnetics, Incorporated and Keltec Corporation, dated September 7,
1995.***                                                           
|        |  |                                                                                                                                                                                  
|10.7    |  | First Amendment to lease, dated as of September 9, 1996, by and between Benecia Associates and Signal
Technology Corporation.****                                                
|        |  |                                                                                                                                                                                  
|10.8    |  | Employee Stock Purchase Plan.*****                                                                                                                                               
|        |  |                                                                                                                                                                                  
|10.9    |  | Sublease Agreement as of October 1, 1998 by and between Copyright Clearance Center, Inc. and Signal
Technology Corporation.******                                                
|        |  |                                                                                                                                                                                  
|10.10   |  | Credit and Security Agreement, dated as of December 23, 2002, by
and among Signal Technology Corporation, Signal Technology Sales
Corporation and Citizens Bank of Massachusetts.
|        |  |                                                                                                                                                                                  
|21.1    |  | Schedule of Registrants subsidiaries.                                                                                                                                           
|        |  |                                                                                                                                                                                  
|23.1    |  | Consent of Independent Accountants.                                                                                                                                              
|        |  |                                                                                                                                                                                  
|99.1    |  | Certification Pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002                                                                         
|        |  |                                                                                                                                                                                  
|99.2    |  | Certification Pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002                                                                         
|        |  |                                                                                                                                                                                  
|*       |  | Incorporated by reference to the corresponding exhibit filed as part of the Registrants registration
statement on Form S-1, as amended (File No. 33-61124).                     
|        |  |                                                                                                                                                                                  
|**      |  | Incorporated by reference to the corresponding exhibit filed as part
of the Registrants 1993 Annual Report on                                                                   

43



---



##### Table of Contents



|        |  |                                                                                                                                                                            
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |  | Form 10-K.                                                                                                                                                                 
|        |  |                                                                                                                                                                            
|***     |  | Incorporated by reference to the corresponding exhibit filed as part of the Registrants 1995 Annual report
on Form 10-K.                                                  
|        |  |                                                                                                                                                                            
|****    |  | Incorporated by reference to the definitive Proxy Statement to be filed with the SEC in connection with
Companys Annual Meeting of Shareholders to be held on May 6, 1997.
|        |  |                                                                                                                                                                            
|*****   |  | Incorporated by reference to the corresponding exhibit filed as part of the Registrants 1996 Annual report
on Form 10-K.                                                  
|        |  |                                                                                                                                                                            
|******  |  | Incorporated by reference to the corresponding exhibit files as a part of the Registrants 1998 Annual report
on Form 10-K.                                                
|        |  |                                                                                                                                                                            
|******* |  | Incorporated by reference to the Registration Statement on Form S-8
(File No. 333-64770), dated July 9, 2001.                                                              



|(b) |  | Reports on Form 8-K
|--- |  | -------------------



| |  |  | The Company filed a Report on Form 8-K dated October 3, 2002, relating to the sale of certain assets of its
commercial fixed wireless business unit to Endwave Corporation for approximately $3.35 million in cash.                                                                                         
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Company filed a Report on Form 8-K dated November 26, 2002, relating to the sale of certain assets of its
remaining commercial fixed wireless business unit to Paratek Microwave for approximately $1.3 million in
cash. Paratek Microwave also assumed certain liabilities in connection with the sale.

44



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

| |  |                                                         
| |  | --------------------------------------------------------
| |  | SIGNAL TECHNOLOGY CORPORATION                           
| |  |                                                         
| |  | By: /s/ Robert N. Nelsen                                
| |  |                                                         
| |  | Chief Financial Officer and Principal Accounting Officer

Date: March 31, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.

|                                                                  |  |               
|----------------------------------------------------------------- |  | --------------
|/s/ George E. Lombard                                             |  | March 31, 2003
|                                                                  |  |               
|Chairman, Chief Executive Officer and Principal Executive Officer |  |               
|                                                                  |  |               
|/s/ Robert N. Nelsen                                              |  | March 31, 2003
|                                                                  |  |               
|Chief Financial Officer                                           |  |               
|                                                                  |  |               
|/s/ Bernard P. OSullivan                                         |  | March 31, 2003
|                                                                  |  |               
|Bernard P. OSullivan                                             |  |               
|Director                                                          |  |               
|                                                                  |  |               
|/s/ Harvey C. Krentzman                                           |  | March 31, 2003
|                                                                  |  |               
|Harvey C. Krentzman                                               |  |               
|Director                                                          |  |               
|                                                                  |  |               
|/s/ Joseph S. Schneider                                           |  | March 31, 2003
|                                                                  |  |               
|Joseph S. Schneider                                               |  |               
|Director                                                          |  |               
|                                                                  |  |               
|/s/ Larry L. Hansen                                               |  | March 31, 2003
|                                                                  |  |               
|Larry L. Hansen                                                   |  |               
|Director                                                          |  |               
|                                                                  |  |               
|/s/ Thomas McInerney                                              |  | March 31, 2003
|                                                                  |  |               
|Thomas McInerney                                                  |  |               
|Director                                                          |  |               
|                                                                  |  |               
|/s/ Thomas Skelly                                                 |  | March 31, 2003
|                                                                  |  |               
|Thomas Skelly                                                     |  |               
|Director                                                          |  |               

45