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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



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Form 10-Q



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended October 29, 2004



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 1-16541



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REMEC, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                      
|-------------------------------------------------------------- |  | -------------------------------------
|CALIFORNIA                                                     |  | 95-3814301                           
|(State of other jurisdiction of incorporation or organization) |  | I.R.S. Employer Identification Number
|                                                               | 
|3790 VIA DE LA VALLE, SUITE 311 DEL MAR, CALIFORNIA            |  | 92014                                
|(Address of principal executive offices)                       |  | (Zip Code)                           



(858) 505-3713

(Registrants telephone number, including area code)



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Indicate by check 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 month (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 ̈



Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    YES  x    NO ̈



Indicate number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date:



|                             |  |                                    
|---------------------------- |  | -----------------------------------
|Class                        |  | Outstanding as of: December 3, 2004
|Common Stock, $.01 par value |  | 62,078,679                         



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##### Table of Contents

REMEC, Inc.

Form 10-Q

For The Quarterly Period Ended October 29, 2004



|           |  |                                                                                       |  |         
|---------- |  | ------------------------------------------------------------------------------------- |  | --------
|Index      |  |                                                                                       |  | Page No.
|PART I     |  | FINANCIAL INFORMATION                                                                 |  |         
|Item 1.    |  | Unaudited Financial Statements:                                                       |  |         
|           |  | Condensed Consolidated Balance Sheets                                                 |  | 3       
|           |  | Condensed Consolidated Statements of Operations                                       |  | 4       
|           |  | Condensed Consolidated Statements of Cash Flows                                       |  | 5       
|           |  | Notes to Condensed Consolidated Financial Statements                                  |  | 6       
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 16      
|Item 3.    |  | Qualitative and Quantitative Disclosures About Market Risk                            |  | 25      
|Item 4.    |  | Controls and Procedures                                                               |  | 26      
|           |  |                                                                                      
|PART II    |  | OTHER INFORMATION                                                                     |  |         
|Item 1.    |  | Legal Proceedings                                                                     |  | 27      
|Item 5.    |  | Other Information                                                                     |  | 27      
|Item 6.    |  | Exhibits                                                                              |  | 27      
|           | 
|SIGNATURES |  | 28                                                                                   



|               |  |  |  | 
|-------------- |  |  |  | 
|CERTIFICATIONS |  |  |  | 
|               |  | 
|EXHIBITS       |  |  |  | 
|Exhibit 10.1   |  |  |  | 
|Exhibit 10.2   |  |  |  | 
|Exhibit 31.1   |  |  |  | 
|Exhibit 31.2   |  |  |  | 
|Exhibit 32.1   |  |  |  | 



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##### Table of Contents

PART IFINANCIAL INFORMATION



Item 1. Financial Statements.



REMEC, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)



|                                                      |  |                 |         |                 |   |        
|----------------------------------------------------- |  | --------------- | ------- | --------------- | - | -------
|                                                      |  | October 29,2004 |         | January 31,2004
|                                                      |  | (unaudited)     |         |                
|ASSETS                                                |  |                 |         |                 |   |        
|Current assets:                                       |  |                 |         |                 |   |        
|Cash and cash equivalents                             |  | $               | 40,517  |                 | $ | 44,783 
|Short-term investments                                |  |                 | 2,589   |                 |   | 10,296 
|Accounts receivable, net                              |  |                 | 76,061  |                 |   | 64,194 
|Notes and other receivables                           |  |                 | 7,271   |                 |   | 7,708  
|Inventories, net                                      |  |                 | 67,746  |                 |   | 75,850 
|Net assets of discontinued operations (Note 8)        |  |                 |        |                 |   | 10,905 
|Other current assets                                  |  |                 | 3,432   |                 |   | 3,481  
|                                                      |  |                 |         |                 |   |        
|Total current assets                                  |  |                 | 197,616 |                 |   | 217,217
|                                                      |  |                
|Property, plant and equipment, net                    |  |                 | 67,359  |                 |   | 75,503 
|Restricted cash                                       |  |                 | 571     |                 |   | 569    
|Goodwill, net                                         |  |                 | 3,018   |                 |   | 65,275 
|Intangible assets, net                                |  |                 | 2,653   |                 |   | 3,257  
|Other assets                                          |  |                 | 2,047   |                 |   | 2,576  
|                                                      |  |                 |         |                 |   |        
|                                                      |  | $               | 273,264 |                 | $ | 364,397
|                                                      |  |                 |         |                 |   |        
|LIABILITIES AND SHAREHOLDERS EQUITY                  |  |                 |         |                 |   |        
|Current liabilities:                                  |  |                 |         |                 |   |        
|Accounts payable                                      |  | $               | 54,532  |                 | $ | 59,855 
|Accrued expenses and other current liabilities        |  |                 | 47,461  |                 |   | 47,401 
|                                                      |  |                 |         |                 |   |        
|Total current liabilities                             |  |                 | 101,993 |                 |   | 107,256
|                                                      |  |                
|Deferred income taxes and other long-term liabilities |  |                 | 4,328   |                 |   | 3,999  
|Shareholders equity                                  |  |                 | 166,943 |                 |   | 253,142
|                                                      |  |                 |         |                 |   |        
|                                                      |  | $               | 273,264 |                 | $ | 364,397
|                                                      |  |                 |         |                 |   |        



See accompanying
notes.



3



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##### Table of Contents

REMEC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except per share data)



|                                                                                         |  |                    |         |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|---------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------ | --------------- |  | - | --------------- | - |  | - | ------- | -
|                                                                                         |  | Three months ended |         |   | Nine months ended |  
|                                                                                         |  | October 29,2004    |         |   | October 31,2003   |   |        | October 29,2004 |  |   | October 31,2003 |  
|Net sales                                                                                |  | $                  | 104,369 |   |                   | $ | 98,575 |                 |  | $ | 323,058         |   |  | $ | 252,369 |  
|Cost of sales                                                                            |  |                    | 85,094  |   |                   |   | 76,672 |                 |  |   | 275,827         |   |  |   | 194,056 |  
|                                                                                         |  |                    |         |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Gross profit                                                                             |  |                    | 19,275  |   |                   |   | 21,903 |                 |  |   | 47,231          |   |  |   | 58,313  |  
|Operating expenses:                                                                      |  |                    |         |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Selling, general and administrative                                                      |  |                    | 13,781  |   |                   |   | 11,505 |                 |  |   | 41,432          |   |  |   | 35,849  |  
|Research and development                                                                 |  |                    | 9,049   |   |                   |   | 11,439 |                 |  |   | 31,274          |   |  |   | 35,099  |  
|Impairment of goodwill                                                                   |  |                    |        |   |                   |   |       |                 |  |   | 62,400          |   |  |   |        |  
|Restructuring and impairment of other long-lived assets (reversals)/charges              |  |                    | (17     | ) |                   |   |       |                 |  |   | (888            | ) |  |   | 378     |  
|                                                                                         |  |                    |         |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Total operating expenses                                                                 |  |                    | 22,813  |   |                   |   | 22,944 |                 |  |   | 134,218         |   |  |   | 71,326  |  
|                                                                                         |  |                    |         |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Loss from continuing operations                                                          |  |                    | (3,538  | ) |                   |   | (1,041 | )               |  |   | (86,987         | ) |  |   | (13,013 | )
|Gain on sale of facility                                                                 |  |                    |        |   |                   |   |       |                 |  |   |                |   |  |   | 945     |  
|Interest income and other, net                                                           |  |                    | (504    | ) |                   |   | (1,954 | )               |  |   | (193            | ) |  |   | 846     |  
|                                                                                         |  |                    |         |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Loss before income taxes                                                                 |  |                    | (4,042  | ) |                   |   | (2,995 | )               |  |   | (87,180         | ) |  |   | (11,222 | )
|Income taxes                                                                             |  |                    | 9       |   |                   |   | (31    | )               |  |   | 19              |   |  |   | 24      |  
|                                                                                         |  |                    |         |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Loss from continuing operations                                                          |  | $                  | (4,051  | ) |                   | $ | (2,964 | )               |  | $ | (87,199         | ) |  | $ | (11,246 | )
|                                                                                         |  |                    |         |  
|Income (loss) from discontinued operations including gain/(loss) on disposal, net of tax |  |                    | 567     |   |                   |   | (1,120 | )               |  |   | 144             |   |  |   | (3,507  | )
|                                                                                         |  |                    |         |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Net loss                                                                                 |  | $                  | (3,484  | ) |                   | $ | (4,084 | )               |  | $ | (87,055         | ) |  | $ | (14,753 | )
|                                                                                         |  |                    |         |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Basic net loss per common share:                                                         |  |                    |         |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Loss from continuing operations                                                          |  | $                  | (0.07   | ) |                   | $ | (0.05  | )               |  | $ | (1.41           | ) |  | $ | (0.19   | )
|Income (loss) from discontinued operations                                               |  |                    | 0.01    |   |                   |   | (0.02  | )               |  |   | 0.00            |   |  |   | (0.06   | )
|                                                                                         |  |                    |         |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|                                                                                         |  | $                  | (0.06   | ) |                   | $ | (0.07  | )               |  | $ | (1.41           | ) |  | $ | (0.25   | )
|                                                                                         |  |                    |         |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Diluted net loss per common share:                                                       |  |                    |         |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Loss from continuing operations                                                          |  | $                  | (0.07   | ) |                   | $ | (0.05  | )               |  | $ | (1.41           | ) |  | $ | (0.19   | )
|Income (loss) from discontinued operations                                               |  |                    | 0.01    |   |                   |   | (0.02  | )               |  |   | 0.00            |   |  |   | (0.06   | )
|                                                                                         |  |                    |         |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|                                                                                         |  | $                  | (0.06   | ) |                   | $ | (0.07  | )               |  | $ | (1.41           | ) |  | $ | (0.25   | )
|                                                                                         |  |                    |         |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Shares used in computing net loss per common share:                                      |  |                    |         |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Basic                                                                                    |  |                    | 62,153  |   |                   |   | 59,260 |                 |  |   | 61,974          |   |  |   | 58,382  |  
|                                                                                         |  |                    |         |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Diluted                                                                                  |  |                    | 62,153  |   |                   |   | 59,260 |                 |  |   | 61,974          |   |  |   | 58,382  |  
|                                                                                         |  |                    |         |   |                   |   |        |                 |  |   |                 |   |  |   |         |  



See accompanying
notes.



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REMEC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)



|                                                                            |  |                   |         |   |                 |   |         |  
|--------------------------------------------------------------------------- |  | ----------------- | ------- | - | --------------- | - | ------- | -
|                                                                            |  | Nine months ended |        
|                                                                            |  | October 29,2004   |         |   | October 31,2003 |  
|OPERATING ACTIVITIES                                                        |  |                   |         |   |                 |   |         |  
|Net loss from continuing operations                                         |  | $                 | (87,199 | ) |                 | $ | (11,246 | )
|Adjustments to reconcile net loss to net cash used by operating activities: |  |                   |         |   |                 |   |         |  
|Depreciation and amortization from continuing operations                    |  |                   | 14,732  |   |                 |   | 13,400  |  
|Impairment of goodwill                                                      |  |                   | 62,400  |   |                 |   |        |  
|Unrealized gain/(loss) on foreign currency hedges                           |  |                   | (1,416  | ) |                 |   | 294     |  
|Gain on sale of facilities                                                  |  |                   |        |   |                 |   | (945    | )
|Restructuring and impairment of other long-lived assets (reversals)/charges |  |                   | (888    | ) |                 |   | 10      |  
|Changes in operating assets and liabilities:                                |  |                   |         |   |                 |   |         |  
|Accounts and other receivables                                              |  |                   | (10,889 | ) |                 |   | (16,844 | )
|Inventories                                                                 |  |                   | 7,879   |   |                 |   | (32,174 | )
|Other current assets                                                        |  |                   | 49      |   |                 |   | 2,452   |  
|Accounts payable                                                            |  |                   | (5,323  | ) |                 |   | 18,672  |  
|Accrued expenses, deferred income taxes and other long-term liabilities     |  |                   | 1,075   |   |                 |   | (13,305 | )
|                                                                            |  |                   |         |   |                 |   |         |  
|Net cash used by operating activities                                       |  |                   | (19,580 | ) |                 |   | (39,686 | )
|INVESTING ACTIVITIES                                                        |  |                   |         |   |                 |   |         |  
|Additions to property, plant and equipment                                  |  |                   | (11,244 | ) |                 |   | (10,139 | )
|Change in restricted cash                                                   |  |                   | (2      | ) |                 |   | 16,480  |  
|Payment for acquisition, net of cash acquired                               |  |                   |        |   |                 |   | (1,847  | )
|Short-term investments, net                                                 |  |                   | 7,823   |   |                 |   | (540    | )
|Proceeds from sale of property, plant & equipment                           |  |                   | 5,145   |   |                 |   | 6,190   |  
|Other assets                                                                |  |                   | 387     |   |                 |   | 273     |  
|                                                                            |  |                   |         |   |                 |   |         |  
|Net cash provided by investing activities                                   |  |                   | 2,109   |   |                 |   | 10,417  |  
|FINANCING ACTIVITIES                                                        |  |                   |         |   |                 |   |         |  
|Proceeds from issuance of long term debt                                    |  |                   |        |   |                 |   |        |  
|Proceeds from sale of common stock                                          |  |                   | 2,643   |   |                 |   | 5,655   |  
|                                                                            |  |                   |         |   |                 |   |         |  
|Net cash provided by financing activities                                   |  |                   | 2,643   |   |                 |   | 5,655   |  
|Decrease in cash from continuing operations                                 |  |                   | (14,828 | ) |                 |   | (23,614 | )
|Net cash provided by discontinued operations                                |  |                   | 11,049  |   |                 |   | 4,711   |  
|Effect of exchange rate changes on cash                                     |  |                   | (487    | ) |                 |   | 246     |  
|                                                                            |  |                   |         |   |                 |   |         |  
|Decrease in cash and cash equivalents                                       |  |                   | (4,266  | ) |                 |   | (18,657 | )
|Cash and cash equivalents at beginning of period                            |  |                   | 44,783  |   |                 |   | 64,396  |  
|                                                                            |  |                   |         |   |                 |   |         |  
|Cash and cash equivalents at end of period                                  |  | $                 | 40,517  |   |                 | $ | 45,739  |  
|                                                                            |  |                   |         |   |                 |   |         |  



See accompanying
notes.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



1. Quarterly Financial Statements



The interim condensed consolidated financial statements included herein have been prepared
by REMEC, Inc. (the Company or REMEC) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). Certain information and footnote disclosures, normally included in
annual financial statements, have been condensed or omitted pursuant to such SEC rules and regulations. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for
the year ended January 31, 2004, included in REMECs Annual Report on Form 10-K. In the opinion of management, the condensed consolidated financial statements included herein reflect all adjustments, consisting only of normal recurring
adjustments, except for impairment of goodwill of $62.4 million which was recorded in the quarter ending July 30, 2004 (See Note 10), necessary to present fairly the consolidated financial position of REMEC as of October 29, 2004, and the results of
its operations for the three and nine month periods ended October 29, 2004 and October 31, 2003. The results of operations for the interim period ended October 29, 2004, are not necessarily indicative of the results, which may be reported for any
other interim period or for the entire fiscal year.



2. Loss Per Share



The Company calculates net loss per share in accordance with SFAS No.
128,Earnings per Share. Basic net loss per share is computed using the weighted average shares outstanding for each period presented. The diluted net loss per share is computed using the weighted average shares outstanding plus potentially
dilutive common shares using the treasury stock method at the average market price during the reporting period. As the Company has incurred net losses for all reporting periods presented, there is no difference between basic and diluted net loss per
share.



Dilutive securities may include options, warrants, and preferred stock
as if converted and restricted stock subject to vesting. Potentially dilutive securities (which include options) totaling 292,000 and 575,000 shares for the three and nine months ended October 29, 2004, respectively, and 894,000 and 506,000 shares
for the three and nine months ended October 31, 2003, respectively, were excluded from the calculation of diluted loss per share because of their anti-dilutive effects.



3. Stock-Based Compensation



In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 148,Accounting for
Stock-Based Compensation-Transition and Disclosure, which (i) amends SFAS No. 123,Accounting for Stock-Based Compensation to add two new transitional approaches when changing from the Accounting Principles Board (APB) Opinion
No. 25,Accounting for Stock Issued to Employees intrinsic value method of accounting for stock-based employee compensation to the SFAS No. 123 fair value method and (ii) amends APB Opinion No. 28,Interim Financial Reporting to call
for disclosure of SFAS No. 123 pro forma information on a quarterly basis. The Company has elected to adopt the disclosure only provisions of SFAS No. 148 and will continue to follow APB Opinion No. 25 and related interpretations in accounting for
the stock options granted to its employees and directors. Accordingly, employee and director compensation expense is recognized only for those options whose price is less than fair market value at the measurement date.



Pro forma information regarding net loss and net loss per share is required by SFAS No. 123,
and has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The pro forma effects of stock-based compensation on net loss and net loss per common share have been estimated at
the date of grant using the Black-Scholes option pricing model based on the following weighted average assumptions for the three and nine months ended October 29, 2004 and October 31, 2003: risk-free interest rates of 4% and 6%, respectively,
dividend yields of 0%, expected volatility of 56.9%, 63.6%, 57.3% and 83.9%, and a weighted average expected life of the option of five and seven years. The Black-Scholes option valuation model was developed for use in estimating the fair value of
traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Companys employee
stock options and rights under the employee stock purchase plan have characteristics significantly different from those of traded options, and because changes in the subjective assumptions can materially affect the fair value estimate, in
managements opinion, the existing models do not necessarily provide a reliable single measure of the fair market value of its employee stock options or the rights granted under the employee stock purchase plan. The Company has issued 4,000 and
131,000 shares respectively, upon the exercise of stock options during the three and nine months ended October 29, 2004.



The following is a summary of the pro forma effects on reported net loss and loss per share for the periods indicated as if the Company had elected to recognize
compensation expense based on the fair value of the options at their grant date as prescribed by SFAS No. 123. For purposes of the pro forma disclosures, the estimated fair value of the options and the shares granted under the employee stock
purchase plan is amortized to expense over their respective vesting period.



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Pro forma information is as follows (in 000s, except per share data):



|                                                                                                                                       |  |                    |        |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | - | ------ | --------------- |  | - | --------------- | - |  | - | ------- | -
|                                                                                                                                       |  | Three months ended |        |   | Nine months ended |  
|                                                                                                                                       |  | October 29,2004    |        |   | October 31,2003   |   |        | October 29,2004 |  |   | October 31,2003 |  
|Net loss applicable to common shareholders, as reported                                                                                |  | $                  | (3,484 | ) |                   | $ | (4,084 | )               |  | $ | (87,055         | ) |  | $ | (14,753 | )
|Deduct: Stock-based employee compensation expense determined under fair value based method, for all awards, net of related tax
effects |  |                    | (1,728 | ) |                   |   | (3,665 | )               |  |   | (5,057          | ) |  |   | (11,868 | )
|                                                                                                                                       |  |                    |        |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Pro forma net loss                                                                                                                     |  | $                  | (5,212 | ) |                   | $ | (7,749 | )               |  | $ | (92,112         | ) |  | $ | (26,621 | )
|                                                                                                                                       |  |                    |        |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Net loss per share:                                                                                                                    |  |                    |        |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|As reported  Basic and diluted                                                                                                        |  | $                  | (0.06  | ) |                   | $ | (0.07  | )               |  | $ | (1.41           | ) |  | $ | (0.25   | )
|                                                                                                                                       |  |                    |        |  
|Pro forma  Basic and diluted                                                                                                          |  | $                  | (0.08  | ) |                   | $ | (0.13  | )               |  | $ | (1.49           | ) |  |   | (0.46   | )





4. Short-term investments



Statement of Financial Accounting Standards (SFAS) No. 115,Accounting for Certain Investments in Debt and Equity Securities requires companies to
record certain debt and equity security investments at market value. Investments with maturities greater than three months are classified as short-term investments. All of the Companys short-term investments are classified as
available-for-sale and are reported at fair value with any material unrealized gains and losses, net of tax, recorded as a separate component of accumulated other comprehensive income (loss) within shareholders equity. The Company manages its
cash equivalents and short-term investments as a single portfolio of highly marketable securities, all of which are intended to be available for the Companys current operations. The carrying value of these securities approximates their fair
value due to the short maturities of these instruments. As of October 29, 2004 and January 31, 2004, the Company had short-term investments of $2.6 million and $10.3 million, respectively. Gross realized and unrealized losses on short-term
investments were not significant in either of the periods ended October 29, 2004 and October 31, 2003.



5. Inventories, net



Inventories, net
consist of the following (in 000s):



|                 |  |                 |        |                 |   |       
|---------------- |  | --------------- | ------ | --------------- | - | ------
|                 |  | October 29,2004 |        | January 31,2004
|Raw materials    |  | $               | 45,882 |                 | $ | 44,431
|Work in progress |  |                 | 9,623  |                 |   | 17,485
|Finished goods   |  |                 | 12,241 |                 |   | 13,934
|                 |  |                 |        |                 |   |       
|                 |  | $               | 67,746 |                 | $ | 75,850
|                 |  |                 |        |                 |   |       



The Company had a reserve for excess
and obsolete inventory of $15.4 million and $19.5 million as of October 29, 2004, and January 31, 2004, respectively. The Company also had additional reserves for anticipated contract losses of $6.4 million as of October 29, 2004 and January 31,
2004.



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##### Table of Contents

6. Commitments and Contingencies



Legal Matters



On September 29, 2004 three class action lawsuits were filed against the Company and current and former officers in the United States District Court for the Southern
District of California alleging violations of federal securities laws between September 8, 2003 and September 8, 2004. The complaints assert, among other things, that during that time period, false and misleading statements were made and material
information was not disclosed regarding the Companys financial condition and performance, growth, operations, financial statements, markets, management, earnings and present and future business prospects. The Company believes that these
lawsuits are without merit and intends to defend against them vigorously.



Other than the lawsuits described above, neither the Company nor any of its subsidiaries is presently subject to any material litigation, nor to the Companys knowledge, is such litigation threatened against the Company or its
subsidiaries, other than routine actions and administrative proceedings arising in the ordinary course of business, all of which collectively are not anticipated to have a material adverse effect on the business or financial condition, cash flows or
results of operations of the Company.



Tax Matters



In the ordinary course of doing business, tax authorities regularly issue notices that
require the Company to address certain tax matters. These notices are not indicative of an ongoing audit, but are the result of certain discrepancies that occur in various income tax, payroll tax or other tax-related matters. The Company anticipates
that the result of these notices will not have a material adverse effect on results of operations, financial condition or cash flows of the Company. The Company believes that it has established sufficient reserves to offset any potential impact that
might occur as a result of these notices.



Indemnifications and Guarantees



Effective January 1, 2003, the recognition provisions of FASB
Interpretation No. 45 (FIN 45) were adopted, which expands previously issued accounting guidance for certain guarantees. Indemnifications issued or modified during the nine months ended October 29, 2004 did not have a material effect on
the consolidated financial statements. A description of the Companys indemnifications as of October 29, 2004 is provided below. The Company is unable to reasonably estimate the maximum amount that it could be required to pay under these
arrangements due to the conditional nature of the Companys obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made under these agreements have not had a material effect on the
Companys results of operation, financial condition or cash flows other than certain guarantee payments made in connection with the customer financing arrangements discussed below.



The Company often designs, develops and manufactures products to a customers specification and may provide the customer with an
indemnification against any liability arising from third-party claims of patent, copyright or trademark infringement. The Company cannot determine the maximum amount of losses that it could incur under this type of indemnification because it often
may not have enough information about the nature and scope of an infringement claim until it has been submitted to the Company and, to date, no claims have been made.



The Company indemnifies its directors and certain of its current and former officers against third party claims against them in their
capacity as directors or officers. Certain of the costs incurred for providing such indemnification may be recovered under various insurance policies.



The Company has guaranteed the performance of one of its wholly owned subsidiaries under a bank agreement to purchase accounts receivable from the subsidiary. This
guarantee provides that if the customer does not pay the accounts receivable due to the subsidiarys failure to perform the underlying contract, the Company guarantees that its subsidiary will repay the funds received from the bank. There have
been no uncollected accounts receivable to date and none are anticipated. The total amount of the potential obligation at October 29, 2004 is $15.0 million. Management believes that the likelihood of a payment associated with this guarantee is
remote as the failure of the customer to make their required payments to the Company would be a breach of the underlying contract and would subject them to a claim for damages from the Company.



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Warranty



Warranty reserves are established for costs that are expected to be incurred after the sale and delivery of a product or service for deficiencies under specific product
or service warranty provisions. The warranty reserves are determined as a percentage of revenues based on the actual trend of historical charges incurred over various periods, excluding any significant or infrequent issues that are specifically
identified and reserved.



The following table summarizes the activity related
to warranty reserves (in 000s):



|                                       |  |                    |       |                   |                 |   |                 |  |   |                 |   |  |   |       |  
|-------------------------------------- |  | ------------------ | ----- | ----------------- | --------------- | - | --------------- |  | - | --------------- | - |  | - | ----- | -
|                                       |  | Three months ended |       | Nine months ended |                
|                                       |  | October 29,2004    |       |                   | October 31,2003 |   | October 29,2004 |  |   | October 31,2003 |  
|Balance at beginning of period         |  | $                  | 8,446 |                   |                 | $ | 7,874           |  | $ | 8,867           |   |  | $ | 8,791 |  
|Additions to reserve                   |  |                    | 495   |                   |                 |   | 786             |  |   | 774             |   |  |   | 790   |  
|Usage and release of warranty reserves |  |                    | (33   | )                 |                 |   |                |  |   | (733            | ) |  |   | (921  | )
|                                       |  |                    |       |                   |                 |   |                 |  |   |                 |   |  |   |       |  
|Balance at end of period               |  | $                  | 8,908 |                   |                 | $ | 8,660           |  | $ | 8,908           |   |  | $ | 8,660 |  
|                                       |  |                    |       |                   |                 |   |                 |  |   |                 |   |  |   |       |  



7. Comprehensive Income (Loss)



Comprehensive income (loss) is defined as the change in equity during a
period from transactions and other events and circumstances from non-owner sources. Net income (loss) and other comprehensive income (loss), including foreign currency translation adjustments and unrealized gains and losses on investments, shall be
reported, net of their related tax effects, to arrive at comprehensive income (loss).



The components of comprehensive income (loss), net of tax, are as follows (in 000s):



|                                                               |  |                    |        |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|-------------------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | - | ------ | --------------- |  | - | --------------- | - |  | - | ------- | -
|                                                               |  | Three months ended |        |   | Nine months ended |  
|                                                               |  | October 29,2004    |        |   | October 31,2003   |   |        | October 29,2004 |  |   | October 31,2003 |  
|Net loss from continuing operations                            |  | $                  | (4,051 | ) |                   | $ | (2,964 | )               |  | $ | (87,199         | ) |  | $ | (11,246 | )
|Net income (loss) from discontinued operations                 |  |                    | 567    |   |                   |   | (1,120 | )               |  |   | 144             |   |  |   | (3,507  | )
|                                                               |  |                    |        |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Net loss                                                       |  |                    | (3,484 | ) |                   |   | (4,084 | )               |  |   | (87,055         | ) |  |   | (14,753 | )
|Change in net unrealized gain (loss) on short-term investments |  |                    | 671    |   |                   |   | (500   | )               |  |   | 116             |   |  |   | (2      | )
|Change in cumulative foreign currency translation adjustment   |  |                    | 1,540  |   |                   |   | 504    |                 |  |   | (487            | ) |  |   | (246    | )
|Change in unrealized gain (loss) on foreign currency hedges    |  |                    | (2,811 | ) |                   |   |       |                 |  |   | (1,416          | ) |  |   |        |  
|                                                               |  |                    |        |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Comprehensive loss                                             |  | $                  | (4,084 | ) |                   | $ | (4,080 | )               |  | $ | (88,842         | ) |  | $ | (15,001 | )
|                                                               |  |                    |        |   |                   |   |        |                 |  |   |                 |   |  |   |         |  



8. Acquisition Transactions and
Discontinued Operations



Paradigm Wireless Systems, Inc.
(Paradigm)



In November 2003, the Company acquired all of the
assets and assumed all of the obligations of Paradigm, a private merchant supplier of RF power amplifiers to the telecommunications infrastructure industry, in a stock-for-stock merger. The addition of Paradigm expands the Companys amplifier
product portfolio. Paradigm stockholders received 1,892,107 shares of REMEC common stock. The board of directors of both companies unanimously approved the acquisition, which was valued at $22.1 million (based upon the average closing price of the
Companys stock for the period of two days before and two days after the date the terms of the purchase agreement were agreed to, or $11.03 per share). The Company has accounted for this transaction as a purchase in accordance with SFAS No.
141,Business Combinations. The results of Paradigm are included in the Companys Wireless Systems segment and have been included in the Companys condensed consolidated financial statements from the date of acquisition forward.



9



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##### Table of Contents

Himark Telecom Group Limited (Himark)



In May 2003, the Company acquired the business of the Himark group, a group of companies in the private sales distribution and value-added
telecommunications sector which are headquartered in Beijing, Peoples Republic of China. The Company paid consideration of approximately $12.1 million, including 1,391,650 shares of REMEC common stock with a value of $7.0 million (based on the
average closing price of the Companys stock for the period of two days before and two days after the date the terms of the purchase agreement were agreed to, or $5.03 per share), as well as cash, a note payable and Class A Preferred Stock of
REMEC International, Inc. The Class A Preferred Stock of REMEC International, Inc. may be converted in certain circumstances into securities granting a 10% ownership interest of REMECs combined Chinese operations. Prior to the acquisition, the
Himark group jointly provided sales and distribution services for REMEC since its entry into the China telecom market. The purpose of the Himark acquisition is to accelerate the Companys penetration into the China telecom market. The Company
has accounted for this transaction as a purchase in accordance with SFAS No. 141. The results of Himark are included in the Companys Wireless Systems segment and have been included in the Companys condensed consolidated financial
statements from the date of acquisition forward, as the Company controls the Himark group through the acquisition of certain assets and liabilities as well as direct ownership of a Hong Kong entity in addition to an option, an exclusive services
agreement and a pledge over the equity of a Peoples Republic of China entity.



Discontinued Operations



The management of REMEC has engaged
the services of financial advisors to facilitate the sale or divestiture of certain of its non-core business operations. Pursuant to its decision, the Company completed the sale of its Canadian subsidiary, REMEC Nanowave Technologies Inc. on August
18, 2004, which had net assets of $2.9 million as of October 29, 2004. Terms of the agreement included an upfront cash payment of $3.0 million and the assumption of notes payable and resulted in a net loss on disposal of $0.2 million. The Company
also completed the sale of its Components product line on October 15, 2004, which had net assets of $5.6 million at the time of the sale. This product line sold for $8 million in cash and resulted in a net gain on disposal of $1.4 million. The
operations for these businesses in prior periods have been reclassified as assets held for sale in accordance with SFAS 144,Accounting for the Impairment or Disposal of Long-Lived Assets.



Operating results of the discontinued operations are shown, net of tax, separately in the
accompanying condensed consolidated statements of operations. The businesses included in discontinued operations had sales aggregating $2.4 million and $14.1 million for the three and nine month ended October 29, 2004, respectively, and $5.5 million
and $19.3 million for the three and nine months ended October 31, 2003, respectively.



Pro Forma Information



The following unaudited pro forma
summary presents the consolidated results of operations of the Company assuming that the acquisitions of Paradigm and Himark and dispositions of Nanowave and Components occurred on February 1, 2003. The pro forma condensed consolidated results of
operations would be as follows (in 000s, except per share data):



|                                      |  |                    |         |   |                   |   |         |                 |  |   |                 |   |  |   |         |  
|------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | --------------- |  | - | --------------- | - |  | - | ------- | -
|                                      |  | Three months ended |         |   | Nine months ended |  
|                                      |  | October 29,2004    |         |   | October 31, 2003  |   |         | October 29,2004 |  |   | October 31,2003 |  
|Net sales                             |  | $                  | 104,369 |   |                   | $ | 103,261 |                 |  | $ | 323,058         |   |  | $ | 270,794 |  
|Net loss from continuing operations   |  |                    | (4,051  | ) |                   |   | (10,599 | )               |  |   | (87,199         | ) |  |   | (22,789 | )
|Net loss from discontinued operations |  |                    | 567     |   |                   |   | (1,120  | )               |  |   | 144             |   |  |   | (3,507  | )
|                                      |  |                    |         |   |                   |   |         |                 |  |   |                 |   |  |   |         |  
|Net loss                              |  |                    | (3,484  | ) |                   |   | (11,719 | )               |  |   | (87,055         | ) |  |   | (26,296 | )
|Loss per share:                       |  |                    |         |   |                   |   |         |                 |  |   |                 |   |  |   |         |  
|Basic and diluted                     |  | $                  | (0.06   | ) |                   | $ | (0.19   | )               |  | $ | (1.41           | ) |  | $ | (0.45   | )



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##### Table of Contents

9. Information by Segment



The Company operates in two reportable segments, Wireless Systems and Defense & Space. The Wireless Systems segment was created as the
result of the reorganization of the Commercial segment announced on May 10, 2004. The Wireless Systems segment, which includes the recently acquired operations of Paradigm and Himark, develops and manufactures high frequency subsystems used in the
transmission of voice, video and data traffic over fixed access and mobile wireless communication networks. The Defense & Space segment provides a broad spectrum of RF, microwave and guidance products for systems integrated by prime contractors
in military and space applications. The Company evaluates performance and allocates resources based on profit or loss from operations before interest, other income and income taxes. The accounting policies of the reportable segments are the same as
those described in the summary of significant accounting policies.



Segment
and Geographic Area Data (in 000s):



|                                                                           |  |                    |         |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|-------------------------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------ | --------------- |  | - | --------------- | - |  | - | ------- | -
|                                                                           |  | Three months ended |         |   | Nine months ended |  
|                                                                           |  | October 29,2004    |         |   | October 31,2003   |   |        | October 29,2004 |  |   | October 31,2003 |  
|Net sales:                                                                 |  |                    |         |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Wireless Systems                                                           |  | $                  | 78,805  |   |                   | $ | 77,623 |                 |  | $ | 249,740         |   |  | $ | 192,056 |  
|Defense & Space                                                            |  |                    | 25,564  |   |                   |   | 20,952 |                 |  |   | 73,318          |   |  |   | 60,313  |  
|                                                                           |  |                    |         |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Consolidated net sales                                                     |  | $                  | 104,369 |   |                   | $ | 98,575 |                 |  | $ | 323,058         |   |  | $ | 252,369 |  
|                                                                           |  |                    |         |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Net sales to external customers:                                           |  |                    |         |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|United States                                                              |  | $                  | 54,561  |   |                   | $ | 55,110 |                 |  | $ | 155,818         |   |  | $ | 138,163 |  
|Canada                                                                     |  |                    | 11      |   |                   |   |       |                 |  |   | 81              |   |  |   |        |  
|Europe                                                                     |  |                    | 26,890  |   |                   |   | 39,331 |                 |  |   | 109,819         |   |  |   | 87,350  |  
|Asia                                                                       |  |                    | 20,171  |   |                   |   | 4,138  |                 |  |   | 51,826          |   |  |   | 24,638  |  
|All other geographic regions                                               |  |                    | 2,736   |   |                   |   | (4     | )               |  |   | 5,514           |   |  |   | 2,218   |  
|                                                                           |  |                    |         |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Total net sales to external customers                                      |  | $                  | 104,369 |   |                   | $ | 98,575 |                 |  | $ | 323,058         |   |  | $ | 252,369 |  
|                                                                           |  |                    |         |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Income (loss) from continuing operations:                                  |  |                    |         |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Wireless Systems                                                           |  | $                  | (8,426  | ) |                   | $ | (7,062 | )               |  | $ | (98,969         | ) |  | $ | (22,338 | )
|Defense & Space                                                            |  |                    | 4,375   |   |                   |   | 4,098  |                 |  |   | 11,770          |   |  |   | 11,092  |  
|                                                                           |  |                    |         |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Consolidated loss from continuing operations                               |  | $                  | (4,051  | ) |                   | $ | (2,964 | )               |  | $ | (87,199         | ) |  | $ | (11,246 | )
|                                                                           |  |                    |         |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Depreciation and amortization:                                             |  |                    |         |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Wireless Systems, net of discontinued operations                           |  | $                  | 3,735   |   |                   | $ | 3,720  |                 |  | $ | 11,386          |   |  | $ | 10,861  |  
|Defense & Space, net of discontinued operations                            |  |                    | 1,111   |   |                   |   | 797    |                 |  |   | 3,346           |   |  |   | 2,539   |  
|                                                                           |  |                    |         |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Consolidated depreciation and amortization, net of discontinued operations |  | $                  | 4,846   |   |                   | $ | 4,517  |                 |  | $ | 14,732          |   |  | $ | 13,400  |  
|                                                                           |  |                    |         |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Wireless Systems, discontinued operations                                  |  | $                  | 52      |   |                   | $ | 18     |                 |  | $ | 88              |   |  | $ | 54      |  
|Defense & Space, discontinued operations                                   |  |                    | 39      |   |                   |   | 356    |                 |  |   | 394             |   |  |   | 1,032   |  
|                                                                           |  |                    |         |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Consolidated depreciation and amortization, discontinued operations        |  | $                  | 91      |   |                   | $ | 374    |                 |  | $ | 482             |   |  | $ | 1,086   |  
|                                                                           |  |                    |         |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Wireless Systems                                                           |  | $                  | 3,787   |   |                   | $ | 3,738  |                 |  | $ | 11,474          |   |  | $ | 10,915  |  
|Defense & Space                                                            |  |                    | 1,150   |   |                   |   | 1,153  |                 |  |   | 3,740           |   |  |   | 3,571   |  
|                                                                           |  |                    |         |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Consolidated depreciation and amortization                                 |  | $                  | 4,937   |   |                   | $ | 4,891  |                 |  | $ | 15,214          |   |  | $ | 14,486  |  
|                                                                           |  |                    |         |   |                   |   |        |                 |  |   |                 |   |  |   |         |  



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##### Table of Contents

|                                                                       |  |                 |         |                 |   |        
|---------------------------------------------------------------------- |  | --------------- | ------- | --------------- | - | -------
|                                                                       |  | October 29,2004 |         | January 31,2004
|Identifiable assets:                                                   |  |                 |         |                 |   |        
|Wireless Systems, net of discontinued operations                       |  | $               | 230,202 |                 | $ | 316,584
|Defense & Space, net of discontinued operations                        |  |                 | 43,062  |                 |   | 36,908 
|                                                                       |  |                 |         |                 |   |        
|Consolidated identifiable assets, net of discontinued operations       |  | $               | 273,264 |                 | $ | 353,492
|                                                                       |  |                 |         |                 |   |        
|Wireless Systems, discontinued operations                              |  | $               |        |                 | $ | 7,519  
|Defense & Space, discontinued operations                               |  |                 |        |                 |   | 3,386  
|                                                                       |  |                 |         |                 |   |        
|Consolidated identifiable assets, discontinued operations              |  | $               |        |                 | $ | 10,905 
|                                                                       |  |                
|Wireless Systems                                                       |  | $               | 230,202 |                 | $ | 324,103
|Defense & Space                                                        |  |                 | 43,062  |                 |   | 40,294 
|                                                                       |  |                 |         |                 |   |        
|Consolidated identifiable assets                                       |  | $               | 273,264 |                 | $ | 364,397
|                                                                       |  |                 |         |                 |   |        
|Long-lived assets by area:                                             |  |                 |         |                 |   |        
|United States, net of discontinued operations                          |  | $               | 37,536  |                 | $ | 69,398 
|Canada, net of discontinued operations                                 |  |                 |        |                 |   |       
|Europe, net of discontinued operations                                 |  |                 | 4,424   |                 |   | 37,096 
|Costa Rica, net of discontinued operations                             |  |                 | 11,604  |                 |   | 9,625  
|Asia, net of discontinued operations                                   |  |                 | 21,514  |                 |   | 30,493 
|                                                                       |  |                 |         |                 |   |        
|Consolidated long-lived assets by area, net of discontinued operations |  | $               | 75,078  |                 | $ | 146,612
|                                                                       |  |                 |         |                 |   |        
|United States, discontinued operations                                 |  | $               |        |                 | $ |       
|Canada, discontinued operations                                        |  |                 |        |                 |   |       
|Europe, discontinued operations                                        |  |                 |        |                 |   |       
|Costa Rica, discontinued operations                                    |  |                 |        |                 |   |       
|Asia, discontinued operations                                          |  |                 |        |                 |   |       
|                                                                       |  |                 |         |                 |   |        
|Consolidated long-lived assets by area, discontinued operations        |  | $               |        |                 | $ |       
|                                                                       |  |                 |         |                 |   |        
|United States                                                          |  | $               | 37,536  |                 | $ | 69,398 
|Canada                                                                 |  |                 |        |                 |   |       
|Europe                                                                 |  |                 | 4,424   |                 |   | 37,096 
|Costa Rica                                                             |  |                 | 11,604  |                 |   | 9,625  
|Asia                                                                   |  |                 | 21,514  |                 |   | 30,493 
|                                                                       |  |                 |         |                 |   |        
|Consolidated long-lived assets by area                                 |  | $               | 75,078  |                 | $ | 146,612
|                                                                       |  |                 |         |                 |   |        



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10. Goodwill



During the fiscal quarter ending July 30, 2004, the Company determined there were indicators of impairment for the Wireless Systems reporting segment as a result of
changes in managements assumptions with respect to revenue growth and gross margins. The Company tested the goodwill of the reporting segment for impairment in accordance with SFAS No. 142,Goodwill and Other Intangible Assets. The
performance of the test required a two-step process. The first step of the test involved comparing the fair value of the affected reporting unit with the reporting segments aggregate carrying value, including goodwill. The Company estimated
the fair value of the Wireless Systems reporting segment as of July 2004 using the income approach methodology of valuation. The assumptions used in this impairment test included sales growth rates ranging from 4%-8%, gross profit margins ranging
from 14%-24%, and a discount rate of 18.6%. The estimates used reflected the Companys inability to gain market segment share or attain the level of profitability previously anticipated. As a result of this comparison, the Company determined
that the carrying value of the Wireless Systems business unit exceeded its implied fair value as of July 2004. The Company had to issue financial statements for the fiscal quarter ended July 30, 2004 before completing the second step of the
impairment test that allows management to measure the actual amount of the impairment loss. Using the guidance included in SFAS No. 5,Accounting for Contingencies the Company determined that an impairment loss was probable and that this
impairment loss could be reasonably estimated. The Companys management made its best estimate of the goodwill impairment loss for the Wireless Systems reporting segment to be $62.4 million. In accordance with SFAS No. 142, the Company recorded
an estimated charge to write down the value of its goodwill in the fiscal quarter ended July 30, 2004. During the Companys fiscal quarter ending October 29, 2004, the Company completed the second step of the goodwill impairment test, which
required the Company to compare the implied fair value of the reporting segment goodwill with the carrying amount of that goodwill. Based on this assessment, there was no adjustment required to the loss recorded in the second fiscal quarter.



The primary factors that contributed to the impairment assessment of the
Wireless Systems reporting segment in the three months ended July 30, 2004 were continued projected losses resulting from industry overcapacity resulting in lower profit margins, and manufacturing cost reductions lagging market price decreases.



The changes in the carrying amount of goodwill, net for the nine months ended
October 29, 2004 are as follows:



|                                                           |  |                |         |  
|---------------------------------------------------------- |  | -------------- | ------- | -
|                                                           |  | Goodwill, net  |        
|                                                           |  | (In thousands) |        
|Balance as of January 31, 2004                             |  | $              | 65,275  |  
|Goodwill increase related to Paradigm acquisition (Note 8) |  |                | 143     |  
|Impairment losses                                          |  |                | (62,400 | )
|                                                           |  |                |         |  
|Balance as of October 29, 2004                             |  | $              | 3,018   |  
|                                                           |  |                |         |  





All of the remaining goodwill relates to the Defense & Space segment for which there are no indicators of impairment.



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##### Table of Contents

11. Restructuring and Impairment of Other Long-lived Assets



2004 Restructuring:



During the fourth quarter of fiscal 2004, the Company announced that as a result of continued operating losses, it was discontinuing
production in Finland, eliminating a significant number of positions in its Finnish, Canadian and U.S. workforce and disposing of other non-strategic assets and operations. As a result, the Company recorded a restructuring charge of $2.7 million
during the fourth quarter related to its fiscal 2004 restructuring plan. The restructuring charge included $2.1 million in employee severance and related costs for approximately 200 employees, all of whom were identified as of January 31, 2004. The
majority of these employees worked in the Companys Wireless Systems segment and left the Company by the end of April 2004.



The following table (in 000s) summarizes the balance of the accrued restructuring reserve, which has been included in accrued expenses in the accompanying Condensed
Consolidated Balance Sheets related to the 2004 restructuring:



|                            |  |                                                   |     |  
|--------------------------- |  | ------------------------------------------------- | --- | -
|                            |  | SeveranceCosts forInvoluntaryEmployeeTerminations |    
|Balance at July 30, 2004    |  | $                                                 | 74  |  
|                            | 
|Activity:                   |  |                                                   |     |  
|Cash                        |  |                                                   | (57 | )
|Reversal                    |  |                                                   | (17 | )
|                            |  |                                                   |     |  
|Balance at October 29, 2004 |  | $                                                 |    |  
|                            |  |                                                   |     |  



2004 Impairment:



The Company tested the long-lived assets of the Wireless Systems reporting segment for
impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This Statement requires you to recognize an impairment loss only if the carrying amount of the long-lived assets is not recoverable by
its undiscounted cash flows, and to measure an impairment loss as the difference between the carrying amount and fair value of the assets. The Company completed this analysis and determined that there was no impairment to its long-lived assets of
the Wireless Systems reporting segment as of October 29, 2004.



During the
second quarter of fiscal 2005, the Company completed the sale of both of its buildings in Finland. The Company initially recorded a charge of $1.0 million, however, based on higher than expected selling prices, the Company has reversed $0.8 million
of the amount originally recorded. This amount is included in the caption Restructuring and Impairment of other Long-lived assets in the statement of operations.



2002 Restructuring:



During the fourth quarter of fiscal 2002, the Company announced that it was undertaking various actions to restructure its operations to improve its overall financial
performance. The Companys restructuring plan, which is primarily associated with its Wireless Systems segment, included reductions in its overall cost structure, realignment of manufacturing capacity to current levels of demand and the
transition of manufacturing operations to low cost, low tax offshore locations. A component of its restructuring charge included the estimated cost of exiting certain leased locations. The facilities leases on these properties expire at various
dates through February 2010.



The following table summarizes the balance of the
accrued restructuring reserve, which has been included in accrued expenses and other current liabilities in the accompanying Condensed Consolidated Balance Sheet at October 29, 2004 (in 000s):



|                            |  |                                       |      |  
|--------------------------- |  | ------------------------------------- | ---- | -
|                            |  | Costs to ExitCertain LeaseObligations |     
|Balance at July 30, 2004    |  | $                                     | 189  |  
|                            | 
|Activity:                   |  |                                       |      |  
|Cash                        |  |                                       | (158 | )
|Reversal                    |  |                                       |     |  
|                            |  |                                       |      |  
|Balance at October 29, 2004 |  | $                                     | 31   |  
|                            |  |                                       |      |  



The remaining balance of the accrued
restructuring reserve, related to the fiscal 2002 restructuring, relates to the Companys contractual obligations and other charges associated with the consolidation of certain facilities within its Wireless Systems segment.



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##### Table of Contents

12. Intangible Assets



Acquired intangible assets subject to amortization at October 29, 2004 were as follows (in 000s):



|                         |  |                     |       |                         |   |        |                   |  |   |      
|------------------------ |  | ------------------- | ----- | ----------------------- | - | ------ | ----------------- |  | - | -----
|                         |  | Gross CarryingValue |       | AccumulatedAmortization |   |        | Net CarryingValue
|Core technology          |  | $                   | 4,800 |                         | $ | (2,147 | )                 |  | $ | 2,653
|Trademark and trade name |  |                     | 110   |                         |   | (110   | )                 |  |   | 0    
|                         |  |                     |       |                         |   |        |                   |  |   |      
|                         |  | $                   | 4,910 |                         | $ | (2,257 | )                 |  | $ | 2,653
|                         |  |                     |       |                         |   |        |                   |  |   |      



Amortization expense for intangible
assets was $0.2 million and $0.5 million for the three months and nine months ended October 29, 2004, respectively, and $0.3 million and $0.7 million for the three and nine months ended October 31, 2003, respectively.



13. Amended Credit Agreement



On July 6, 2004, the Company extended the term of its existing revolving working capital
line of credit with its senior lender, Silicon Valley Bank, to July 5, 2005, and increased the maximum amount of the credit facility to $30.0 million of which, $15.8 million was available and $7.0 million has been used under letter of credit
arrangements and $7.2 million has been utilized in connection with foreign currency forward contracts and other banking cash management products as of October 29, 2004. The credit facility is secured by the Companys domestics trade receivables
and inventory.



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##### Table of Contents

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



Overview



REMEC designs and manufactures microwave and millimeter wave subsystems used in the transmission of voice, video and data traffic over wireless communications networks and provides advanced integrated microwave
subsystem solutions for defense and space electronics applications. We manufacture our products at our own plants in Heredia, Costa Rica; Laguna, Philippines; Shanghai, China; Tijuana, Mexico; and Kearny Mesa and Escondido, California. We sell our
Wireless Systems products primarily to original equipment manufacturers (OEMs), which in turn integrate our products into wireless infrastructure equipment solutions sold to network service providers. In addition, we sell certain niche products
directly to network service providers. Our Defense & Space RF and microwave equipment is sold to major U.S. defense prime contractors for integration into larger systems, primarily radar electronic warfare, communications and navigation. Our net
revenue consists principally of sales of our Defense & Space microwave and RF products. Such sales represent most of our total net revenue in fiscal 2005.



The management of REMEC has engaged the services of financial advisors to facilitate the sale or divestiture of certain of its non-core business operations. Pursuant
to its decision, the Company completed the sale of its Canadian subsidiary, REMEC Nanowave Technologies Inc. on August 18, 2004, which had net assets of $2.9 million as of October 29, 2004. Terms of the agreement included an upfront cash payment of
$3.0 million and the assumption of notes payable. The Company also completed the sale of its Components product line on October 15, 2004, which had net assets of $5.6 million at the time of the sale. This product line sold for $8 million in cash.
The operations for these businesses have been reclassified as assets held for sale for all effected periods presented in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets.



Operating results of the discontinued operations are shown, net of tax, separately in the
accompanying condensed consolidated statements of operations. The businesses included in discontinued operations had sales aggregating $2.4 million and $14.1 million for the three and nine months ended October 29, 2004, respectively, and $5.5
million and $19.3 million for the three and nine months ended October 31, 2003, respectively.



The demand for our products has been affected in the past, and may continue to be affected in the future, by various factors, including, but not limited to, the following:



| |  | the economic and market conditions in our markets and excess industry capacity in commercial wireless markets;
| | - | --------------------------------------------------------------------------------------------------------------



| |  | uncertainty regarding the timing of orders and the continuance of a strong defense market;
| | - | ------------------------------------------------------------------------------------------



| |  | the timing, rescheduling or cancellation of significant customer orders and our ability, as well as the ability of our customers, to manage inventory;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | our ability to specify, develop or acquire, complete, introduce, market and transition to volume production new products and technologies in a timely manner;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the qualification, availability and pricing of competing products and technologies and the resulting effects on sales and pricing of our products; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the rate at which our present and future customers and end-users adopt our products and technologies in our target markets.
| | - | ---------------------------------------------------------------------------------------------------------------------------



From time to time, our key customers place large orders causing our quarterly net revenue to
fluctuate significantly. We expect these fluctuations to continue. For these and other reasons, our net revenue results in the current period may not be indicative of our future net revenue potential.



Despite risks that could negatively impact our sales, we believe volume opportunities exist
in our Wireless Systems and Defense & Space markets. The emerging economies of China, India and other developing nations are creating strong demand for new wireless network installations. Investment in improved weapons systems by the U.S.
Government in response to worldwide terrorist threats is expected to continue strong, benefiting sales prospects for our Defense & Space operations. Growth in next generation digital broadband 3G networks, which improve the quality of wireless
voice, video and data transmission to levels comparable to that of dedicated broadband networks, is stimulating demand for new 3G-compatible signal transmission components. The eventual replacement of analog networks with all-digital broadband
technology is resulting from consumers growing acceptance of a new generation of voice, video and data compatible cell phones, PDAs, laptop computers and portable communication devices. The widespread use of digitally based wireless
communications products reflects consumers growing acceptance of wireless communications as an essential, timesaving go anywhere technology that has become an integral part of todays lifestyles.



Although we believe significant volume growth opportunities exist in the markets we serve, we
also believe that excess capacity in the commercial marketplace will continue to exert downward pressure on pricing. We believe these pricing conditions will continue for sometime and we cannot predict when or if they will improve. This condition
places considerable downward pressure on our product gross margins. We have major cost improvement initiatives underway which we believe will reduce manufacturing and operating costs and are necessary for us to continue to provide high quality
products at competitive prices to our customers; however, gross margins on our products may not be improved as a result of these actions due to industry pricing pressures.



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##### Table of Contents

The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and the
related notes included elsewhere herein. The statements in this report on Form 10-Q that relate to future plans, events or performance are forward-looking statements. Actual results could differ materially from those discussed in forward-looking
statements due to a variety of factors, including REMECs success in penetrating the wireless systems market, risks associated with the cancellation or reduction of orders by significant wireless systems or defense customers, trends in the
wireless systems and defense markets, risks of cost overruns and product nonperformance and other factors and considerations described in REMECs Annual Report on Form 10-K, and the other documents REMEC files from time to time with the SEC.
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. REMEC undertakes no obligation to publicly release the result of any revisions to these forward-looking statements, other
than as required by applicable law that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.



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##### Table of Contents

Results of Operations as a Percentage of Net Sales



The following table sets forth, as a percentage of total net sales, certain consolidated statement of operations data for the periods
indicated:



|                                                                            |  |                    |    |  |                   |    |  |                 |    |  |                 |   
|--------------------------------------------------------------------------- |  | ------------------ | -- |  | ----------------- | -- |  | --------------- | -- |  | --------------- | --
|                                                                            |  | Three months ended |    |  | Nine months ended |   
|                                                                            |  | October 29,2004    |    |  | October 31,2003   |    |  | October 29,2004 |    |  | October 31,2003 |   
|Net sales                                                                   |  | 100.0              | %  |  | 100.0             | %  |  | 100.0           | %  |  | 100.0           | % 
|Cost of sales                                                               |  | 81.5               |    |  | 77.8              |    |  | 85.4            |    |  | 76.9            |   
|                                                                            |  |                    |    |  |                   |    |  |                 |    |  |                 |   
|Gross profit                                                                |  | 18.5               |    |  | 22.2              |    |  | 14.6            |    |  | 23.1            |   
|Operating expenses:                                                         |  |                    |    |  |                   |    |  |                 |    |  |                 |   
|Selling, general and administrative                                         |  | 13.2               |    |  | 11.7              |    |  | 12.8            |    |  | 14.2            |   
|Research and development                                                    |  | 8.7                |    |  | 11.6              |    |  | 9.7             |    |  | 13.9            |   
|Impairment of goodwill                                                      |  |                   |    |  |                  |    |  | 19.3            |    |  |                |   
|Restructuring and impairment of other long-lived assets (reversals)/charges |  |                   |    |  |                  |    |  | (0.3            | )  |  | 0.2             |   
|                                                                            |  |                    |    |  |                   |    |  |                 |    |  |                 |   
|Total operating expenses                                                    |  | 21.9               |    |  | 23.3              |    |  | 41.5            |    |  | 28.3            |   
|                                                                            |  |                    |    |  |                   |    |  |                 |    |  |                 |   
|Loss from continuing operations                                             |  | (3.4               | )  |  | (1.1              | )  |  | (26.9           | )  |  | (5.2            | ) 
|Gain on sale of facility                                                    |  |                   |    |  |                  |    |  |                |    |  | 0.4             |   
|Interest income and other, net                                              |  | (0.5               | )  |  | (1.9              | )  |  | (0.1            | )  |  | 0.3             |   
|                                                                            |  |                    |    |  |                   |    |  |                 |    |  |                 |   
|Loss before income taxes                                                    |  | (3.9               | )  |  | (3.0              | )  |  | (27.0           | )  |  | (4.5            | ) 
|Income taxes                                                                |  |                   |    |  |                  |    |  |                |    |  |                |   
|                                                                            |  |                    |    |  |                   |    |  |                 |    |  |                 |   
|Loss from continuing operations                                             |  | (3.9               | )  |  | (3.0              | )  |  | (27.0           | )  |  | (4.5            | ) 
|Loss from discontinued operations, net of tax                               |  | 0.5                |    |  | (1.1              | )  |  | 0.0             |    |  | (1.4            | ) 
|                                                                            |  |                    |    |  |                   |    |  |                 |    |  |                 |   
|Net loss                                                                    |  | (3.4               | )% |  | (4.1              | )% |  | (27.0           | )% |  | (5.9            | )%
|                                                                            |  |                    |    |  |                   |    |  |                 |    |  |                 |   



Results of Operations



Three Months Ended October 29, 2004 as Compared to Three Months Ended
October 31, 2003



Net Sales And Gross Profit. Net sales for
the three months ended October 29, 2004 increased 5.9% over the comparable prior year period primarily in our Defense & Space segment. Our Wireless Systems products sales were up during this period as well. Continued downward pricing pressures
in our Wireless Systems markets combined with start-up and ramp-up costs on new tower mounted amplifier and filter products resulted in a decline in our gross margin as a percentage of net sales from 22.2% for the third quarter of fiscal 2004 to
18.5% in the comparable period of fiscal 2005.



Segment
Information. The following segment information should be read in conjunction with the financial results of each reporting segment as detailed in Note 9 of the Condensed Consolidated Financial Statements. Results within each of our
business segments were as follows:



Wireless Systems. Net sales
increased 1.5%, from $77.6 million for the three months ended October 31, 2003 to $78.8 million for the three months ended October 29, 2004. Increased sales of the Companys original equipment manufacturer (OEM) amplifier products and high
frequency point-to-point outdoor radios and transceivers (ODUs) were partially offset by reduced filters and tower mounted amplifier product sales.



Gross profit as a percentage of net sales decreased from 19.5% for the three months ended October 31, 2003 to 15.7% for the three months ended October 29, 2004. The
decline was the result of price reductions on certain products and start up costs required to begin production on new filter and tower mounted amplifier products. Results for the third quarter of fiscal 2005 included a favorable impact totaling $2.6
million of low cost basis inventory obtained in our acquisition of Spectrian versus $1.9 million in the third quarter of fiscal 2004. Sales relative to these Spectrian products were up slightly quarter over quarter.



Operating expenses as a percentage of sales of 25.7% decreased from 26.1% in the comparable
year earlier quarter. For the three months ended October 29, 2004 operating expenses increased by $0.1 million, or 0.5%, from $20.2 million for the three months ended October 31, 2003 to $20.3 million for the three months ended October 29, 2004.
Sarbanes-Oxley implementation costs were the primary reasons for the dollar increase.



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Excluding the impact of discontinued operations, the net loss of the Wireless Systems segment was $(8.4) million for the
three months ended October 29, 2004 versus $(7.1) million for the three months ended October 31, 2003.



Defense & Space. Net sales increased 22.0% from $21.0 million for the three months ended October 31, 2003 to $25.6 million for the three months
ended October 29, 2004. The increase is primarily attributable to increased delivery rates on production programs based on customer contract requirements. Gross profit as a percentage of net sales decreased from 32.4% for the three months ended
October 31, 2003 to 26.9% for the three months ended October 29, 2004. The decrease is primarily a result of increased direct materials content in the current production programs, as well as reclassification of certain customer funded development
costs from operation expenses to cost of goods. Operating expenses as a percentage of net sales decreased from 12.9% for the three months ended October 31, 2003 to 9.9% for the three months ended October 29, 2004. The reduction in operating expenses
was mostly attributable to the reclassification of certain customer funded development costs from operating expenses to cost of goods. The operating profit of the Defense & Space segment increased from $4.1 million for the three months ended
October 31, 2003 to $4.4 million for the three months ended October 29, 2004 primarily due to a higher revenue during the quarter.



Selling, General and Administrative Expenses. Selling, general and administrative expenses, or SG&A, increased from 11.7% of sales for the three months
ended October 31, 2003 to 13.2% of sales for the three months ended October 29, 2004. SG&A costs totaled $13.8 million for the three months ended October 29, 2004 as compared to $11.5 million for the comparable prior year quarter, an increase of
$2.3 million. The increase was primarily due to Sarbanes-Oxley implementation costs, higher consulting costs, and additional support staff acquired from the Paradigm and Himark acquisitions.



Research And Development Expenses. Research and development expenses decreased
$2.4 million or 20.9% for the three months ended October 29, 2004 as compared to the comparable prior year quarter. Expenses were $11.4 million in the comparable prior year period as compared to $9.0 million for the three months ended October 29,
2004. The decrease was primarily due to the sale of our Fixed Wireless product line in May 2004 and the result of improved discretionary cost controls. As a percentage of net sales, research and development expenses decreased to 8.7% for the three
months ended October 29, 2004 compared to 11.6% in the comparable prior year.



Interest income and other, net. Interest income and other, net, were $0.5 million for the three months ended October 29, 2004. This resulted primarily from foreign exchange losses on working capital balances in the
Companys foreign entities totaling $0.6 million. These were partially offset by interest and other miscellaneous expenses tolling $(0.1) million.



Provision For Income Taxes. During the third quarter of fiscal 2003, the Company elected to discontinue its prior practice of recording a tax benefit
for its operating losses. Accordingly, no tax benefit has been recorded during fiscal 2005. Income tax payments for the three months ended October 29, 2004 and the comparable year earlier period reflect tax payments to various state tax entities and
were nominal.



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Nine months Ended October 29, 2004 as Compared to Nine months Ended October 31, 2003



Net Sales And Gross Profit. Net sales for the nine months ended October 29,
2004 increased 28.0% over the comparable prior year period primarily as a result of increased sales of Wireless Systems amplifier products to OEMs as discussed below. Pricing pressures in the Wireless Systems markets we operate in, combined
with additional costs to begin production on new amplifier, filter, and tower mounted amplifier products and to relocate our manufacturing operations from Finland to China and Costa Rica resulted in a decline in our gross margin as a percentage of
net sales from 23.1% for the nine months ended October 31, 2003 to 14.6% in the comparable period of fiscal 2005.



Segment Information. The following segment information should be read in conjunction with the financial results of each reporting segment as detailed
in Note 9 of the Condensed Consolidated Financial Statements. Results within each of our business segments were as follows:



Wireless Systems. Net sales increased 30.0%, from $192.1 million for the nine months ended October 31, 2003 to $249.7 million for the nine months ended October 29,
2004. OEM amplifier products were up as a result of strong customer demand, new customer business, new programs, and the Paradigm acquisition. Tower mounted amplifiers, filters, and high frequency point-to-point outdoor radios and transceivers
(ODUs) have also increased year over year. These increases were partially offset by decreased Fixed Wireless product sales as a result of their divestiture and slower penetration into the China network optimization market.



Gross profit as a percentage of net sales decreased from 20.4% for the nine months ended
October 31, 2003 to 10.8% for the nine months ended October 29, 2004. The decline was the result of competitive price pressures, production start-up cost in the filters and tower mounted amplifier product lines, and costs related to relocating our
manufacturing operations from Finland to China and Costa Rica. Results for the nine months ended October 31, 2003 included a favorable impact totaling $5.8 million of low cost basis inventory obtained in our acquisition of Spectrian. This favorable
impact declined to $4.4 million during the comparable period of fiscal 2005.



For the nine months ended October 29, 2004, operating expenses (including the impairment of goodwill and restructuring charges) totaled $125.7 million, an increase of $62.3 million as compared to the nine months ended October 31, 2003. The
charge for the impairment of goodwill was $62.4 million in the second quarter of this fiscal year. The remaining increase in operating expenses is attributable to the Paradigm and Himark acquisitions, increases in bad debt reserves, and
Sarbanes-Oxley implementation expenses.



Excluding the impact of discontinued
operations, noted earlier, the net loss of the Wireless Systems segment was $(99.0) million for the nine months ended October 29, 2004 and was $(22.3) million for the nine months ended October 31, 2003.



Defense & Space. Net sales increased 21.6% from $60.3 million for
the nine months ended October 31, 2003 to $73.3 million for the nine months ended October 29, 2004. The increase is primarily attributable to increased delivery rates on production programs based on customer contract requirements. Gross profit as a
percentage of net sales decreased from 31.6% for the nine months ended October 31, 2003 to 27.5% for the nine months ended October 29, 2004. The decrease is primarily a result of increased direct labor and direct materials content in the current
production programs. Operating expenses as a percentage of net sales decreased from 13.3% for the nine months ended October 31, 2003 to 11.7% for the nine months ended October 29, 2004. This decrease in the operating costs as a percentage of sales
is mostly attributable to higher revenues for the nine months ended October 29, 2004 compared the nine months ended October 31, 2003, and lower indirect labor costs. The operating profit of the Defense & Space segment increased from $11.1
million for the nine months ended October 31, 2003 to $11.8 million for the nine months ended October 29, 2004 primarily due to the increase in net sales during the nine months ended October 29, 2004.



Selling, General and Administrative Expenses. Selling, general and
administrative expenses, or SG&A, decreased as a percentage of sales from 14.2% for the nine months ended October 31, 2003 to 12.8% for the nine months ended October 29, 2004. In absolute dollars, SG&A increased from $35.9 million for the
nine months ended October 31, 2003 to $41.4 million for the nine months ended October 29, 2004. The increase was primarily due to Sarbanes-Oxley implementation costs, increases of bad debt reserves, additional expenses for strategic and other
consulting, and additional support staff acquired from the Paradigm and Himark acquisitions.



Research And Development Expenses. Research and development expenses decreased from $35.1 million in the comparable prior year period to $31.3 million for the nine months ended October 29, 2004. The
decrease was primarily due to the sale of the Fixed Wireless product line in May 2004, function consolidations, and the result of improved discretionary cost controls. As a percentage of sales, research and development expenses decreased from 13.9%
in the comparable prior year period to 9.7% for the nine months ended October 29, 2004.



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Impairment of Goodwill. During the nine months ended October 29, 2004, the Company determined there were
indicators of impairment for the Wireless Systems reporting segment. The Company tested the goodwill of the reporting segment for impairment in accordance with SFAS No. 142,Goodwill and Other Intangible Assets. The performance of the test
required a two-step process. The first step of the test involved comparing the fair value of the affected reporting unit with the reporting segments aggregate carrying value, including goodwill. The Company estimated the fair value of the
Wireless Systems reporting segment as of July 2004 using the income approach methodology of valuation. As a result of this comparison, the Company determined that the carrying value of the Wireless Systems business unit exceeded its implied fair
value as of July 2004. Based on this assessment, the Company recorded a charge of $62.4 million to write down the value of goodwill associated with the Wireless Systems reporting segment during the second quarter of this fiscal year. The Company
completed the second step of the goodwill impairment test, which required the Company to compare the implied fair value of the reporting segment goodwill with the carrying amount of that goodwill during the current fiscal quarter. Based on this
assessment, there was no adjustment required to the loss previously recorded in the second fiscal quarter.



Restructuring Charges. Results for the nine months ended October 31, 2003 include a restructuring charge of $0.4 million related to the sub-lease of two facilities closed as part of the Companys
fiscal 2002 restructuring plan. For the nine months ended October 29, 2004, the Company recognized a credit in the amount of $0.9 million related to the reversal of reserves intended for the sale of two buildings in Finland, one during the first
quarter and another during the second quarter of fiscal 2005.



Interest
income and other, net. Interest income and other, net, were $0.2 million for the nine months ended October 29, 2004 primarily due to foreign exchange losses on working capital balances in the Companys foreign entities.



Provision For Income Taxes. During the third quarter of fiscal 2003, the
Company elected to discontinue its prior practice of recording a tax benefit for its operating losses. Accordingly, no tax benefit has been recorded during fiscal 2004. Income tax payments for the nine months ended October 29, 2004 and the
comparable year earlier period reflect tax payments to various state tax entities.



Liquidity and capital resources



At October 29, 2004, we had
$95.6 million of working capital, which included cash and cash equivalents totaling $40.5 million and short-term investments totaling $2.6 million. During the second quarter, we renegotiated our credit facility and now have a $30.0 million revolving
working capital line of credit with a bank, that expires in July 2005. The borrowing rate under this credit facility is based on prime + 1%, with prime being defined as the banks most recently announced per annum prime
rate. Through October 29, 2004, we have not had any borrowings under this credit facility; approximately $15.8 million of this facility was available and $7.0 million of our credit line was utilized as security for the issuance of
standby letters of credit while an additional $7.2 million has been utilized in connection with certain foreign currency forward contracts and other banking cash management products. We are required to meet certain financial covenants for quick
ratio and tangible net worth. This facility is also subject to a Material Adverse Change clause whereby the bank can subjectively determine that the Company is in default under the credit agreement.



During the current fiscal quarter, the Company entered into a banking arrangement with Nordea
bank in Finland giving us access to 6 million Euros. As of October 29, 2004, the Company had utilized approximately one-third of this facility.



During the nine months ended October 29, 2004, net cash used by operations totaled $19.6 million. The negative operating cash flow during this period was principally the
result of cash used to fund our loss (net of non-cash items including depreciation and amortization expense, goodwill impairment and restructuring costs) of $11.1 million, $10.8 million of accounts receivable increases due to higher business
activity; reductions in accounts payable and accrued expenses of $4.2 million, partially offset by a reduction in inventory of $7.9 million.



During the nine months ended October 29, 2004, we generated $2.1 million of cash from investing activities. Cash inflows from investing activities included the sale of a
building in Finland and proceeds from other short-term investments which more than offset $11.2 million of cash outflows related to the purchase of capital expenditures.



Financing activities provided approximately $2.6 million during the nine months ended October 29, 2004, primarily as a result of proceeds
from the issuance of common stock under our Employee Stock Purchase Plan and stock option exercises. The sale of discontinued operations generated an additional $10.9 million in cash, net of current period activity.



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Our future cash requirements will depend upon many factors, including the nature and timing of orders by OEM customers,
competitive pricing pressures, the status of competitive products, our ability to achieve timely anticipated product cost reductions, the progress of our research and development efforts, and the success of our marketing and sales efforts. Currently
our principal source of liquidity consists of our existing cash balances and our bank line of credit. We regularly review our cash funding requirements and attempt to meet those requirements through a combination of cash on hand and cash provided by
operations. We are evaluating alternatives that will provide liquidity that will be additive to the current credit facility. We believe that our existing working capital and that available under our existing bank credit line will be adequate to fund
our operations through at least October 31, 2005. Our ability to increase revenues and generate profits is subject to numerous risks and uncertainties and any significant decrease in our revenues or product gross margins would reduce our operating
cash flows and erode our existing cash balances. No assurances can be given that we will be able to generate positive operating cash flows in the future, be able to secure the anticipated increase to our credit facilities, or maintain and/or grow
our existing cash balances.



We are continuing to explore a number of strategic
and financing alternatives, including the sale of additional business units. We have engaged multiple financial advisors to assist in the analysis and exploration of these alternatives. We cannot predict when any of these alternatives will be
consummated, if at all.



Off-Balance Sheet Arrangements



As of October 29, 2004, we did not have any other relationships with unconsolidated entities
or financial partners, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited
purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.





Obligations and Commitments



The following table summarizes our contractual payment obligations and commitments as of
October 29, 2004:



|                          |  |                                        |         |      |   |        |  |      |       |      |   |       |  |            |       |  |   |       |  |   |       
|------------------------- |  | -------------------------------------- | ------- | ---- | - | ------ |  | ---- | ----- | ---- | - | ----- |  | ---------- | ----- |  | - | ----- |  | - | ------
|                          |  | Payment Obligations by Year (in 000s)
|                          |  | Total                                  |         | 2005 |   | 2006   |  | 2007 |       | 2008 |   | 2009  |  | Thereafter
|Operating leases          |  | $                                      | 71,093  |      | $ | 2,061  |  | $    | 7,487 |      | $ | 7,325 |  | $          | 6,126 |  | $ | 5,425 |  | $ | 42,669
|Purchase obligations      |  |                                        | 40,388  |      |   | 40,388 |  |      |      |      |   |      |  |            |      |  |   |      |  |   |      
|Restructuring liabilities |  |                                        | 31      |      |   | 31     |  |      |      |      |   |      |  |            |      |  |   |      |  |   |      
|                          |  |                                        |         |      |   |        |  |      |       |      |   |       |  |            |       |  |   |       |  |   |       
|                          |  | $                                      | 111,512 |      | $ | 42,480 |  | $    | 7,487 |      | $ | 7,325 |  | $          | 6,126 |  | $ | 5,425 |  | $ | 42,669
|                          |  |                                        |         |      |   |        |  |      |       |      |   |       |  |            |       |  |   |       |  |   |       



We lease certain office and production
facilities under non-cancelable agreements classified as operating leases. In accordance with accounting principles generally accepted in the United States, obligations under these long-term leases are not recorded on the balance sheet as
liabilities until payment is due.



We incur various purchase obligations with
other vendors and suppliers for the purchase of inventory, as well as other goods and services, in the normal course of business. Our purchase obligations are comprised of active and passive components as well as custom-machined parts and castings,
manufacturing and test equipment, computer hardware and information system infrastructure and other purchase commitments made in the ordinary course of business. These obligations are generally evidenced by purchase orders with delivery dates from
four to six weeks from the purchase order date, and in certain cases, supply agreements that contain the terms and conditions associated with these purchase arrangements. We are committed to accept delivery of such materials pursuant to such
purchase orders subject to various contract provisions which may allow us to delay receipt of such order or allow us to cancel orders beyond certain agreed lead times. Such cancellations may or may not include cancellation costs payable by us.



Our restructuring liabilities consist primarily of estimated future lease and
operating costs on restructured facilities, less offsetting sublease income.



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Critical Accounting Policies and Estimates



The discussion and analysis of our financial condition and results of operations are based upon our Condensed Consolidated Financial
Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts
of assets and liabilities, revenues and expenses, and related disclosure of any contingent assets and liabilities at the date of our financial statements. On an ongoing basis, we evaluate our estimates, including those related to bad debts,
inventories, intangible assets, restructuring costs and income taxes. We base our estimates on historical experience and current developments and on various other assumptions that are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.



Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially may result
in materially different results under different assumptions or conditions. We consider the following accounting policies to be those that are both most important to the portrayal of our financial results and that require the most subjective
judgment.



Revenue Recognition. We derive the majority of our
revenue from product sales and we recognize revenue from these sales upon transfer of title to the product, which generally occurs upon shipment to the customer, although in a growing number of instances, after transfer to our customers through an
intermediary warehouse. We generally ship to our customers Free on Board shipping point except in the circumstances described above. The SECs Staff Accounting Bulletin (SAB) No. 101, as amended by SAB No. 104, Revenue
Recognition, provides guidance on the application of accounting principles generally accepted in the United States to selected revenue recognition issues. Revenues associated with the performance of non-recurring engineering and development
contracts are recognized when earned under the terms of the related contract; and revenues for cost-reimbursement contracts are recorded as costs are incurred and include estimated earned fees in the proportion that costs incurred to date bears to
estimated costs. We believe that our revenue recognition policy is consistent with this guidance and in accordance with accounting principles generally accepted in the United States. If our shipping policies were to change, including the point of
title transfer, materially different reported results would be likely. Prospective losses on contracts, which are accrued for, are based upon the anticipated excess of manufacturing costs in inventory over the selling price of the remaining units to
be delivered. Actual losses could differ from those estimated due to changes in the ultimate manufacturing costs and contract terms.



Allowance for Doubtful Accounts. Allowances for doubtful accounts are estimated at the segment level based on estimates of losses related to customers
receivable balances. In establishing the appropriate provisions for customer receivables balances, the Company makes assumptions with respect to their future collectibility. The Companys assumptions are based upon individual assessment of a
customers credit quality as well as subjective factors and trends, including the aging of receivables balances. Generally, these individual credit assessments occur at regular reviews during the life of the exposure and consider (a) a
customers ability to meet and sustain their financial commitments; (b) a customers current and projected financial condition; (c) the positive or negative effects of the current or projected industry outlook; and (d) the economy in
general. Once the Company considers all of these factors, a determination is made as to the probability of default. An appropriate provision is made, which takes into account the severity of the likely loss on the outstanding receivable balance
based on the Companys experience in collecting these amounts. In addition to these individual assessments, in general, the Company provides a 5% reserve against all outstanding customer balances that are greater than 60 days past due. The
Companys level of reserves fluctuates depending upon all of the factors mentioned above. Credit losses have historically been within our expectations and the allowances established. At October 29, 2004, accounts receivable totaled $76.1
million, net of reserves for bad debt of $4.6 million.



Inventory
Adjustments. Inventories are stated at the lower of weighted average cost or market. We review the components of our inventory on a regular basis for excess, obsolete and impaired inventory based on estimated future usage and sales. As a
general rule, stock levels in excess of one years expectation of usage or sales are fully reserved. The likelihood of any material inventory write-down is dependent on customer demand, competitive conditions or new product introductions by us,
or our customers, that vary from our current expectations. If future demand were significantly less favorable than projected by management, increases to the reserve would be required. In general, our losses from inventory obsolescence have been
within our expectations and the reserves established. At October 29, 2004, inventories totaled $67.7 million, net of reserves for excess and obsolete inventory of $15.4 million and contract losses of $6.4 million.



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Valuation of Goodwill, Intangible and Other Long-Lived Assets. We are required to assess goodwill
impairment in fiscal 2005 using the methodology prescribed by Statement of Financial Accounting Standards (SFAS) No. 142 Goodwill and Other Intangible Assets. SFAS No. 142 requires that goodwill be tested for impairment at the reporting
unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests in certain circumstances. Application of the goodwill impairment test requires judgment, including the identification of reporting
units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units and determining the fair value of each reporting unit. Significant judgments required to estimate the fair value of reporting units include estimating
future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for each reporting unit.



The majority of our acquisitions that resulted in goodwill being recorded fall within our
Wireless Systems segment. The majority of goodwill and other long-lived assets within the Wireless Systems segment are attributable to the ADC Mersum OY, Himark and Paradigm acquisitions. Nanowave Technologies, Inc., which was merged into the
Defense & Space segment in connection with the reorganization/reevaluation of the reporting units in 2003, is the only purchased business of this segment. Management determined in accordance with SFAS No. 142 that our segments meet the criteria
for aggregation and therefore performed its analysis at the reporting segment level. Our impairment review process is based on the income approach methodology of valuation that uses our estimates of revenue for the reporting units, driven by assumed
market growth rates and assumed market segment share, and estimated costs as well as appropriate discount rates.



We performed an assessment of goodwill impairment as of July 30, 2004 and the Company determined that there were indicators of impairment for the Wireless Systems
reporting segment. The Company tested the goodwill of the reporting segment for impairment in accordance with SFAS No. 142,Goodwill and Other Intangible Assets. The performance of the test required a two-step process. The first step of the
test involved comparing the fair value of the affected reporting unit with the reporting segments aggregate carrying value, including goodwill. The Company estimated the fair value of the Wireless Systems reporting segment as of July 2004
using the income approach methodology of valuation. As a result of this comparison, the Company determined that the carrying value of the Wireless Systems business unit exceeded its implied fair value as of July 2004. Based on this assessment, the
Company recorded a charge of $62.4 million to write down the value of goodwill associated with the Wireless Systems reporting segment during the second quarter of this fiscal year (see Note 10). The Company completed the second step of the goodwill
impairment test, which required the Company to compare the implied fair value of the reporting segment goodwill with the carrying amount of that goodwill during the current fiscal quarter. Based on this assessment, there was no adjustment required
to the loss previously recorded in the second fiscal quarter.



The Company also
tested the long-lived assets of the Wireless Systems reporting segment for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This Statement requires you to recognize an impairment loss
only if the carrying amount of the long-lived assets is not recoverable by its undiscounted cash flows, and to measure an impairment loss as the difference between the carrying amount and fair value of the assets. The Company completed this analysis
and determined that there was no impairment to its long-lived assets of the Wireless Systems reporting segment as of October 29, 2004.



Accrued Restructuring Costs. To the extent that exact amounts are not determinable, we have estimated amounts for the direct costs and liabilities related
to our restructuring efforts in accordance with the Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring). We will continue to reassess the related accrual annually and record adjustments to this reserve as circumstances warrant. At October 29, 2004, most accrued restructuring costs had been expensed.



Accrued Warranty Costs. Estimated future warranty obligations related to
certain products are charged to operations in the period in which the related revenue is recognized. We establish a reserve for warranty obligations based on historical warranty experience.



Valuation of Deferred Income Taxes. Valuation allowances are established to
reduce deferred tax assets to the amount expected to be realized when it is more likely than not that the deferred tax assets will not be realized in the near term. During fiscal 2003, in conjunction with our acquisition of Spectrian Corporation,
management undertook a reassessment of our tax strategy and our overall tax situation, which included the transferring of certain intangible property to off-shore entities. This analysis led us to conclude that, while management expects that we will
transition to profitability, the majority of any future profitability will be generated in tax jurisdictions with low effective tax rates. As a result, we believe that our ability to recover tax assets associated with high effective tax rate
jurisdictions has diminished in the near term and that it is appropriate to establish a valuation allowance to fully reserve our net deferred tax assets.



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Item 3. Qualitative and Quantitative Disclosures About Market Risk.



Interest Rate Risk. In July 2004, we increased our credit facility from $25.0 million to $30.0 million of which $15.8 million is available for borrowing at October 29, 2004. To the extent of our
borrowings under this facility, we will be exposed to changes in interest rates.



At October 29, 2004, our investment portfolio includes fixed-income securities with a market value of approximately $2.6 million. These securities are subject to interest rate risk and will decline in value if interest rates increase. Under
our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. A hypothetical 100 basis point increase in interest rates in our investment portfolio would not materially affect the fair value of
these securities.



Foreign Currency Exchange Rate Fluctuations.
We have operations in Europe, Asia-Pacific and the Americas. As a result, our financial position, results of operations and cash flows can be affected by fluctuations in foreign currency exchange rates. Many of our reporting entities conduct a
portion of their business in currencies other than the entitys functional currency. These transactions give rise to receivables and payables that are denominated in currencies other than the entitys functional currency. The value of
these receivables and payables is subject to changes in exchange rates because they may become worth more or less than they were worth at the time we entered into the transaction due to changes in exchange rates. Both realized and unrealized gains
or losses in the value of these receivables and payables are included in the determination of net income. Net currency exchange losses recognized on business transactions were $0.9 million and $0.6 million for the three and nine months ended October
29, 2004, respectively, and gains of $0.3 million and $1.5 million for the three and nine months ended October 31, 2003, respectively, and are included in Interest income and other, net in the Condensed Consolidated Statements of Operations.



Historically, our currency exposures have been primarily concentrated in the
Euro and the British Pound Sterling. As fluctuations in these currencies occurred, we experienced equal upward or downward movement in our net sales and related costs and operating expenses. As we continue to concentrate our manufacturing operations
in countries whose functional currency is the US dollar, we will be subject to market risk associated with fluctuations in the Euro and the British Pound Sterling. In the fourth quarter of fiscal 2004, we established a formal documented program to
utilize foreign currency forward exchange contracts to offset the risk associated with the effects of specific foreign currency exposures. Under this program, increases or decreases in our foreign currency exposures are offset by gains and losses on
the forward contracts, so as to mitigate the possibility of foreign currency transaction gains and losses. Under this program, foreign currency exposures arose from sales denominated in Euro and therefore the related forward contracts qualified for
special hedge accounting.



At October 29, 2004, we have open forward contracts
totaling a notional amount of 41.9 million Euros with terms of 30 to 180 days. The fair value of these forward contracts amounted to $1.1 million and are included in other current liabilities. During the quarter ended April 30, 2004, we determined
that previously designated hedged forecasted transactions with a combined notional value of 13.0 million Euros, which originally qualified for special hedge accounting, had to be discontinued as the forecasted transactions no longer were expected to
occur in the form originally contemplated. Accordingly, $0.7 million of unrealized gains on these derivatives that had not previously been included in earnings had to be reclassified to earnings to reflect the discontinuance of this portion of the
cash flow hedge. The reclassified amounts are recorded in Interest income and other, net. The remaining forward contracts totaling a notional amount of 41.9 million Euros, still qualify for special hedge accounting as it is probable that the
forecasted transactions will occur as designated. Our policy is to measure effectiveness by comparing changes in spot exchange rates. This method reflects our risk management strategies, the economics of these strategies in our financial statements
and better manages the overall effectiveness of the forward hedges. Under this method, the change in fair value for the quarter ended October 29, 2004 for the forward contracts that still qualify for special hedge accounting attributable to the
changes in spot exchange rates (the effective portion) totaling $2.8 million and are reported in other comprehensive income in shareholders equity. The remaining change in fair value of the forward contract (the ineffective
portion) totaling $0.4 million of expense has been recognized in Interest income and other, net. Our ultimate realized gain or loss with respect to currency fluctuations will depend on the currency exchange rates and other factors in effect as
the contracts mature.



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Item 4. Controls and Procedures.



Evaluation
of Disclosure Controls and Procedures. The Company maintains controls and procedures designed to ensure that it is able to collect the information it is required to disclose in reports it files or submits under the Exchange Act, and to
record, process, summarize and disclose this information within the time periods specified in SEC rules and forms. Based on an evaluation during the most recent quarter, the Companys principal executive officer and principal financial officer
have concluded that the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) are effective to ensure that information
required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.



Changes in Internal Controls. During the period covered by this report, the
Company has continued its efforts to improve its internal controls over financial reporting in connection with its assessment of such internal controls pursuant to Section 404 of the Sarbanes-Oxley Act of 2002.



Sarbanes-Oxley 404 Compliance. Pursuant to Section 404 of the Sarbanes-Oxley
Act of 2002, the Company is engaged in an evaluation of the effectiveness of its internal controls over financial reporting. The Companys Section 404 project plan includes many time-critical milestones, and its actions during the fourth
quarter will be critical to achieving these milestones and successfully completing the assessment of its internal controls. Documentation of internal controls is substantially complete and internal testing of controls is underway. During the
documentation and testing phase, the Company has identified control deficiencies that it must correct and retest prior to January 31, 2005. Remediation of these control deficiencies may be significant and, even though the Company has made the
Section 404 project a top priority, there can be no assurances that all control deficiencies identified during this process will be remediated before the end of the fiscal year, or that the remaining unresolved control deficiencies will not rise to
the level of significant deficiencies or material weaknesses. Further, the Companys timely compliance with Section 404 has been adversely impacted by the lack of involvement by an independent registered public accountant following the
resignation of Ernst & Young LLP, announced at the end of September 2004 and effective following their review of the Companys interim financial statements for the quarter ended October 29, 2004. The Company has only recently been able to
retain a new independent registered public accounting firm. If the newly retained accounting firm cannot timely complete the work necessary to attest to the Companys internal controls, the Company could fail to meet its regulatory reporting
obligations.



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PART IIOTHER INFORMATION



Item 1. Legal Proceedings.



On September 29, 2004
three class action lawsuits were filed against REMEC and current and former officers in the United States District Court for the Southern District of California alleging violations of federal securities laws between September 8, 2003 and September
8, 2004. The complaints assert, among other things, that during that time period, false and misleading statements were made and material information was not disclosed regarding REMECs financial condition and performance, growth, operations,
financial statements, markets, management, earnings and present and future business prospects. REMEC believes that the lawsuits are without merit and intends to defend against them vigorously. Even if we are entirely successful in these lawsuits, we
may incur significant legal expenses and our management may expend significant time in the defense.



Other than the lawsuits described above, neither REMEC nor any of its subsidiaries is presently subject to any material litigation, nor to REMECs knowledge, is such litigation threatened against REMEC or its
subsidiaries, other than routine actions and administrative proceedings arising in the ordinary course of business, all of which collectively are not anticipated to have a material adverse effect on the business or financial condition of REMEC.



Items 2 through 4 are not applicable and have been omitted.



Item 5. Other Information.



(a)



On September 16, 2004, the Companys Board of Directors approved an updated form of
Indemnification Agreement (the Updated Agreement), and authorized the Company to enter into the Updated Agreement with each of its officers and directors. The Board of Directors had previously approved and entered into indemnification
agreements with its officers and directors (the Prior Agreements). The Updated Agreement is a revised version of the Prior Agreement, and is intended to supersede and replace the Prior Agreement. The revisions in the Updated Agreement
were made to conform the Prior Agreement to applicable state and federal law, and to further the purposes and intent of the indemnification provisions contained in the Companys Articles of Incorporation and Bylaws. The updated form of
Indemnification Agreement is included in this report as Exhibit 10.1.



On
November 9, 2004, the Company entered into a Change of Control and Transition Agreement with Jack A. Giles, its Executive Vice President and President of REMEC Space & Defense. This Agreement provides Mr. Giles with certain benefits in the event
of a change of control, including acceleration of his unvested options and restricted stock units, severance payments and continued health benefits. The Change of Control and Transition Agreement is included in this report as Exhibit 10.2.



On November 12, 2004, the Company amended its Change of Control Agreement with
Mr. Jon E. Opalski, its Executive Vice President, Commercial Operations, to expand the definition of change of control in such Agreement. The Company previously filed a form Change of Control Agreement as an exhibit to its Annual Report
on Form 10-K for the year ended January 31, 2003.



(b) None.



Item 6. Exhibits



| | (a) | Exhibits.
| | --- | ---------



|              |  |                                                                                                                        
|------------- |  | -----------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                            
|10.1          |  | Form of Indemnification Agreement for directors and officers.                                                          
|              | 
|10.2          |  | Change of Control Agreement dated November 9, 2004 between REMEC, Inc. and Jack A. Giles.                              
|              | 
|31.1          |  | Certification of Chief Executive Officer Pursuant to Section 302 of the SarbanesOxley Act of 2002.                    
|              | 
|31.2          |  | Certification of the Chief Financial Officer Pursuant to Section 302 of the SarbanesOxley Act of 2002.                
|              | 
|32.1          |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



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SIGNATURES



Pursuant to the requirements of the
Securities and Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|            |  |                                       
|----------- |  | --------------------------------------
|REMEC, Inc.
|            | 
|By:         |  | /s/ THOMAS H. WAECHTER                
|            |  | Thomas H. Waechter                    
|            |  | President and Chief Executive Officer 
|            | 
|            |  | /s/ WINSTON E. HICKMAN                
|            |  | Winston E. Hickman                    
|            |  | Chief Financial and Accounting Officer
|            | 
|Date:       |  | December 8, 2004                      



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