RADN Radyne Corp (MM)

Radyne Corporation

Notes to Condensed Consolidated Financial Statements

(Information for September 30, 2007 and 2006 is Unaudited)

The unaudited condensed consolidated financial statements of Radyne Corporation (the “Company”) for the three- and nine-months ended September 30, 2007 and 2006 have been prepared in accordance with GAAP and the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission (the “Commission”). In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary, all of which are of a normal recurring nature, to present fairly the Company’s financial position, results of operations and cash flows. Interim results are not necessarily indicative of results for a full year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. A copy of the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports are available through the Commission’s website at www.sec.gov or through our website found at www.radn.com in the Investors section.

The preparation of consolidated financial statements in conformity with GAAP requires management to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions affect the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates and assumptions based upon historical experience and various other factors and circumstances. The Company believes that its estimates and assumptions are reasonable in the circumstances; however, actual results may differ from these estimates under different future conditions. With the Company’s acquisition of AeroAstro, Inc. on August 1, 2007, the Company’s financial results for the three- and nine-month periods ending September 30, 2007 include financial results for AeroAstro for the two-months ended September 30, 2007. Periods prior to the three- and nine-months ended Sept 30, 2007, do not include the financial results of AeroAstro, Inc.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, (“SFAS 159”). SFAS 159 allows entities the option to measure eligible financial instruments at fair value as of specified dates. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We do not expect the adoption of SFAS 159 to have a material impact on our consolidated financial statements.

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements, (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosure about fair value measurements. SFAS 157 applies whenever other statements require or permit assets or liabilities to be measured at fair value and is effective for fiscal years beginning after November 15, 2007. We do not expect the adoption of SFAS 157 to have a material impact on our consolidated financial statements.

On May, 2, 2007, the FASB issued Staff Position No. FIN 48-1, Definition of Settlement in FASB Interpretation No. 48 (“FSP FIN 48-1”) which amends FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) to provide guidance about how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. Under the FSP FIN 48-1, a tax position is considered to be effectively settled if the taxing authority completed its examination, the Company does not plan to appeal, and it is remote that the taxing authority would reexamine the tax position in the future.

Adoption of FIN 48

In June 2006, FASB issued FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxe s. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized a decrease of $567,000 in the liability for unrecognized tax benefits, which was accounted for as increases to the January 1, 2007 balances of retained earnings and additional paid in capital in the amounts of $513,000 and $54,000, respectively. As of the date of adoption and after accounting for the cumulative effect adjustment noted above, the Company’s unrecognized tax

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benefits as of January 1, 2007 totaled approximately $1.7 million. The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods is approximately $1.3 million.

The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense; the amount recorded for the three-months ended September 30, 2007 totaled approximately $31,000. Accrued interest and penalties as of January 1, 2007 and September 30, 2007 were approximately $24,000 and $76,000, respectively. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision.

The Company does not anticipate that the total amount of unrecognized tax benefits will significantly change during the next twelve months.

The Company and its subsidiaries are subject to the following material taxing jurisdictions: U.S. federal, Arizona, California and Virginia. The tax years that remain open to examination by the U.S. federal jurisdiction are years 2003 through 2006; the Arizona and California filings that remain open to examination are years 2002 through 2006.

The Company accounts for share-based compensation under Statement of Financial Accounting Standard No. 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”) and Staff Accounting Bulletin No. 107 (“SAB 107”), Share-Based Payment, which requires the measurement and recognition of all share-based compensation under the fair value method. The Company issued 34,750 options and 20,000 stock awards during the three-months ended September 30, 2007.

In addition, as part of the AeroAstro acquisition, the Company issued and exchanged options to AeroAstro employees for options granted prior to the acquisition. The Company exchanged options at the rate of 6.1459 AeroAstro options for each Radyne option based on the ratio of the value of a share of Radyne stock as agreed on by the parties and the consideration paid per AeroAstro share. The exercise price of the exchanged options was determined by multiplying the original exercise price times the 6.1459 ratio. The grant date, vesting schedule, term and other characteristics of the original grant carried over to the exchanged Radyne options.

The following table summarizes option activity, prior to the exchange of AeroAstro options, under the Company’s 2007 Stock Incentive Plan and 2000 Long-Term Incentive Plan as of September 30, 2007 and changes during the period then ended.

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The following table summarizes the AeroAstro option exchange under the AeroAstro, Inc. 1999 Stock Option Plan assumed on August 1, 2007, in accordance with the Merger Agreement.

The following table summarizes consolidated option activity, including the conversion of AeroAstro options, under the Company’s 2007 Stock Incentive Plan and 2000 Long-Term Incentive Plan as of September 30, 2007 and changes during the period then ended.

The aggregate intrinsic value represents the difference between the Company’s closing stock price of $10.56 at September 28, 2007 and the exercise price multiplied by the number of options outstanding or exercisable as of that date. The excess tax benefit realized from stock plan dispositions and amount classified as cash provided by financing in the Consolidated Statement of Cash Flows was $298,000 for the nine-months ended September 30, 2007.

The Company expects to recognize approximately $1.6 million in future compensation expense related to non-vested options with a weighted average vesting period remaining of 2.02 years.

As of September 30, 2007, there were 1,426,661 shares of common stock available for issuance pursuant to the Company’s aforementioned plans.

The Company has an Employee Stock Purchase Plan (“ESPP”), which was adopted by the Company’s shareholders in 1999. Under the terms of the ESPP, eligible employees of the Company are offered options to purchase shares of the Company stock at a price equal to the fair market value on the first or last day, whichever was lower, of each six-month offering period. As a result of these terms, the Company is required to record expense in the consolidated statements of operations related to the ESPP subsequent to the adoptions of SFAS123(R). Therefore, the Company has recognized $88,000 in pre-tax compensation expense under the ESPP during the three-months and $296,000 for the nine-months ended September 30, 2007. There were 1,000,000 shares authorized for issuance under the ESPP. As of September 30, 2007, there were 68,717 shares remaining available for issue under the ESPP.

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The Company utilizes the Black-Scholes Options-Pricing Model to determine the fair value of stock options under SFAS 123(R). Management is required to make certain assumptions with respect to selected model inputs, including anticipated changes in the underlying stock price (i.e., expected volatility) and option exercise activity (i.e., expected term). There were 34,750 options granted during the three- and nine-month periods ended September 30, 2007. In the prior periods that had options granted, and for which the current expense exists, the Company made assumptions for the three categories of compensation expense recorded during the period: stock options, ESPP, and awards granted. Directors, executives and non-executives have different historical option exercise patterns and the Company groups its assumptions into categories for options issued to each of these groups. The expected term was determined to be approximately 5 years for directors, 6 years for executives and 3 years for non-executives based primarily on historical option exercise patterns. The volatility calculated used the Company’s historical volatility rates. The risk free interest rates used were the then current quoted rates from U.S Government Treasury instruments, in which the term of the rates matches that of the awards. The preceding table represents the weighted average assumptions used to determine compensation cost for stock options during the nine-month period ending September 30, 2007.

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The following table sets forth the number of customers that made up more than 10% of consolidated or segmented accounts receivable.

On a consolidated basis, the Company had one customer who accounted for more than 10% of consolidated accounts receivable.

The following table sets forth the number of customers that made up more than 10% of consolidated or segmented sales.

On a consolidated basis, the Company had one customer who accounted for more than 10% of consolidated revenue. The Satellite Electronics and Broadcast Equipment and Amplifier segments recognized $13.7 million in revenue from this customer.

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The Company’s is organized into three operating segments: 1) Satellite Electronics and Broadcast Equipment, represented by Radyne and Tiernan product brands; 2) Amplifiers, represented by Xicom products; and 3) Microsatellites, represented by AeroAstro products. Each segment is organized and managed separately for the purposes of making key decisions such as sales/marketing, product development and capital allocation. Ultimately, the chief operating decision maker evaluates and makes decisions, based on the financial information available about these three segments. The chief operating decision maker for the Company is the CEO. Below are the results of operations for the Company’s three operating segments. For further discussion of these results, refer to Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” located elsewhere in this Quarterly Report on Form 10-Q.

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The Company’s sales in principal foreign and domestic markets as a percentage of total sales for the nine-months ended September 30, 2007 and 2006 follow:

Besides the United States, the Company did not have an individual country that accounted for 10% of consolidated sales for the nine-month periods ended September 30, 2007 and 2006. Besides the United States, the Amplifier segment did not have a country that represented more than 10% of the segmented sales during the nine-month period ended September 30, 2007 and none in 2006. Besides the United States, the Satellite Electronics and Broadcast Equipment segment had one country, India, which accounted for more than 10% of sales during the nine-month periods ended September 30, 2007 and 2006. Besides the United States, the Microsatellite segment did not have a country that represented more than 10% of the segmented sales during the two-month period ended September 30, 2007. All of the Company’s foreign sale exports are from the Company’s United States manufacturing facilities.

During the quarter, the Company entered into a new credit arrangement with a syndicate of banks to replace its existing line of credit. The new arrangement provides up to $60.0 million. The amount of credit available to us under the credit agreement at September 30, 2007 was approximately $59.8 million. The Company paid approximately $140,000 representing a facility fee and bank costs for a four-year commitment on the arrangement, whether or not any amounts actually are drawn on the line of credit. The credit agreement expires on August 31, 2011 and limits transfers of assets, liens, loans and investments in other entities and limits the use of proceeds, acquisitions of assets, indebtedness and capital expenditures without the bank’s consent. To be eligible to draw funds under the line of credit, the credit agreement requires us to maintain specific levels of tangible net worth, earnings and other ratios. The Company was in compliance with all covenants at September 30, 2007. The overall credit agreement specifies interest rates between LIBOR plus 100 - 175 basis points based on certain financial measurements or prime rate minus 50 basis points depending on terms and other conditions.

Xicom Technology Europe, Ltd (“XTEL”), a Xicom subsidiary, is located in the United Kingdom and uses British Pounds as its functional currency. The Company translates assets and liabilities to U.S. dollars at the reporting period-end exchange rate, and the resulting gains and losses arising from the translation of net assets are recorded as other comprehensive income in equity on the Condensed Consolidated Balance Sheet . Elements of the consolidated statements of operations are translated at average exchange rates in effect during the period and foreign currency transaction gains and losses are included in interest and other income in the Condensed Consolidated Statements of Operations .

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Amortization expense for the nine-months ended September 30, 2007 and 2006 was $952,000 and $855,000, respectively. Amortization expense for 2007 is projected to be $1.4 million, 2008 - $1.6 million, 2009 - $1.3 million, 2010 - $1.1 million and 2011 - $1.1 million.

The following table illustrates the preliminary additional goodwill acquired during the purchase of AeroAstro.

Goodwill (non-tax deductible), created in acquisitions, increased over the nine-months ended September 30, 2007 due to the preliminary transaction costs associated with the acquisition of AeroAstro.