THE COMPANY . We are Acrodyne Communications, Inc., a Delaware corporation, which operates in one industry segment — the design, manufacture and marketing of television broadcast transmitters, which are sold in the United States and internationally.  Our wholly owned operating subsidiary, Acrodyne Industries, Inc., manufactures and sells TV transmitters produced to customer specifications.

BUSINESS OF ACRODYNE . We have designed, manufactured and marketed television transmitters which have been sold in the United States and internationally since 1971.  The function of a television transmitter is to broadcast over the air television signals to a specific audience receiving such signals by regular antenna or by a local cable company, which then feeds the signal to their subscribers.

ACRODYNE PRODUCTS AND SERVICES

Overview

We design, manufacture and market digital and analog television broadcast transmitters for domestic and international television stations, broadcasters, government agencies, not-for-profit organizations and educational institutions.  The estimated useful life of a television transmitter or translator is approximately 20 years.  Our television transmitters, which range in transmission power levels from one hundred watts for localized applications to two hundred eighty kilowatts for large television broadcasters, have a modularized design that permits us to respond to specific customer requests. We classify our transmitters into two categories based on the power output amplifier design.  For higher power requirements, we use Inductive Output Tube (IOT) power amplifiers.  IOT is a vacuum tube device for amplifying television signals to very high power.  For low power requirements, we use Solid State output amplifiers.  Solid State is a transistor-based device for amplifying television signals to low power.  Each power level product transmits signals in both UHF and VHF frequency bands.  The VHF band covers television channels two through thirteen and the UHF band covers television channels above thirteen.  Each transmitter permits the sender to broadcast over one channel.

All of our television transmitters feature enhanced linear amplifiers.   Such units feature easy to read diagnostic displays and meters that clearly indicate a unit’s operating condition.  Units automatically shut down for self-protection if out-of-tolerance conditions are encountered. We believe that our television transmitters are relatively easy to maintain since they utilize common modules and parts.  Other operating features include full remote control, telemetry and status functions (i.e. monitoring the transmitter’s performance metrics), and a modular design that allows for cost-effective expansion to higher output power levels.

Lower Power Analog and Digital Television Transmitters

Lower power analog and digital television transmitters with power outputs of up to 10 kilowatts are used by both Full Power Broadcast Stations and Low Power Broadcast Stations (“LPTV Stations”), a United States classification, which are limited by the Federal Communications Commission (“FCC”) to power output levels of 10 watts in the VHF band and 10 kilowatts in the UHF band.  Solid-state refers to the physical make-up of the transmitter components. Instead of vacuum tubes where electron flow takes place in a vacuum, solid state transmitters utilize transistors, which have crystalline structures.

UHF solid-state television transmitters are particularly well suited for lower power applications in broadcasting.  Solid State transmitters typically satisfy broadcast applications up to 10 kilowatts, after which tube technology (such as IOT) becomes cost effective.  In addition, there is a substantial market overseas for these UHF transmitters.  Power ranges are from 10 watts up to 40 kilowatts in UHF and up to 10 kilowatts in the VHF frequency spectra for domestic and international television formats.  On November 29, 1999, Acrodyne and Rohde & Schwarz, one of the world’s foremost manufacturers of solid-state transmitters formed a strategic alliance.  The Rohde & Schwarz group of companies, with headquarters in Munich, Germany, develops, produces and markets communication test and measurement instruments and systems.  It gave exclusive rights to us to market and sell Rohde & Schwarz solid -state transmitter products in the United States.  This agreement also includes technology and product sales agreement to support our line of Quantum high power transmitter products.  We paid no compensation to Rohde & Schwarz for the rights to sell their product line.  The Rohde and Schwarz product line replaced the obsolete lower power products that we manufactured prior to 2000. The R&S products allows us to offer a full line of products from low power to the high power provided by the Quantum IOT line.  The recent FCC ruling allowing broadcasters to operate at lower than licensed power for digital transmissions has increased the sale of the R&S products.  Sales of low power transmitters as a percentage of our total sales represented 16% and 21% during 2002 and 2001, respectively.

Higher Power UHF Analog and Digital Television Transmitters

Higher power UHF analog television transmitters range in power from above 20 kilowatts to 280 kilowatts.  For television transmitters with higher power output levels, we use IOT (Inductive Output Tube) tubes that use water cooling to prolong their useful lives.  Such advanced features are designed into our Quantum product line and significantly reduce the operating costs of these transmitters.  At identical output power, the power consumption of a Quantum IOT transmitter is approximately 50% less than that of a transmitter using klystron tubes, an older technology design for a high power vacuum tube amplifying device, which is the predecessor of the current IOT tube technology.  Sales of high power transmitters as a percentage of our total sales represented 70% and 68% during 2002 and 2001, respectively.

Auxiliary Products and Services

In addition to manufacturing and selling our transmitters, we also offer television broadcasters a value-added complete broadcast system that include procurement, systems integration and installation of the television transmitter and antenna and related accessory equipment.  Such products and services are provided to both higher power and lower power broadcasters. Upon request, our technicians also supervise the installation of television transmitters on-site, in the United States and abroad.  Our technicians perform additional testing after the transmitter has been connected to the station’s programming sources and the transmission antenna to assure that the television transmitter operates as intended.  This is an ongoing commitment to provide full service to today’s broadcasters and will continue as part of our offering one-stop shopping to our customers.  Sales of auxiliary products and services as a percentage of our total sales represented 14% and 11% during 2002 and 2001, respectively.

Outlook

Our results of operations are reflective of the changes and uncertainties that exist in the television broadcasting sector in response to the FCC’s regulations surrounding digital television. The FCC’s digital mandate allows low power digital transmission currently and requires high power digital transmission by as early as 2006. Sinclair Broadcast Group (Sinclair) is currently our largest customer and their DTV strategy has been to purchase primarily high power transmitters that they will operate at low power until they are required to operate them at high power. Other television companies have responded to the FCC mandate by purchasing low power transmitters to meet the current requirement and we believe that these companies will need to replace these low power transmitters with high power equipment by 2006. However, we believe that a significant amount of uncertainty exists in the broadcasting sector concerning the actual timing of the high power requirement and that many companies believe that the requirements will be delayed. Additionally, we believe that the slump in advertising revenues in recent years and continued economic uncertainties have contributed to the decision by many broadcasting companies to opt for the temporary low power solution.

THE TELEVISION TRANSMISSION INDUSTRY

Approximately 10,000 analog and digital translators and television transmitters with an output power level of one watt or more are in operation in the United States.  Of these, more than 1,900 television transmitters in the United States have an output power level of five kilowatts or more.  As of December 31, 2002, we had sold and delivered, since our inception, approximately, 1,800lower power transmitters and 165 higher power transmitters in the United States and 1,660 lower power transmitters and 90 higher power transmitters abroad.

Digital Television (formerly High Definition Television - “HDTV”) encompasses higher fidelity video and audio production, transmission and display technologies, and promises to provide television viewers with greater picture resolution, improved color fidelity, and higher fidelity surround sound audio. We believe that digital television (“DTV”) is the largest emerging market for the manufacturers of television broadcasting equipment.  In December 1996, the FCC announced its decision concerning the transmitted format to be used for the transmission of DTV signals relieving the speculation that had taken place for several years.  In the first quarter of 1997, the FCC allocated DTV channels in the UHF band for each full service television station in the country.  Based on the most recent FCC pronouncements, those channels will co-exist with each station’s existing VHF or UHF channel for nine years after the selection of a transmission standard and adoption of a Table of Allotments, after which the pre-existing channel must be surrendered.  Each station will be required to apply for a construction permit to install one DTV transmitter during the three year phase-in period and will have three years to construct such a facility. During the remainder of the nine year transition, each licensee may transmit on the assigned DTV channel and its regular channel.  At the end of the nine year period, each licensee must surrender the non-DTV channel. Each DTV channel will require its own transmitter and antenna if the channel assignments are not adjacent.

We believe that we can capitalize on the opportunities afforded by this emerging market because our current product line, is configured to be compatible with the DTV digital transmission format selected.

GROWTH STRATEGY

Acrodyne supplies the United States and World broadcast communities with television transmission equipment. The advent of Digital Television has created a new market for transmitters as every station in the U.S. must build a digital facility and be on the air by a date certain. The FCC has changed the rules several times and moved some of the scheduled dates which had the effect of prolonging the build out period. Acrodyne is addressing the digital market by supplying both high and low power equipment to customers. We also believe that the current analog television system that consumers currently receive into their homes will not be abandoned for many years and that the need for upgraded and replacement equipment will become a strong secondary market. As such, Acrodyne equipment is scalable and can provide analog output today and be upgraded easily to become the principle digital transmitter at the station when the station permanently discontinues its analog transmissions and solely provides digital transmissions.

We also view the International expansion of digital television as an emerging market and have begun to address it by expanding our activities and presence internationally.

We believe that we can increase sales of our transmitters based on a growth strategy centered on the following principles:

•                   Communicating our Quality Process focus /Product Quality to our (potential) customers.

•                   Dramatically increasing direct customer contact and marketing activities (Direct Sales/Agents and Partners).

•                   Continually update and streamline the manufacturing facility to support growth up to $100 million in annual sales with outgrowth of Quality Process Implementation.

•                   Continually improve the Quantum Family of IOT transmitters with the incorporation of the latest generation/proven technology to garner increased market share.

•                   Drive down the manufacturing cost of the Quantum through continual value engineering, which involves the continuing effort to improve a products performance while finding ways to reduce its cost.

MARKETING AND SALES

Marketing Strategy

Marketing and Sales are currently positioning us as the “Technology Leader” in the industry.  In early 2002, we determined that it would be advantageous to update and modernize our brand image in the marketplace. We accomplished such branding by changing our logo to Ai from the previous ACRODYNE.

We draw on the strengths of the Engineering Department’s history of designing state of the art industry accepted products over the past 30 years.  Additionally, sales is targeting TV Stations with antiquated Analog equipment for replacement with a cost savings/future growth, marketing plan.  This plan immediately improves the TV Stations cash flow, increasing station net worth and allows conversion of their new Analog Transmitter to a Digital Transmitter when needed with minimal cost.  The Sales department has also moved forward on developing strong alliances with well-established Studio Integration companies to gain alternative access to the broadcast market resulting in increased product sales.  The Sales departments ultimate goal centers on product branding acceptance tied with Quality and Technology supremacy.

Domestic Sales

Domestic sales accounted for 97.4% of our net sales in 2002. For the most part, we sell systems  directly to television stations.  However, as mentioned above, we have developed alliances with companies bringing us additional business otherwise not attainable.  Domestic sales are handled by regional sales managers located in both field offices and the manufacturing facility.  Regional sales staff are supported by management and applications personnel at our factory. Regular and direct contact promotes coordination of effort for optimum performance.  Domestic sales negotiations often require weeks or months of cultivation and planning with the customer. All domestic sales staff is required to have in-depth industry knowledge to guide the prospective client to cost effective, responsible purchasing decisions.

International Sales

International sales accounted for approximately 2.6% of net sales in 2002.  Independent manufacturers’ representatives and distributors, who normally have specific account affiliations within a particular country, operate on an exclusive and non-exclusive basis and receive a negotiated commission rate.

Customer Base

Our business has historically been dependent upon a relatively small number of significant transmitter sales with one-time customers.  With the launch of the Quantum transmitter line, we are targeting the entire professional broadcast industry.  In addition, Sinclair has orally committed to purchase all UHF transmitter requirements from us.  Total sales to Sinclair accounted for $16,790,794 or 64% of sales in 2002 and $8,795,294 or 63% of sales in 2001.

RELATIONSHIP WITH SINCLAIR

We depend on Sinclair Broadcast Group (Sinclair) as an important source of liquidity and rely on Sinclair for a significant portion of our revenues.   As of December 31, 2002, Sinclair held an aggregate of 2,418,333 shares of our common stock, representing approximately 32.64% of issued common stock, assuming no warrants were exercised.  Accordingly, Sinclair did not control us; however, Sinclair did maintain significant influence over our operations.  On January 1, 2003, as a result of our January 2003 recapitalization plan, described in Item 12, Sinclair held an aggregate of 22,768,333 shares of our common stock, representing approximately 82.4% of issued common stock, assuming no warrants were exercised.  Additionally the following three Sinclair employees were elected to Acrodyne’s Board of Directors:  Nathaniel Ostroff is Sinclair’s Vice President for New Technology; David Smith is Sinclair’s President, Chief Executive Officer, and Chairman of the Board; and David Amy is Sinclair’s Executive Vice President and Chief Financial Officer.

Sinclair accounted for approximately $16,790,794, or 64% of our 2002 transmitter sales and approximately $637,365, or 29% of our accounts receivable at December 31, 2002 were due from Sinclair and television stations it owned.  We expect our revenues from Sinclair to decrease during 2003 since Sinclair’s conversion to digital television is almost complete. To counteract declining revenues from Sinclair, we have directed our sales force to focus their efforts on non-affiliated companies.  Our plan to sell digital transmitters to new customers is dependent on the success of our efforts to position ourselves  as the technology leader in the broadcast equipment industry.  Placing emphasis on our history of designing and manufacturing state of the art industry accepted products over the past thirty years enhances this effort.  Also, marketing programs delineating our transmitters’ ability to operate at a lower cost and future growth directed to television stations with antiquated analog transmitters will generate additional sales.  Our plan immediately improves customers’ cash flow and protects their investment by allowing the analog transmitter to be converted to digital at minimal cost.  Strong alliances with well-established system integration companies are moving forward, thereby attaining additional access to the broadcast market.

GOVERNMENT REGULATION

Industry Regulation

Transmission characteristics are regulated in the United States by the FCC and abroad by local governments and international treaties.  United States television transmission is in either the VHF band, covering the frequency ranges from 54 MHz (Channel 2) to 88 MHz (Channel 6) and 174 MHz (Channel 7) to 216 MHz (Channel 13), or the UHF band, covering the frequency range from 470 MHz (Channel 14) to 806 MHz (Channel 69).  Users include governments, not-for-profit and privately owned and operated commercial, educational, foreign language and religious broadcasters.  United States broadcasters are regulated by the FCC as to operating characteristics and suitability of ownership.  We have registered all of our television transmitters that are required to be registered with the FCC and believe that our products and procedures satisfy all the criteria necessary to comply with the regulations of the FCC. In addition to the FCC, foreign governments regulate radio-frequency broadcast equipment operating within their borders.  However, the United States and almost all foreign governments are parties to international treaties which adhere to frequency allocation and interference criteria.

Environmental Regulation

We believe we are in compliance with applicable United States, state and local laws and regulations relating to the protection of the environment.

COMPETITION

We are a small company competing with Harris and Thales. Both of these organizations have significantly larger capital resources.  Our position in the industry is similar to Axcera and Larcan' two companies with capital and resources similar to ours. While we have limited capital resources, we benefit from a strong engineering staff with many years of experience. This allows us to capture our share of the market through rapid response product differentiation, performance and leading technology.  We believe our Quantum transmitter is a superior product; however, we are vulnerable to any competitor’s aggressive price-cutting to gain market share.

CURRENT MANUFACTURING

Our manufacturing department, located in Phoenixville, Pennsylvania, is primarily involved in final system assembly. All phases of assembly are performed in a single open area comprising approximately 15,000 square feet.  We do not utilize, and are not dependent upon, any unusual raw materials or processes in the design of our products. Major purchased parts include fabricated printed circuit boards, water-cooling pumps, specialized output filters, power transformers, inductive output power tubes and cavities.  All of these major parts are available from several sources.

Chemical etching of circuit boards and painting of cabinets is performed by outside suppliers to minimize the potential for adverse environmental consequences at our facility.  Previously, assembly had occurred in our build-to-order shop utilizing standard assembly modules depending on the frequency and output power level of the transmitter.

PATENTS, TRADEMARKS, and LICENSES

We are the owner of seven patents related to our former product lines.  These patents are not applicable to our new, digital product line and we no longer desire to support these patents legally or financially .

During March 2000, we entered into a 10-year license agreement (the “License Agreement”) with Sinclair for the exclusive right to manufacture and sell certain Sinclair designed transmitter lines. Under terms of the License Agreement, we would pay Sinclair an annual royalty of $300,000 for five years.  For years six through ten, we would pay Sinclair an annual royalty equal to 1.0% of revenues realized by us attributable to the License Agreement.  At end of the tenth year, we have the option to purchase the Sinclair technology.  The purchase price would be twice the cumulative royalty amount paid to Sinclair for years six through ten.  As part of the recapitalization plan

approved by our shareholders and completed in January 2003, Sinclair terminated this agreement, forgave amounts due under the agreement, and transferred ownership of the technology to us in exchange for shares of our stock.

EMPLOYEES

At the end of 2002, we employed approximately 71 individuals on a full-time basis, none of whom are union members.  We believe we have a good relationship with our employees.